UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|(Mark One) |                                                                                                                                                          
|---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|ý          | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year endedDecember 31, 2004                          
|or        
|o          | 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

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

|Delaware(State or other jurisdiction of
incorporation or organization)                   |  | No. 59-1513162(I.R.S. Employer
Identification No.)
|---------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Bentley Park
2 Holland Way
Exeter, New Hampshire(Address of principal executive offices) |  | 03833(Zip Code)                                   
|(Registrant's telephone number, including area code)(603) 658-6100                      
|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
Preferred Stock Purchase Rights |  | New York Stock Exchange and Pacific Exchange
New York Stock Exchange and Pacific Exchange

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

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

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. ý

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter.

|Title of Class                                                                                                                    |  | Aggregate Market Value * |  | As of Close of Business on
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ |  | --------------------------
|Common Stock, $.02 par value                                                                                                      |  | $200,072,468             |  | June 30, 2004             
|Indicate the number of shares outstanding of each of the registrant's classes of common stock,
as of the latest practicable date.
|Title of Class                                                                                                                    |  | Shares Outstanding       |  | As of Close of Business on
|Common Stock, $.02 par value                                                                                                      |  | 21,317,677               |  | March 14, 2005            

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 2005 Annual Meeting of StockholdersIncorporated by
Reference into Part III of this Annual Report on Form 10-K



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Part I

Item 1. Business

Overview

Bentley Pharmaceuticals, Inc., headquartered in the U.S., is an international specialty pharmaceutical company, incorporated in the State of Delaware.
References in this report to "the Company", "we", "us" or "our" refer to Bentley and its subsidiaries as a whole, without regard to the separate operations and obligations of each entity in the group,
unless the context clearly indicates one of the entities in the group.

The
Company is focused on:



Our
pharmaceutical product sales and licensing activities are based primarily in Spain, where we have a significant commercial presence and manufacture and market approximately 120
pharmaceutical products through three wholly-owned Spanish subsidiaries, Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. These products represent various dosage strengths and product
formulations of more than 30 chemical entities in four primary therapeutic areas: cardiovascular, gastrointestinal, neurological and infectious diseases. We continually add to our product portfolio in
response to increasing market demand for generic and branded therapeutic agents, and when appropriate, divest portfolio products that we consider to be redundant or that have become
non-strategic. Although most of our sales of these products are currently in the Spanish market, we have recently focused on increasing our sales in other European countries and other
geographic regions through strategic alliances with companies in these territories.

In
April 2004, we purchased a manufacturing facility located in Zaragoza, Spain that specializes in the manufacture of certain active pharmaceutical ingredients. The facility has
been approved by the U.S. Food and Drug Administration (FDA) for the manufacture of one ingredient for marketing and sale in the U.S. We are manufacturing and marketing these products through our
subsidiary, Bentley API. Additionally, we have a strategic alliance with Teva Pharmaceutical Industries Ltd. (Teva) granting us the right to register and market certain of Teva's pharmaceutical
products in Spain through our sales force of approximately 160 full-time personnel who focus on major cities throughout Spain. In November 2004, we entered into a multi-product
collaboration agreement with Perrigo Company (Perrigo), the largest U.S. manufacturer of over-the-counter pharmaceutical and nutritional products for the store brand market, to
co-develop and market, in the U.S. and potentially other markets, generic pharmaceutical products that we manufacture in Spain.

In
our research and development activities, we have U.S. and international patents and other proprietary rights to technologies that facilitate the absorption of drugs. We are developing
products that incorporate our drug delivery technologies and have licensed applications of our proprietary CPE-215® drug delivery technology to Auxilium
Pharmaceuticals, Inc., which launched Testim® in the U.S. market, in February 2003. Testim, which incorporates our CPE-215 drug delivery technology, is a gel
indicated for testosterone replacement therapy, which restores serum testosterone levels in men and thereby improves symptoms of health problems associated with low testosterone levels (hypogonadism).
In early 2005, Testim received marketing authorizations in two additional European countries, bringing the total number of countries in which Testim is approved outside the U.S. to 11. Additionally,
Testim was launched in Germany in January 2005 by Auxilium's partner, Ipsen. We are in discussions with other pharmaceutical and biotechnology companies to form additional strategic alliances
to facilitate

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the
development and commercialization of other products using our drug delivery technologies, including product candidates that deliver insulin to diabetic patients intranasally and treat nail fungus
infections topically.

Our
Common Stock began trading on the New York Stock Exchange (NYSE)on May 12, 2004, under the trade symbol BNT. Previously our Common Stock was traded
on the American Stock Exchange under the same symbol.

Industry Overview

Pharmaceutical Industry in Europe

The European Union, with an increasingly affluent population of approximately 375 million people and approximately $75 billion in pharmaceutical
sales in 2000, represents the second largest pharmaceutical market in the world, according to IMS Health. With the addition of 10 new countries to the European Union in May 2004, its population
has increased to more than 450 million people. Healthcare expenditures in Western Europe, as in the U.S., are growing at a rate faster than the overall economy and drug expenditures as a
percentage of total gross domestic product are lower than in the U.S., according to IMS Health.

Many
European countries exercise strict controls over the prices of, and reimbursement for, pharmaceutical products. These countries often have national health insurance systems that
provide reimbursement for prescription pharmaceuticals. The prices that these systems are willing to pay for products affects the profitability of the product sales. However, given the varying
priorities and economies of each of the European countries, price consistency has not been achieved and both the prices and reimbursement rates often vary dramatically from country to country.

A
basic tenet of the European Union has been encouraging the free movement of goods among all member states. Many European governments have policies in place that encourage sale of
pharmaceutical products at the lowest price available. As a result, an active network of parallel importation has evolved in which products manufactured in one country flow into other European
countries. This effectively favors manufacturers whose cost of goods are lower, enabling them to more effectively compete on the basis of price.

Since
Spain's entry into the European Union in 1986, the Spanish pharmaceutical market has been evolving steadily into a market that is increasingly similar to those of other countries
in Western Europe and the U.S. With a population of approximately 40 million, Spain was ranked in 2004 as the seventh largest pharmaceutical market in the world and fifth largest in the
European Union. Pharmaceutical sales in Spain reached approximately $10 billion in 2003, according to IMS Health, and have been growing at approximately 10% per year in recent years.

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

Although
comprising less than five percent of the Spanish pharmaceutical market (less than eight percent of the units of pharmaceutical products sold in Spain), generic pharmaceuticals
are expected to

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significantly
increase their market penetration due to increases in drug usage driven by an aging population and opportunities to launch new generic products as patents expire for blockbuster drugs.
Several initiatives are underway by the Spanish government in response to the rise in healthcare costs, including education, financial incentives to prescribing physicians and public campaigns to
stimulate the use of generic pharmaceuticals. Due to the structure of the Spanish market for pharmaceutical products, producers generally market their products to physicians and pharmacies to whom
they emphasize a combination of quality and price.

Generic
pharmaceutical products in other European countries have attained greater market share, with generics in major markets such as the United Kingdom and Germany achieving over 40%
market share. Generic products have achieved a high proportion of the market in many of these countries due to government programs that encourage the prescription of generic pharmaceuticals. In some
of these markets, competition has made price the single most significant factor in determining market share. This has favored producers of products that have cost structures that can support
competitive pricing. In these markets, emphasis can be placed on selling to distributors at favorable prices rather than the more expensive alternative of marketing to physicians or consumers.

Drug Delivery Industry

Drug delivery companies develop technologies to improve the administration of therapeutic compounds. These technologies are designed to enhance safety, efficacy,
ease-of-use and patient compliance with prescribed therapy. Drug delivery technologies provide opportunities for pharmaceutical and biotechnology companies to extend their drug
franchises as well as develop new
and innovative products. The worldwide market for drug delivery systems was estimated to be more than $40 billion in 2000 and is projected to approach $90 billion by 2005.

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

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

Developing
safer and more efficacious methods of delivering existing drugs generally is less risky than attempting to discover new drugs, because of lower development costs. On average,
it takes 10 to 15 years for an experimental new drug to progress from the laboratory to commercialization in the U.S., with an average cost of approximately $900 million. Typically, only
one in 5,000 compounds entering preclinical testing advances into human testing and only one in five compounds tested in

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humans
is approved for commercialization. By contrast, drug delivery companies typically target drugs that already have been approved, have a track record of safety and efficacy and have established
markets for which there is a proven medical need. Consequently, clinical trials related to drug delivery technologies applied to previously-approved pharmaceuticals need only show that the new
technologies deliver the drug without adverse side effects and with the same clinical efficacy.

Our Strategy

Our objective is to be a leading specialty pharmaceutical company focused on:



Our
strategies to accomplish this objective include:

Increase our domestic product sales through targeted promotion and expansion of our product portfolio and increase international sales

We plan to increase our generic and branded product sales by expanding the portfolio of products manufactured in Spain and by forming strategic alliances to
increase our sales outside of Spain. We are expanding our product portfolio through the acquisition or licensing of currently marketed and late stage pharmaceutical products. We directly promote and
sell these products in Spain through our own sales force of approximately 160 full-time personnel focused on major cities throughout Spain and outside Spain through the development of
alliances with partners in other countries in Europe and elsewhere.

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

Additionally,
we have a strategic alliance with Teva granting us the right to register and market certain of Teva's pharmaceutical products in Spain through our sales force of
approximately 160 full-time personnel who focus on major cities throughout Spain.

We
are expanding the sales of products outside of Spain by developing alliances with strategic partners in targeted markets that offer compatible regulatory approval regimes and
attractive margins. Most of these alliances relate to specific products that our partners have expertise in marketing. We have already developed alliances in Portugal, Greece, the United Kingdom,
Germany, Austria, Morocco, Poland and the Czech Republic for targeted products in these and other countries. In certain European countries that have a highly developed competitive market for generics
based primarily on price, we intend to sell either directly or through our alliances to distributors. In countries that require a sales force to market to physicians or consumers, we intend to
continue to concentrate our efforts through alliances with entities that have marketing forces already in place. We are also evaluating and

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making
modifications to our finished pharmaceutical products manufacturing facility so that it will comply with Good Manufacturing Practices (GMP) of the FDA. These modifications should enable us to
submit our products for U.S. marketing approval by the FDA.

Focus on commercializing our CPE-215®permeation platform technology and developing proprietary products
based on our other technologies

We apply our drug delivery and oral drug formulation technologies in an effort to improve the performance of existing pharmaceutical products with respect to
their method of delivery and effectiveness. We also may be able to reduce manufacturing costs for certain products as a result of our proprietary manufacturing processes.

Our
CPE-215 technology enables the absorption of drugs across membranes of the skin, mouth, nose, vagina and eye. We believe our CPE-215 technology can be
incorporated into a wide variety of pharmaceutical formats and products, including those formulated as creams, ointments, gels, solutions, lotions, sprays or patches. CPE-215 has a record
of safety in humans as a food additive and fragrance and is currently listed on the FDA's inactive ingredient list for approved drug products. Testim, the first product incorporating our
CPE-215 drug delivery technology, was approved by the FDA in October 2002 and was launched in the U.S. market by our licensee, Auxilium, in February of 2003. We are optimistic that
this past experience with CPE-215 may result in reduced preclinical development time relating to its use in new formulations of previously approved compounds. We market our
CPE-215 technology to pharmaceutical and biotechnology companies whose products we believe would benefit from its permeation properties.

We
believe these benefits include:



In
addition to marketing our CPE-215 technology to pharmaceutical companies for application with their branded or generic products, we selectively apply this technology to
our own development of certain products. We target compounds with established market demand or that face limited market acceptance as a result of less efficient drug delivery methods. We are currently
working on applications of the CPE-215 technology to the intranasal delivery of insulin to diabetic patients and the topical treatment of nail fungus infections.

We
have been granted a patent in the U.S. for our oral formulation of acetaminophen. We have pending applications in Europe and elsewhere. We have also been granted a Spanish patent for
our
oral formulations of omeprazole and lansoprazole. In the case of acetaminophen, we believe that we have developed dosages that result in:



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With
respect to omeprazole and lansoprazole, we believe that we have created manufacturing processes that require less time to efficiently produce our versions of these products.

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

Our Proprietary Drug Technologies

Proprietary Drug Manufacturing Technologies

We believe that there are several opportunities to enter into additional collaborations with pharmaceutical and biotechnology companies and expand our product
lines using our proprietary drug technologies. For example, in November 2004, we entered into a multi-product collaboration agreement with Perrigo Company, the largest U.S. manufacturer of
over-the-counter pharmaceutical and nutritional products for the store brand market, to co-develop and market in the U.S. and potentially other markets generic
pharmaceutical products that we manufacture in Spain.

CPE-215 Permeation Platform Technology

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



CPE-215
has a record of safety in humans as a food additive and fragrance and is currently listed on the FDA's inactive ingredient list for approved drug products. Testim,
the first product incorporating our CPE-215 drug delivery technology, was approved by the FDA in October 2002 and was launched in the U.S. market by our licensee, Auxilium, in
February of 2003. We are optimistic that this past experience with CPE-215 may result in reduced preclinical development activities required for new product formulations of previously
approved pharmaceutical compounds.

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Solubility Enhancement Technology

Our solubility enhancement technology involves chemical and manufacturing procedures that enhance compound solubility without changing the compound's therapeutic
properties. Although this technology may be applied to other chemical entities, to date we have incorporated this technology only in acetaminophen compounds, which are known to have problems of
insolubility and undesirable taste. Based upon clinical studies completed in Europe in 2001 and 2002, we believe that our technology enables us to develop and deliver dosages of acetaminophen that
make it highly dispersible, rapidly soluble in water, better tasting and faster in reaching peak blood levels to deliver pain relief and reduce fever than other tablets or capsules. We believe the use
of our technology will increase solubility, which will lessen undesirable side effects, such as flatulence in effervescent formulations and the bitter taste of pills, which commonly are associated
with acetaminophen and many other oral medications. Patents have been filed on this technology, of which one has been granted in the United States and others are pending in Europe and elsewhere.

Oral Formulation Technologies

Our oral formulation technologies involve the application of a proprietary manufacturing process as well as specialized equipment, each of which plays a role in
producing pharmaceutical products, while reducing manufacturing time and costs. We have developed new methods for manufacturing products such as omeprazole, lansoprazole and other similar products
that are stability-sensitive to humidity and temperature. We have been granted a Spanish patent relating to these processes. The patent claims as innovative the manufacturing process that renders
these products more stable, while protecting active substances from gastric degradation utilizing microgranulation and microencapsulation techniques.
These patented technologies can contribute to our ability to compete against other companies whose manufacturing processes are more costly and time consuming.

Licensed Product

Topical Testosterone Gel

In February 2003, our licensee, Auxilium Pharmaceuticals, Inc. launched Testim, a testosterone gel containing our CPE-215 drug delivery
system, in the United States. Testim is marketed by Auxilium under a license of our drug delivery technology.

Testosterone
replacement therapy is used to treat men whose bodies produce insufficient amounts of testosterone (hypogonadism). Symptoms associated with low testosterone levels in men
include depression, decreased libido, erectile dysfunction, muscular atrophy, loss of energy, mood alterations, increased body fat and reduced bone density. Currently marketed hormone replacement
therapies involve delivery of hormones by injections, through transdermal patches and by gels. Injection therapy has limitations, including pain, which can lead to decreased patient acceptance and
decreased compliance with prescribed therapy. Although patches have been able to alleviate many of the gastrointestinal side effects associated with oral delivery of hormones, patches, even in their
smallest form, are often conspicuous and may result in skin irritation or even inaccurate dosing, should the patch fall off. The transdermal delivery of hormones through gels, creams and lotions
provides commercially attractive and efficacious alternatives to other current methods of delivery. As more baby-boomers enter middle age and more attention is focused on male hormonal
deficiencies, the worldwide testosterone replacement market has increased. According to IMS Health, in 2003, U.S. testosterone replacement therapy sales grew by 32% to approximately
$400 million from 2002.

Testim
resulted from our May 2000 research agreement with Auxilium, a specialty pharmaceutical company that develops and markets products for urologic and sexual health, pursuant
to which Auxilium agreed to develop and test various pharmaceutical compositions of topical testosterone using our CPE-215 technology. We licensed to Auxilium exclusive worldwide rights to
develop, market and

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sell
Testim, which rights became effective in September 2000. After Auxilium conducted clinical trials, a New Drug Application (NDA) was approved by the FDA on October 31, 2002. Testim
was launched in the United States by Auxilium in February 2003. In June 2003, Testim was approved in the United Kingdom and in January 2004, Auxilium entered into an agreement
with Bayer Inc., a division of Bayer AG, to market Testim in Canada upon approval of Testim by the Canadian authorities. In early 2005, Testim received marketing authorizations in two
additional European countries, bringing the total number of countries in which Testim is approved outside the U.S. to 11. Additionally, Testim was launched in Germany in January 2005 by
Auxilium's partner, Ipsen.

Manufactured and Marketed Products

In Spain, we manufacture approximately 120 pharmaceutical products, representing various dosage strengths and product formulations of more than 30 chemical
entities. We market these products primarily in Spain and have developed alliances with other companies that market our products, pursuant to license and supply agreements, in other countries,
including Portugal, Greece, the United Kingdom, Germany, Austria, Morocco, Poland and the Czech Republic. In addition, we manufacture products that are marketed by other companies both in Spain and
elsewhere. Our product lines consist of generic and branded products within four primary therapeutic areas: cardiovascular, gastrointestinal, infectious and neurological diseases. Our generic and
branded products are marketed to physicians, pharmacists and hospitals by our three Spanish sales and marketing organizations, Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. We also
market over-the-counter products through Laboratorios Rimafar. There are approximately 179,000 physicians and 21,000 pharmacies in Spain.

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

Branded Pharmaceutical Products

Our branded pharmaceutical product line consists of 40 pharmaceutical products representing various product presentations, formulations and dosage strengths of 29
chemical entities, which are represented by 20 trademarked brand names. Sales of branded pharmaceuticals accounted for 25% of our revenues in 2004, compared to 29% in 2003 and 32% in 2002. We market
our branded and, to a lesser extent, certain of our generic and over-the-counter products through our Laboratorios Belmac subsidiary, which has approximately 75
full-time sales personnel who focus on major cities throughout Spain. A few branded products are also marketed by the sales forces of Laboratorios Davur and Laboratorios Rimafar. We
supplement our sales and marketing efforts for branded products through advertising in trade publications. Most of our branded products are known in the industry as "branded generics" as they are
being marketed by us under a "brand" name even though we are not the innovator of the product.

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

|Our Branded
Product Name |  | Active Ingredient                  |  | Innovator Product        |  | Used to Treat                          
|------------------------ |  | ---------------------------------- |  | ------------------------ |  | ---------------------------------------
|Belmalip®                |  | simvastatin                        |  | Zocor® (Merck)           |  | elevated cholesterol                   
|Belmazol®                |  | omeprazole                         |  | Prilosec® (AstraZeneca)  |  | gastroesophageal reflux disease        
|Cimascal D Forte®        |  | calcium carbonate and vitamin D3   |  | Calcite-D® (Riva)        |  | osteoporosis                           
|Codeisan®                |  | codeine                            |  | Tricodein® (Solco)       |  | cough and bronchitis                   
|Enalapril Belmac®        |  | enalapril maleate                  |  | Vasotec® (Merck)         |  | cardiovascular disease and hypertension
|Ibumac®                  |  | ibuprofen                          |  | Motrin® (McNeil)         |  | rheumatoid arthritis                   
|Lanzol®                  |  | lansoprazole                       |  | Prevacid® (Tap)          |  | gastroesophageal reflux disease        
|Mio Relax®               |  | carisoprodol                       |  | Soma® (MedPointe)        |  | muscle spasms                          
|Pentoxifilina Belmac®    |  | pentoxifylline                     |  | Trental® (Aventis)       |  | peripheral arterial disease            
|Senioral®                |  | oxymetazoline and chlorpheniramine |  | Denoral® (Aventis)       |  | cold and sinus congestion              
|Xetin®                   |  | paroxetine                         |  | Paxil® (GlaxoSmithKline) |  | depression                             

Generic Pharmaceutical Products

Our generic pharmaceutical product line consists of 54 pharmaceutical products representing various product presentations, formulations and dosage strengths of 17
chemical entities. We entered the generic pharmaceutical market in Spain in September 2000. Laboratorios Davur, our sales and marketing organization devoted primarily to generic products,
markets generic pharmaceutical products to physicians and pharmacists through a sales force of approximately 60 full-time sales personnel who focus on major cities throughout Spain.
Laboratorios Rimafar, our sales and marketing organization devoted primarily to generics and over-the-counter products, all of which are generic, markets to pharmacists through
a sales force of approximately 23 full-time sales personnel throughout Spain. Laboratorios Belmac also sells certain generic products. We supplement our sales and marketing efforts for
generic products through advertising in trade publications.

We
believe we can grow by providing a more extensive line of products to our generic products sales force for marketing to our physician and pharmacy clients.

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

|Our Generic
Product Name                                 |  | Active Ingredient           |  | Innovator Product           |  | Used to Treat                          
|-------------------------------------------------------- |  | --------------------------- |  | --------------------------- |  | ---------------------------------------
|Amoxicilina Davur®
Amoxicilina Belmac®                   |  | amoxicillin trihydrate      |  | Amoxil® (GlaxoSmithKline)   |  | infections                             
|Azitromicina Davur®                                      |  | azithromycin                |  | Zithromax® (Pfizer)         |  | infections                             
|Ciprofloxacino Davur®                                    |  | ciprofloxacin hydrochloride |  | Cipro® (Bayer)              |  | microbial infections, including anthrax
|Enalapril Davur®                                         |  | enalapril maleate           |  | Vasotec® (Merck)            |  | cardiovascular disease and hypertension
|Fluoxetina Davur®
Fluoxetina Rimafar®
Fluoxetina Belmac® |  | fluoxetine hydrochloride    |  | Prozac® (Eli Lilly)         |  | depression                             
|Ibuprofeno Davur®                                        |  | ibuprofen                   |  | Motrin® (McNeil)            |  | pain, fever                            
|Lansoprazol Davur®
Lansoprazol Rimafar®                  |  | lanoprazole                 |  | Prevacid® (Tap)             |  | gastroesophageal reflux disease        
|Loratadina Davur®
Loratadina Rimafar®                    |  | loratadine                  |  | Claritin® (Schering)        |  | seasonal allergic rhinitis             
|Mirtazapina Davur®                                       |  | mirtazapine                 |  | Remeron® (Organon)          |  | depression                             
|Omeprazol Davur®
Omeprazol Rimafar®                      |  | omeprazole                  |  | Prilosec® (AstraZeneca)     |  | gastroesophageal reflux disease        
|Paroxetina Davur®
Paroxetina Rimafar®                    |  | paroxetine                  |  | Paxil® (GlaxoSmithKline)    |  | depression                             
|Pentoxifilina Davur®                                     |  | pentoxifylline              |  | Trental® (Aventis)          |  | peripheral arterial disease            
|Selegilina Davur®                                        |  | selegiline hydrochloride    |  | Eldepryl® (Somerset)        |  | Parkinson's disease                    
|Sertralina Davur®                                        |  | sertraline hydrochloride    |  | Zoloft® (Pfizer)            |  | depression                             
|Simvastatina Davur®
Simvastatina Rimafar®                |  | simvastatin                 |  | Zocor® (Merck)              |  | elevated cholesterol                   
|Trimetazidina Davur®                                     |  | trimetazedine               |  | Idaptan® (Servier)          |  | coronary therapy                       
|Zolpidem Davur®                                          |  | zolpidem tartrate           |  | Ambien® (Sanofi-Synthelabo) |  | insomnia                               

Strategic Alliance with Teva

In July 2000, we entered into a five year strategic alliance with Teva, a world leader in generic pharmaceutical products, pursuant to which we were
granted a royalty-free, non-exclusive license to register and sell certain of Teva's pharmaceutical products. Under this license agreement, we register these products with
Spain's Ministry of Health and, upon approval, sell these products in Spain. We have a non-exclusive obligation to purchase the products from Teva, allowing us to purchase any of the
products from sources other than Teva if we can demonstrate that Teva's price for a product exceeds the current price from another qualified source and if Teva has not exercised its right to match the

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lower
price. The collaboration with Teva expires in July 2005 and is renewable automatically for one-year terms. We have received marketing approval for 12 of these products, of
which, one was launched in 2004, and 27 other product registrations have been submitted to the Ministry of Health and are pending approval. While there can be no assurance that any future products
will be co-developed and licensed from Teva beyond July 2005, the existing licensed products (approved and pending) will remain the property of the Company and Teva is expected to
continue to supply either raw materials or finished goods for those products.

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

Sales to Licensees and Others

In addition to manufacturing and selling our own branded and generic products, we license the right to market products to others within and outside of Spain.
These license agreements are usually accompanied by long-term exclusive supply agreements, whereby our licensees purchase the licensed products from our manufacturing facility. As of
December 31, 2004, the Company's Spanish operations have executed 119 license agreements, of which 14 with customers in Spain and 41 with customers outside of Spain, cover actively marketed
products that are generating revenues. The remaining licenses, four with customers in Spain and 60 with customers outside of Spain, are for products that are awaiting regulatory approvals. Our Spanish
manufacturing facility also supplies branded and generic products under 14 license agreements and 15 contract manufacturing agreements in Spain. Our clients market these products under their own names
and with their own labeling. Many of the products we manufacture for others use the same active ingredients that are used in our own marketed products.

Strategic Alliance with Perrigo Company

We entered into a product development, license and manufacturing agreement with Perrigo Company in November 2004. Perrigo has agreed to
co-develop, market and sell in the U.S., and potentially other markets, selected generic products manufactured by our active pharmaceutical ingredients manufacturing subsidiary, Bentley
API, and finish dosage forms produced by our manufacturing subsidiary, Laboratorios Belmac.

Under
the agreement, Abbreviated New Drug Applications (ANDA) for the co-developed products will be submitted by Perrigo to the FDA. We, together with Perrigo, have
identified certain prescription drugs for co-development and commercialization that are no longer under patent protection or are soon to lose patent protection in the U.S. Under the
agreement, we and Perrigo share undisclosed percentages of the cost of development for each ANDA. The specific products and percentage of development expenses have not been disclosed for competitive
reasons.

Manufacturing

Our 108,000 square-foot pharmaceutical product manufacturing facility is located in Zaragoza, Spain. Our manufacturing facility complies with GMPs in
Europe and is capable of producing tablets, capsules, ointments, lotions, liquids and sachets, as well as microgranulated products. The facility also includes analytical chemistry, quality control,
quality assurance and formulation research laboratories. We are also evaluating and making modifications to this manufacturing facility so
that it will comply with U.S. GMPs. These modifications should enable us to submit our products for marketing approval by the FDA.

We
have fully integrated manufacturing support systems, including quality assurance, quality control, regulatory compliance and inventory control. These support systems are designed to
maintain

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high
standards of quality for our products and deliver reliable products and services to our customers on a timely basis. We require a supply of quality raw materials and packaging materials to
manufacture and package drug products. Historically we have not had difficulty obtaining raw materials and packaging materials from suppliers. Currently, we rely on approximately 43 suppliers to
deliver our required raw materials and packaging materials, most of which are supplied by 20 of these entities. We have no reason to believe that we will be unable to procure adequate supplies of raw
materials and packaging materials on a timely basis. Union Quimico Farmaceutica, S.A. is our sole supplier of omeprazole. We believe that alternative sources of omeprazole are available and we will
obtain required governmental approval to source from them, if necessary.

Products in Development

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

|Product Candidate          |  | Technology             |  | Used to Treat                      |  | Status                                               
|-------------------------- |  | ---------------------- |  | ---------------------------------- |  | -----------------------------------------------------
|Generic products           |  | Various                |  | Various                            |  | Bioequivalence and/or submitted for approval in Spain
|Intranasal insulin         |  | CPE-215                |  | Diabetes                           |  | Phase I/II                                           
|Antifungal nail lacquer    |  | CPE-215                |  | Onychomycosis                      |  | Phase I/II                                           
|Improved acetaminophen     |  | Solubility enhancement |  | Pain; fever                        |  | Submitted for approval in Spain                      
|Topical hormonal therapy   |  | CPE-215                |  | Osteoporosis; Erectile dysfunction |  | Preclinical                                          
|Intranasal pain management |  | CPE-215                |  | Pain                               |  | Preclinical                                          

Generic Products

We continually evaluate which pharmaceutical products are good candidates for us to develop, test and market in Spain, the U.S. and elsewhere. We select products
based on factors including the timing of expiration of the patent on the innovator's product, the ability of our manufacturing facility to efficiently produce the product, the availability and cost of
the raw materials to produce the product as well as the potential market size and pricing that can be obtained for the product. Once we select a product, our scientists develop a generic formulation
of the product, which then must be tested to determine if it is bioequivalent to the innovator's product. Products are then submitted for marketing approval by the relevant regulatory authorities,
generally starting with Spain's Ministry of Health. Through our agreement with Perrigo, they have agreed to co-develop, market and sell in the U.S., and potentially other markets, selected
products produced by our active pharmaceutical ingredients manufacturing subsidiary, Bentley API, and finish dosage forms produced by our pharmaceutical product manufacturing subsidiary, Laboratorios
Belmac.

We
attempt to have several products in each stage of development so that we can have a steady pipeline of product introductions. For competitive reasons, we generally do not disclose
which generic products we are developing.

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Intranasal Insulin

We are developing intranasal formulations of insulin to treat patients suffering from Type I and Type II diabetes. Based on preclinical studies at various
universities and the results of our Phase I study and preliminary results of our Phase II study, we believe our intranasal insulin formulation can potentially achieve higher levels of bioavailability
compared to other drug delivery systems currently being developed. Our product is designed to deliver insulin through a small, discreet nasal spray that can be carried in a patient's pocket. Our
formulation is designed to blunt the increase in glucose following meals which may greatly reduce the number of insulin injections required to be taken by Type I diabetics (those requiring insulin);
and it may reduce the number of medications currently required to be taken by Type II diabetics (those not requiring insulin).

In
January 2004, we completed a Phase I clinical trial of an intranasal insulin product formulation in healthy volunteers. The study was conducted by a clinical research
organization in a hospital setting in Ireland in compliance with U.S. and European clinical standards, and provided encouraging results. The clinical study consisted of 8 healthy
(non-diabetic) human volunteers who, over several weeks, each received up to four intranasal sprays of insulin utilizing our proprietary drug delivery technology. The study, which is
designed to demonstrate safety, also demonstrated a consistent response in the group. Elevated blood insulin levels were detected within 10 minutes of nasal administration, a peak increase at about 20
minutes and return to pre-dose levels by 60-90 minutes. Baseline blood glucose levels were quickly depressed in a dose-related manner, with a peak decrease at about
40 minutes after nasal insulin administration. These results were also consistent with a decrease in the normal volunteers' baseline blood insulin levels, as measured by plasma C-peptide,
which occurred at about 60 minutes after nasal insulin dosing.

Based
on the results of this Phase I study, we proceeded with a Phase II protocol for evaluation in insulin-dependent diabetics, which was completed in late 2004 and is in the final
stages of reporting. Preliminary results of the study indicate that the preparation was well absorbed and diminished the rise in glucose following a standard meal. Additional work is planned,
including continued formulation development and additional Phase II studies.

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

Antifungal Nail Lacquer

We are developing a topical nail lacquer for treating fingernail and toenail fungal infections (onychomycosis). We completed two Phase I/II clinical trials for
the treatment of nail fungal infections at the University of Alabama at Birmingham in 2002 and 2003 utilizing a clotrimazole lacquer formulation containing CPE-215. In
February 2004, our leading candidate to license our topical Antifungal Nail Lacquer product line decided not to move forward with a collaboration following a change in their senior management.
We have since opened discussions with other potential licensees.

According
to the National Onychomycosis Society, nail fungus affects almost 30 million people, primarily between the ages of 40 and 65. Patients electing to take oral therapy must
undergo blood monitoring during the course of treatment to monitor for liver damage. The cost of oral therapy is in excess of $800 for a twelve-week treatment regimen, not including
physician costs or other periodic monitoring costs.

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Acetaminophen

We have developed and patented oral formulations of acetaminophen, the active ingredient in such products as McNeil Consumer Healthcare's Tylenol®
line of products, which is commonly used for controlling pain and fever. We believe that our oral formulations of acetaminophen make it highly dispersible, rapidly soluble in water, better tasting and
achieve faster onset than other tablets or capsules. These characteristics give our oral formulations superior properties over many currently marketed products, which do not dissolve easily in water
and may cause bitter taste and flatulence. These improvements are particularly useful for treating children, the elderly and those who have difficulty swallowing pills. Clinical studies in Europe
documenting the product's improved dissolution and absorption were conducted in 2001 and 2002. We have also completed bioequivalence studies, which compare the rate and extent of absorption and levels
of concentration of our oral formulations needed to produce a therapeutic effect, with other formulations of acetaminophen. We submitted this product for approval in Spain in July 2002, and are
in preliminary discussions with potential collaborators to license and market this product outside of Spain.

Topical Hormonal Therapy

Our topical hormonal therapy incorporates the use of metabolic steroids that regulate most of the hormonal action in adult males. Hormone replacement therapies
using these metabolic steroids may have significant benefits in treating a number of medical afflictions, including osteoporosis and sexual dysfunction. We have granted to Auxilium a worldwide license
to develop, market and sell a topical hormonal therapy containing our CPE-215 technology. Auxilium, which has already incorporated our CPE-215 technology into Testim, is
evaluating the formulations of this topical hormonal therapy product.

Intranasal Pain Management

Many people suffer from chronic moderate-to-severe pain that is related to cancer, back problems and orthopedic injury. These people also
may experience intermittent flares of pain that can occur even though they are taking analgesic medications on a fixed schedule for pain control. A severe flare of pain is called breakthrough pain
because the pain breaks through the regular pain medication. About one-half to two-thirds of patients with chronic cancer-related pain also experience episodes of breakthrough
cancer pain. Generally, breakthrough pain occurs without prior onset symptoms and may last from seconds to minutes or hours. Recent regulatory concerns regarding the safety of COX-2
inhibitors and other non-steroidal anti-inflammatory drugs may provide opportunities for alternative methods for treating pain. The U.S. prescription market for the treatment
of moderate to severe pain, including breakthrough pain, is approximately $2 billion annually.

Orally
delivered pain products may not provide rapid relief and typically demonstrate considerable patient-to-patient variability in absorption. Injectable
formulations of pain products provide rapid and effective pain relief, but administration often requires professional assistance or hospitalization. We believe our intranasal pain product under
development could provide significant medical benefits over oral and injectable formulations as it is intended to combine patient convenience and ease of use with the rapid onset of pain relief and
the same potency as injectable delivery routes. Our intranasal pain product is in preclinical development for the treatment of chronic pain and acute episodes of chronic pain.

Under
a research agreement with Auxilium, we formulated the intranasal delivery of a pain management chemical agent using our CPE-215 technology. Auxilium is evaluating these
formulations.

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Intellectual Property

We actively seek to protect our products and proprietary information by means of U.S. and foreign patents, trademarks and contractual arrangements. Our success
will depend in part on our ability to obtain and enforce patents on our products, processes and technologies to preserve our trade secrets and other proprietary information and to avoid infringing on
the patents or proprietary rights of others. Our CPE-215 technology is covered by our U.S. patent and 11 foreign patents, including those in Japan, Korea and most major European countries.
These patents for our CPE-215 technology expire in the U.S. in 2008 and in foreign countries between 2006 and 2014. In 2003, we acquired a U.S. patent regarding our antifungal nail lacquer
product which expires in 2020. Patent applications for our antifungal nail lacquer are currently pending in Europe and other foreign countries. We also have four international patents pending covering
various applications of our CPE-215 technology, including testosterone and insulin compositions.

We
have been granted a patent in the United States for our oral formulation of acetaminophen. We have pending applications in Europe and elsewhere. We have also been granted a Spanish
patent for our oral formulations of omeprazole and lansoprazole.

We
own approximately 110 trademarks for pharmaceutical products in Spain. In addition, we also rely on unpatented proprietary technologies in the development and commercialization of our
products. We also depend upon the unpatentable skills, knowledge and experience of our scientific and technical personnel, as well as those of our advisors, consultants and other contractors. To help
protect our proprietary know-how that is not patentable, and for inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements
to protect our interests. To this end, we require employees, consultants and advisors to enter into agreements that prohibit the disclosure of confidential information and, where applicable, require
disclosure and assignment to us of the ideas, developments, discoveries and inventions that arise from their activities for us. Additionally, these confidentiality agreements require that our
employees, consultants and advisors do not bring to us, or use without proper authorization, any third party's proprietary technology.

Competition

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

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

Customers

In Spain, our sales representatives from Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar actively promote our products to physicians and retail
pharmacists. We sell our products directly to pharmaceutical distributors and indirectly to customers who purchase our products from distributors. Outside Spain, we currently sell our products to our
strategic partners who then

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distribute
our products directly or through distributors in their respective territories. We have begun to market certain products directly to distributors in selected markets outside of Spain. Our
manufacturing facility also supplies branded and generic products to customers both within and outside of Spain, including the European Union, geographical Europe, Northern Africa and the Middle East,
under licensing and supply agreements or contract manufacturing arrangements. The wholesale distributor network for pharmaceutical products in Europe and more specifically in Spain in recent years has
been subject to consolidation, which has increased and we expect will continue to increase our, and other industry participants', customer concentration.

In
the United States, we have entered into research and license agreements with pharmaceutical companies, whereby we perform research activities and license product candidates in
exchange for milestone payments and royalties and/or a share of profits derived from product sales.

In
2004, 2003 and 2002, only one of our customers, Cofares, accounted for more than ten percent of our consolidated total revenues. Sales to this customer accounted for approximately 14%
of our consolidated total revenues in each of the three years ended December 31, 2004, 2003 and 2002. See Note 14 of the Notes to the Consolidated Financial Statements in Item 15
for financial information regarding geographic areas.

Employees

We employ approximately 349 people, 18 of whom are employed in the U.S. and 331 of whom are employed in Spain, as of March 3, 2005. Approximately 117 of
these employees are principally engaged in manufacturing activities, 160 in sales and marketing, 23 in product development and 49 in management and administration. In general, we consider our
relations with our employees to be good.

Regulation

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

United States

Prior to marketing most pharmaceutical products in the U.S., the product must first be approved by the FDA. For new compounds, the regulatory approval process
begins with preclinical laboratory and animal testing. The approval process generally consists of the following five principal stages:



In
some cases, further clinical trials may also be required following approval.

The
IND is submitted to the FDA when the appropriate preclinical studies are completed and must be submitted to the FDA 30 days before beginning clinical studies. The IND becomes
effective if the FDA does not put the investigations described in the IND on clinical hold within 30 days of receiving the IND for filing.

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Human
clinical trials typically are conducted in three sequential phases. Some clinical trials may include aspects of more than one phase.



Throughout
the drug development process, the IND must be updated continually with protocol amendments, information amendments, IND Safety Reports and Annual Reports. The FDA carefully
reviews all data submitted and holds meetings with the sponsor at key stages to discuss the preclinical and clinical plans and results.

The
clinical, chemistry, statistics, biopharmaceuticals, microbiology (if applicable) and nonclinical data that has been collected over many years of development is submitted to the FDA
in an NDA. Additionally, an NDA will contain complete chemistry, manufacturing and controls information, demonstrating that the applicant is capable of consistently manufacturing a drug product of
appropriate strength, quality and purity. An NDA is an application requesting FDA approval to market a new drug for human use in interstate commerce. The current User Fee Rate for Fiscal Year 2005 for
the submission of an NDA is $627,000.

NDAs
are allocated varying review priorities based on 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 are 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, and in some cases to provide additional information on efficacy, which can involve significant expense. Our products under development and future products to be developed must go
through the approval process delineated above prior to gaining approval by the FDA for commercialization.

FDA
approval is also required for the marketing of generic equivalents of an existing drug. An ANDA is required to be submitted to the FDA for approval. When processing an ANDA, the FDA,
in lieu of the requirement for conducting complete clinical studies, requires bioavailability and/or bioequivalence studies. Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the body. Bioequivalence compares the bioavailability of one drug product (in this case, the generic product under review) with another (usually the innovator
product). When bioequivalence is established, the rate of absorption and levels of concentration of the generic drug in the body will closely approximate those of the previously approved drug. An ANDA
may only be submitted for a drug on the basis that it is the equivalent to a previously approved drug.

In
addition to obtaining FDA approval for each product, each manufacturer of drugs must register its manufacturing facilities with the FDA, and must list the drug products it
manufactures at each facility. 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 U.S.,
foreign manufacturing establishments must also comply with U.S. GMPs and are subject to inspection by the FDA. Such inspections generally take place upon submission of an NDA or ANDA to the FDA or at

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any
other time deemed necessary by the FDA and can impact both the approval of drugs, and a company's ability to continue manufacturing following approval.

Europe

As a pharmaceutical manufacturer in Spain, which is a member of the European Union, we are subject to the regulations enacted by the European Union that require
us to obtain manufacturing, marketing and pricing authorizations to commercialize pharmaceutical products in Spain.

Pharmaceutical
manufacturers in Europe must obtain marketing approval from the regulatory authority of each country in which they intend to market a product. In Spain, that authority is
the Spanish Ministry of Health. The development process in Europe is similar to that in the United States described above, with the same three clinical phases for branded drugs and bioequivalence
studies for generic drugs to assure their safety and efficacy. A dossier must be prepared for each pharmaceutical product and, upon approval of the product, it may be marketed in that country. In
Spain, generic products are generally approved approximately one year after submission, while branded products take considerably longer. Spain and certain other European countries also regulate the
price that can be charged to the patient for each product as well as set the amount that the public insurance programs will reimburse for each product, directly affecting a product's profitability. In
late October 2003, the Spanish government enacted a regulation that reduced the prices that the government reimburses for certain prescription pharmaceutical products. These new prices became
effective on December 26, 2003, but were voluntarily implemented by some companies, including our Spanish subsidiaries, on December 1, 2003. In 2005, the Spanish government temporarily
suspended the reference-price system that was implemented by the Spanish government in late 2003 and proposed a 67-point plan to replace the reference price system. The new plan includes a
4.2% price reduction in 2005 (and an additional 2% reduction in 2006) on only those drugs that have been on the market in Spain for over one year and were not already subject to the reference-price
reductions for 2004. (See Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations.)

In
order to speed approvals within European Union countries, the European Union has established a mutual recognition procedure. When a manufacturer submits a pharmaceutical product for
marketing approval, it must designate whether the filing will serve as a reference authorization for other European Union countries and, if so, which specific European countries. If the filing is not
designated as a mutual recognition reference filing, then other applications must be made individually to other countries for approval to be granted in those other countries. If the filing is
designated as a reference authorization, then the authority in the initial country is required to evaluate the submission on the basis of its own domestic standards as well as the standards of each of
the countries listed by the manufacturer. As the standards for pharmaceutical approvals have not been harmonized among the various European Union members, certain aspects of the filing must comply
with standards that vary by country. In addition, the process for initial evaluation of mutual recognition filings is generally significantly longer than that for national filings and, as a result,
companies often choose not to use this process for their first approval. However, if the filing is approved for the reference and the mutual recognition countries, the manufacturer would be permitted
to market the product in all of the jurisdictions selected.

A
manufacturing facility is required to obtain a general permit to operate a pharmaceutical business certifying that its facilities comply with European GMPs. These permits are granted
by the national authorities in the country of manufacture and other European countries rely on regulation by the authority of the country of manufacture.

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Trends in Healthcare Regulation

The cost of healthcare continues to be a subject of investigation and action by governmental agencies, legislative bodies and private organizations. Many
countries, in Europe and elsewhere, directly or indirectly through reimbursement limitations, control the selling prices and reimbursement prices of certain healthcare products. For example, in Spain,
prices for prescription pharmaceutical products must be approved by Spain's Ministry of Health. In order to help control rising healthcare costs, the Ministry of Health, in recent years, has
encouraged the substitution of generic-equivalent products. In further efforts to reduce healthcare costs, the Ministry of Health had been contemplating new laws and regulations that would
significantly reduce the market prices of certain pharmaceutical products, including generic-equivalent drugs. In late October 2003, the Spanish government enacted a regulation that reduced the
prices that the government reimburses for certain prescription pharmaceutical products. These new prices became effective on December 26, 2003, but were voluntarily implemented by some
companies, including our Spanish subsidiaries, on December 1, 2003. As a result, certain of our selling prices for these products have been reduced. The regulation affected six of our chemical
entities sold in Spain, including the chemical entities omeprazole, simvastatin and enalapril, and reduced our 2004 revenues by approximately $13,800,000 million. In 2005, the Spanish
government temporarily suspended the reference-price system that was implemented by the Spanish government in late 2003 and proposed a 67-point plan to replace the reference price system.
The new plan includes a 4.2% price reduction in 2005 (and an additional 2% reduction in 2006) on only those drugs that have been on the market in Spain for over one year and were not already subject
to the reference-price reductions for 2004. (See Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations.) There can be no assurance that the
government in Spain or in other countries will not implement additional price reductions in the future.

In
Spain and in certain other European countries, there are regulations that prohibit a pharmacy from substituting another product if a doctor's prescription has specified a specific
product for that patient. Recently, there has been intense scrutiny of pharmacists to assure that they are complying with this regulation. Other European countries permit the pharmacist to substitute
products more freely than Spain. Any change in this regulation may negatively affect our sales in Spain, as our products are often prescribed by brand name by the physicians.

In
Western Europe, efforts are under way by the European Union to harmonize technical standards for many products, including drugs, to make more uniform the requirements for marketing
approval from the various regulatory agencies.

In
the United States, most states have enacted generic substitution legislation requiring or permitting a dispensing pharmacist to substitute a generic version of a prescribed innovator
drug. Federal and state governments continue their efforts to reduce costs of subsidized healthcare programs, including restrictions on amounts agencies will reimburse for the use of products. Efforts
to reduce healthcare costs are also being made in the private sector. Healthcare providers have responded by instituting various cost reduction and containment measures of their own. It is not
possible to predict the extent to which we or the healthcare industry in general might be affected by these changes.

Continuing
reviews of the utilization, safety and efficacy of healthcare products and their components are being conducted by industry, government agencies and others. These studies,
which employ increasingly sophisticated methods and techniques, can call into question the utilization, safety and efficacy of previously marketed products and in some cases have resulted, and may in
the future result, in the discontinuance of such products and give rise to claims for damages from persons who believe they have been injured as a result of their use. Similar consequences can arise
as a result of adverse events, which can impact both innovator and generic versions of the same drug. We maintain product liability insurance for such potential claims; however, no such claims have
ever been asserted against us.

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Other Regulations

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

Item 2. Properties

We own a 15,700 square foot commercial building situated on approximately 14 acres of land in Exeter, New Hampshire that serves as our corporate headquarters and
research and development laboratory. It is located approximately 45 minutes north of Boston, Massachusetts.

We
also own a 108,000 square foot facility in Zaragoza, Spain, which accommodates our pharmaceutical products manufacturing plant, warehouse, research and development laboratory and
office space.

We
purchased a 11,000 square foot active pharmaceutical ingredients manufacturing facility in Zaragoza, Spain in April 2004 and subsequently purchased adjacent parcels of land
totaling approximately 4 acres for expansion of our active pharmaceutical ingredients manufacturing operation. The API manufacturing facility is located in an industrial park and we have acquired
sufficient acreage adjacent thereto to accommodate future expansion.

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

We
believe that each of our facilities has sufficient space for our current needs and our contemplated expansion in the near future. Our manufacturing facilities are currently operating
at approximately 50% of capacity, if operating for two shifts per day, five days per week.

Item 3. Legal Proceedings

On February 4, 2002, we were notified that a legal proceeding had been commenced against us by Merck & Co. Inc. and its Spanish subsidiary,
Merck Sharp & Dohme de España, S.A., alleging that we violated their patents in our production of simvastatin products and requested an injunction ordering us not to manufacture
or market the products. The case was brought against our Spanish subsidiaries in the 39th First Instance Court of the City of Madrid. After a hearing on February 18, 2002, the court refused to
grant the requested injunction and dismissed the case on February 25, 2002, awarding court costs and legal fees to us. Merck has appealed the award of fees. Merck re-instituted its
claim against us in another proceeding brought in the 19th First Instance Court of the City of Madrid, of which we received notice on January 23, 2003. This case also alleged
violation of Merck's patents in the production of simvastatin products, requested an order that we cease manufacturing the products and demanded damages during the period of manufacture. After a trial
with respect to this matter held on February 19 and 20, 2004, the court, on April 8, 2004, ruled in our favor, again awarding us court costs and legal fees. Merck has subsequently
appealed this ruling.

On
January 10, 2004, we were notified that a legal proceeding had been commenced against us by Smith Kline Beecham PLC, Smith Kline Beecham, S.A. and GlaxoSmithKline S.A. alleging
that we violate their patents in our production of paroxetine products and they requested an order requiring us to not manufacture or market the products. The case was brought against our Spanish
subsidiaries in the 50th First Instance Court of the City of Madrid. This proceeding followed a preliminary injunction that the same plaintiffs attempted to bring against us in 2003,
which was dismissed. We filed a response to this suit in February 2004 that included a counterclaim requesting that the court declare the asserted patent invalid. We intend to vigorously oppose
this claim as we believe the claim is without merit. Our paroxetine product line was launched in 2003.

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In
September 2004, a legal action was filed against us in the U.S. District Court of the District of Delaware by Ethypharm S.A., a French-based drug delivery company, primarily
claiming misappropriation of unspecified alleged trade secrets in connection with the manufacture of omeprazole since March 2002 by Laboratorios Belmac, one of our Spanish subsidiaries. A
related claim was previously brought against Laboratorios Belmac in the 72nd First Instance Court of the City of Madrid requesting an injunction, which remains unresolved. We intend to
vigorously defend against the claims in the U.S. and Laboratorios Belmac is doing the same in the Spanish proceeding.

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

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

Not applicable.

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Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The following table sets forth, for the periods indicated, the range of quarterly high and low sales prices for our common stock as reported on the New York Stock
Exchange (beginning May 12, 2004and on the American Stock Exchange prior thereto) under the symbol "BNT." Our common stock began trading on the New York Stock Exchange on
May 12, 2004 and on the Pacific Exchange on March 27, 1996.

High

LowFiscal Year Ended December 31, 2003First Quarter

$
9.70

$
7.85Second Quarter


14.05


8.20Third Quarter


18.80


12.81Fourth Quarter


17.15


11.34Fiscal Year Ended December 31, 2004First Quarter


14.76


10.62Second Quarter


14.10


11.20Third Quarter


13.89


9.52Fourth Quarter


11.40


8.35Fiscal Year Ending December 31, 2005First Quarter (through March 13, 2005)


10.94


8.51


As
of March 9, 2005 there were 1,045 holders of record of our common stock, which does not reflect stockholders whose shares are held in street name.

Dividends

We have never paid cash dividends on our common stock and we do not intend to pay dividends in the foreseeable future. We intend to retain future earnings in
order to finance the growth and development of our business.

22

---





'

Item 6. Selected Financial Data

The following sets forth the selected Consolidated Income Statement data for the years ended December 31, 2000, 2001, 2002, 2003 and 2004 and Consolidated
Balance Sheet data as of December 31, 2000, 2001, 2002, 2003 and 2004, all of which are derived from our audited Consolidated Financial Statements and related notes. The following Consolidated
Income Statement data for the years ended December 31, 2002, 2003 and 2004 and Consolidated Balance Sheet data as of December 31, 2003 and 2004 should be read together with our
Consolidated Financial Statements and related notes appearing elsewhere in Item 15 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on
Form 10-K. The Consolidated Income Statement data for the years ended December 31, 2000 and 2001 and the Consolidated Balance Sheet data as of December 31, 2000, 2001
and 2002 are derived from our audited Consolidated Financial Statements and related notes not included in this Annual Report on Form 10-K.

Consolidated Income Statement Data

|                                                   |  | For The Year Ended December 31,
|-------------------------------------------------- |  | -------------------------------
|
|
|Total revenues                                     |  | $                              
|Cost of net product sales                          |  |                                
|                                                   |  |                                
|Gross profit                                       |  |                                
|Operating expenses                                 |  |                                
|Gain on sale of drug licenses                      |  |                                
|Other income (expenses)                            |  |                                
|                                                   |  |                                
|Income (loss) before income taxes                  |  |                                
|Provision for income taxes                         |  |                                
|                                                   |  |                                
|Net income (loss)                                  |  | $                              
|                                                   |  |                                
|Net income (loss) per common sharebasic           |  | $                              
|                                                   |  |                                
|Net income (loss) per common sharediluted         |  | $                              
|                                                   |  |                                
|Weighted average common shares outstandingbasic   |  |                                
|                                                   |  |                                
|Weighted average common shares outstandingdiluted |  |                                
|                                                   |  |                                

---

23

---



Consolidated Balance Sheet Data

|                              |  | December 31,
|----------------------------- |  | ------------
|
|
|Working capital               |  | $           
|                              |  |             
|Currrent assets               |  | $           
|Non-current assets            |  |             
|                              |  |             
|Total assets                  |  | $           
|                              |  |             
|Current liabilities           |  | $           
|Long-term debt                |  |             
|Other non-current liabilities |  |             
|                              |  |             
|Total liabilities             |  | $           
|                              |  |             
|Redeemable preferred stock    |  | $           
|                              |  |             
|Stockholders' equity          |  | $           
|                              |  |             

24

---





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

The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes included in Item 8 of this Annual Report on
Form 10-K. Except for the historical information contained herein the foregoing discussion contains forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those projected in the forward-looking statements discussed herein.

Cautionary Note Regarding Forward-Looking Statements

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

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

Overview

We are a specialty pharmaceutical company focused on:



Branded and Generic Pharmaceuticals

Our pharmaceutical product sales activities are based in Spain, where we have a significant commercial presence and we manufacture and market approximately 120
pharmaceutical products. These products represent various dosage strengths and product formulations of more than 30 chemical entities in four primary therapeutic areas: cardiovascular,
gastrointestinal, neurological and infectious diseases. In 2004 approximately 30% of our product revenues were derived from two of our product lines. We market our branded and generic products to
physicians, pharmacists and hospitals through our three separate sales and marketing organizations based in Spain: Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. As prices for
prescription pharmaceuticals have been lowered in Spain by action of the Ministry of Health, which has authority to approve pharmaceutical prices, we are working to improve the efficiency of our
manufacturing operations to reduce our costs, while also increasing sales. We have recently focused on increasing our sales in other European countries and other geographic regions through strategic
alliances with distributors in these territories. We also target markets that offer compatible regulatory approval regimes and attractive product margins.

25

---



We
also expect to grow our business by acquiring additional products to sell through our organization and our strategic alliances. We continually acquire rights to new products in
response to increasing market demand for generic and branded therapeutic products and, when appropriate, we divest products that we consider to be redundant or that have become
non-strategic. For example, in November 2004, we entered into a multi-product collaboration agreement with Perrigo
Company, the largest U.S. manufacturer of over-the-counter pharmaceutical and nutritional products for the store brand market, to co-develop and market in the U.S.
and potentially other markets selected generic pharmaceutical products that we produce in Spain.

We
also manufacture pharmaceuticals for other drug companies. In April 2004, we purchased a manufacturing facility located in Spain that specializes in the manufacture of active
pharmaceutical ingredients. The facility has been approved by the FDA for the manufacture of one ingredient for marketing and sale in the U.S. We are manufacturing and marketing these ingredients
through our subsidiary, Bentley API. In addition, our Spanish pharmaceutical product manufacturing facility produces pharmaceutical products that are marketed by other pharmaceutical companies both in
Spain and in other international markets.

Proprietary Drug Delivery Technologies and Products

We develop products that incorporate our drug delivery technologies that we have developed in the United States. We have licensed applications of our proprietary
CPE-215 drug delivery technology to Auxilium Pharmaceuticals, Inc., which launched Testim the first product incorporating our CPE-215 drug delivery technology, in the
United States in February 2003. Testim is a gel indicated for testosterone replacement therapy. In 2005 Testim was launched in Germany and received marketing authorizations in two additional
European countries, bringing the total number of countries in which Testim is approved outside the U.S. to 11. We are also in discussions with other pharmaceutical and biotechnology companies to form
additional strategic alliances to facilitate the development and commercialization of other products using our drug delivery technologies, including product candidates that deliver insulin to diabetic
patients intranasally and to treat nail fungus infections topically.

Consolidated Results of Operations

Fiscal Year Ended December 31, 2004 Compared To Fiscal Year Ended December 31, 2003

Revenues

|               |                                      |   |        |        |     |    |   |        |        | Increase |   
|-------------- | ------------------------------------ | - | ------ | ------ | --- | -- | - | ------ | ------ | -------- | --
|
|
|Revenues:      |                                      |   |        |        |     |    |   |        |        |          |   
|               | Net product sales                    |   | $      | 69,942 |     | 95 | % | $      | 62,955 |          | 97
|               | Licensing and collaboration revenues |   |        | 3,451  |     | 5  | % |        | 1,721  |          | 3 
|               |                                      |   |        |        |     |    |   |        |        |          |   
|Total revenues |                                      | $ | 73,393 |        | 100 | %  | $ | 64,676 |        | 100      | % 
|               |                                      |   |        |        |     |    |   |        |        |          |   

Total
revenues for the year ended December 31, 2004 increased 13% from the year ended December 31, 2003. However, our total revenues increased approximately 3% when
expressed in constant currency. An increase in the weighted average value of the Euro, in relation to the U.S. Dollar, had the effect of increasing revenues by approximately $6,502,000, partially
offsetting the impact of price reductions in Spain. Sales of active pharmaceutical ingredients from our new manufacturing facility (included in "All other
products" in the table below) added $1,742,000 to our consolidated revenues in 2004. The advancement of our proprietary drug delivery programs in the U.S., evidenced by

26

---



the
growing royalty stream from sales of Testim, and other licensing revenues, increased our 2004 revenues by approximately $1,730,000, when compared to the prior year.

Our
revenues are generated through our primary sales channels of branded pharmaceuticals, generic pharmaceuticals, sales to licensees and others and licensing and collaboration revenues.
The following is a summary of our revenues by sales channel and top-selling product lines:

For
the year ended December 31, 2004 (in thousands):

|                              |  | Revenues Within Spain |        |   |   |        |   |   |       
|----------------------------- |  | --------------------- | ------ | - | - | ------ | - | - | ------
|
|Omeprazole                    |  | $                     | 2,721  |   | $ | 13,520 |   | $ |      
|Simvastatin                   |  |                       | 1,392  |   |   | 3,638  |   |   |      
|Enalapril                     |  |                       | 3,192  |   |   | 1,243  |   |   |      
|Paroxetine                    |  |                       | 1,045  |   |   | 2,928  |   |   |      
|Codeisan                      |  |                       | 3,131  |   |   |       |   |   |      
|All other products            |  |                       | 6,910  |   |   | 7,690  |   |   | 576   
|Sales to licensees and others |  |                       |       |   |   |       |   |   | 10,502
|Licensing and collaborations  |  |                       |       |   |   |       |   |   | 607   
|                              |  |                       |        |   |   |        |   |   |       
|Total Revenues                |  | $                     | 18,391 |   | $ | 29,019 |   | $ | 11,685
|                              |  |                       |        |   |   |        |   |   |       
|% of 2004 Revenues            |  |                       | 25     | % |   | 40     | % |   | 16    

For
the year ended December 31, 2003 (in thousands):

|                              |  | Revenues Within Spain |        |   |   |        |   |   |      
|----------------------------- |  | --------------------- | ------ | - | - | ------ | - | - | -----
|
|Omeprazole                    |  | $                     | 6,099  |   | $ | 13,863 |   | $ |     
|Simvastatin                   |  |                       | 2,176  |   |   | 4,412  |   |   |     
|Enalapril                     |  |                       | 2,610  |   |   | 1,878  |   |   |     
|Paroxetine                    |  |                       |       |   |   | 749    |   |   |     
|Codeisan                      |  |                       | 2,713  |   |   |       |   |   |     
|All other products            |  |                       | 5,463  |   |   | 6,065  |   |   |     
|Sales to licensees and others |  |                       |       |   |   |       |   |   | 9,536
|Licensing and collaborations  |  |                       |       |   |   |       |   |   | 203  
|                              |  |                       |        |   |   |        |   |   |      
|Total Revenues                |  | $                     | 19,061 |   | $ | 26,967 |   | $ | 9,739
|                              |  |                       |        |   |   |        |   |   |      
|% of 2003 Revenues            |  |                       | 29     | % |   | 42     | % |   | 15   

Spanish Operations.The core of our Spanish operations has been the efficient manufacturing and domestic marketing of branded
and generic pharmaceutical products. Historically, our pharmaceutical products were sold only within Spain. However, the execution of our long-term strategic plan has created an
opportunity for our Spanish operations to expand beyond the borders of Spain and into other European countries and other countries outside of Europe. The 11% increase in net product sales for the year
ended December 31, 2004 over the prior year was primarily due to an increase in the weighted average value of the Euro in relation to the U.S. Dollar, increased sales outside of Spain,
increased sales of our paroxetine product line, which was initially launched in May 2003, and increases in sales of other generic products, such as trimetazedine, pentoxifylline and increases
in sales to licensees and others. Our paroxetine product line generated net sales of $3,973,000, representing 5% of our total revenues during 2004 and 37% of our total growth in 2004. These increases
helped to offset or lessen the impact of price reductions in Spain, which are discussed below. Our revenues from our

27

---



omeprazole
products in 2004 declined to 22% of our total revenues, compared to 31% in the prior year, due to reduced selling prices in Spain.

Prices
for prescription pharmaceutical products in Spain must be approved by the Ministry of Health. For several years, the Ministry of Health has encouraged the substitution of
generic-equivalent products in order to help control rising healthcare costs. In late October 2003, the Spanish government enacted a regulation that reduced the prices that the government
reimburses for nine of our chemical entities, including the chemical entities omeprazole, simvastatin and enalapril, which accounted for approximately two thirds of revenues in the year ended
December 31, 2003. We implemented these new prices on December 1, 2003.

Although
the law required laboratories to begin selling at the new prices in December 2003, pharmacies in Spain were able to continue to sell at the old higher prices until
January 31, 2004. This transition period was an attempt to reduce returns of the higher priced products by allowing the higher priced products to pass through the distribution channel to the
end users. On average, our customers maintain a stock of approximately one to two months' supply of our products. As we began selling at the new lower prices on December 1, 2003 we expected the
majority of our products that were labeled at the old higher prices to have cleared the distribution channel by January 31, 2004. We experienced an unforeseen level of returns totaling
approximately $3,323,000 in 2004. These product returns exceeded our allowance for estimated sales returns at that time. A majority of the products returned were either expired, nearing expiration or
otherwise not resalable and consequently were destroyed.

The
reduced selling prices resulted in a reduction in total revenues of approximately $13,800,000 in 2004. Consequently our gross margins on pharmaceutical net product sales were
negatively impacted, resulting in a decline in our gross margins from 58% in 2003 to 52% in 2004.

In
response to the risk of government mandated price reductions, we implemented several initiatives which have effectively reduced our production costs on several of our products and
increased our gross margins. These initiatives include the purchase of new high speed manufacturing equipment, new product launches, and increased sales volume and market share through strategic
pricing. We expect to continue to increase our future sales volume through our pipeline of approximately 100 products. Additionally, in April 2004, we purchased a manufacturing facility,
located in Zaragoza, Spain, which specializes in the manufacture of active pharmaceutical ingredients. The ability to manufacture active pharmaceutical ingredients has diversified our revenue base. We
will continue to focus on acquiring, developing and launching new products that will improve our product mix. We will also continue our efforts to increase our sales outside of Spain through
additional registration, marketing, and supply agreements. We will also continue to make significant investments in renovating and increasing capacity in our manufacturing facilities, as well as
continued investments in new high speed, high volume equipment. We anticipate that our gross margins will gradually increase as we continue to implement our strategy and benefit from economies of
scale.

28

---





|                       |                            |   |        |       |     |    |   |        |       | Change |   
|---------------------- | -------------------------- | - | ------ | ----- | --- | -- | - | ------ | ----- | ------ | --
|
|
|Branded Product Sales: |                            |   |        |       |     |    |   |        |       |        |   
|                       | Enalapril                  |   | $      | 3,192 |     | 17 | % | $      | 2,610 |        | 14
|                       | Codeisan                   |   |        | 3,131 |     | 17 | % |        | 2,713 |        | 14
|                       | Omeprazole                 |   |        | 2,721 |     | 15 | % |        | 6,099 |        | 32
|                       | Mio Relax                  |   |        | 1,485 |     | 8  | % |        | 1,114 |        | 6 
|                       | Simvastatin                |   |        | 1,392 |     | 8  | % |        | 2,176 |        | 11
|                       | All other branded products |   |        | 6,470 |     | 35 | % |        | 4,349 |        | 23
|                       |                            |   |        |       |     |    |   |        |       |        |   
|Total branded sales    |                            | $ | 18,391 |       | 100 | %  | $ | 19,061 |       | 100    | % 
|                       |                            |   |        |       |     |    |   |        |       |        |   

Sales
of our branded pharmaceutical products decreased in 2004 by approximately 12% when expressed in constant currency. An increase in the weighted average value of the Euro, in
relation to the U.S. Dollar, had the effect of increasing branded product sales by approximately $1,675,000, resulting in a 4% decrease in branded pharmaceutical sales in the year ended
December 31, 2004 when expressed in U.S. Dollars. Branded sales accounted for 25% of total revenues during 2004, compared to 29% of total revenues during 2003. Price reductions that took effect
in December 2003 continued to negatively impact our branded product sales during 2004. Most significantly, sales of our branded omeprazole decreased by approximately $3,378,000 from the prior
year, as a result of the price reductions, although sales increased 2% during the year in terms of number of units sold. Sales of our branded enalapril, which experienced a 50% increase in unit volume
compared to the prior year, increased 22% from the prior year in spite of price cuts, and now accounts for 17% of our branded product sales. Strong sales of our cough and cold medicine, Codeisan, and
the launch of our branded version of paroxetine in May 2003 also helped to mitigate the impact of the price reductions.



|                       |                            |   |        |        |     |    |   |        |        | Change |   
|---------------------- | -------------------------- | - | ------ | ------ | --- | -- | - | ------ | ------ | ------ | --
|
|
|Generic Product Sales: |                            |   |        |        |     |    |   |        |        |        |   
|                       | Omeprazole                 |   | $      | 13,520 |     | 47 | % | $      | 13,863 |        | 51
|                       | Simvastatin                |   |        | 3,638  |     | 12 | % |        | 4,412  |        | 16
|                       | Paroxetine                 |   |        | 2,928  |     | 10 | % |        | 749    |        | 3 
|                       | Pentoxifylline             |   |        | 2,622  |     | 9  | % |        | 2,070  |        | 8 
|                       | Trimetazidine              |   |        | 1,983  |     | 7  | % |        | 532    |        | 2 
|                       | All other generic products |   |        | 4,328  |     | 15 | % |        | 5,341  |        | 20
|                       |                            |   |        |        |     |    |   |        |        |        |   
|Total generic sales    |                            | $ | 29,019 |        | 100 | %  | $ | 26,967 |        | 100    | % 
|                       |                            |   |        |        |     |    |   |        |        |        |   

Sales
of our generic pharmaceutical products increased in terms of units sold, but decreased by approximately 2% in 2004 when expressed in constant currency. An increase in the weighted
average value of the Euro, in relation to the U.S. Dollar, had the effect of increasing generic product sales by approximately $2,643,000, resulting in an 8% increase in generic pharmaceutical sales
in the year ended December 31, 2004, when expressed in U.S. Dollars. Sales of our generic omeprazole, which experienced an 8% increase in unit volume, decreased by 2% when expressed in U.S.
Dollars as a result of price reductions that took effect in December 2003. These sales accounted for 47% of our

29

---



generic
pharmaceutical revenues in 2004, compared to 51% of generic revenues in the prior year. Sales of our generic simvastatin, which experienced a 16% increase in unit volume, decreased by
approximately 18%, when expressed in U.S. Dollars as a result of the price reductions. Our generic paroxetine, which was launched in May 2003, added approximately $2,179,000 to our generic
sales in 2004, when compared to 2003, positioning it third behind our generic omeprazole and simvastatin products. Sales of our generic trimetazidine increased by approximately $1,451,000 in 2004, or
approximately 273% from 2003, while sales of our generic pentoxifylline increased by $552,000, or approximately 27%.



Increase2004

2003

$

%(in thousands)Sales to licensees and others

$
20,790

$
16,927

$
3,863

23
%


In
addition to manufacturing and selling products our own branded and generic products, we license the right to market products to others within and outside of Spain. These license
agreements are usually accompanied by long-term exclusive supply agreements, whereby our licensees purchase the licensed products from our manufacturing facility. As of December 31,
2004, our Spanish operations have executed 119 license agreements, of which 14 with customers in Spain and 41 with customers outside of Spain, cover actively marketed products that are generating
revenues. The remaining licenses, four with customers in Spain and 60 with customers outside of Spain, are for products that are awaiting regulatory approvals. Additionally, we have 15 contract
manufacturing agreements in effect in Spain and 6 contract manufacturing agreements in effect for international customers. Our clients market these products under their own name and with their own
labeling. Many of the products we manufacture for others use the same active ingredients that are used in our own marketed products. Sales under these agreements increased by 23%, 12% in constant
currency, over the prior year. An increase in the weighted average value of the Euro, in relation to the U.S. Dollar, had the effect of increasing our revenues from sales to licensees and others by
approximately $1,894,000.

Licensing and Collaboration Revenues.Licensing and collaboration revenues now account for 5% of total revenues and increased
by approximately $1,730,000, or approximately 101%, in 2004. These revenues include royalties totaling $2,844,000 from the commercialization and continued sales of Testim, the first product
incorporating our CPE-215 drug delivery technology, which was launched by our licensee, Auxilium, in February 2003. Testim is currently reported to capture approximately
12%13% of all new testosterone replacement prescriptions in the market. Also included inlicensing and collaboration revenuesin 2004 are
revenues of approximately $607,000 related to product licensing activities in Europe.

Gross Profit.Gross profit decreased by approximately 7% in constant currency in 2004 as a direct result of the
December 2003 price reductions in Spain. An increase in the weighted average value of the Euro, in relation to the U.S. Dollar, had the effect of increasing gross profit by approximately
$3,359,000. Gross margins on net product sales decreased from 58% in 2003 to 51% in 2004 (52% gross margins on sales of pharmaceutical products, excluding sales of active pharmaceutical ingredients).
Product returns, including returns related to the government mandated price reductions, reduced 2004 revenues by approximately $3,323,000. Product returns decreased to levels consistent with our
historical experience by June 2004. In 2005 the Spanish government temporarily suspended the reference-price system that was implemented by the Spanish government in late 2003 and proposed a
67-point plan to replace the reference system. The new plan includes a 4.2% price reduction in 2005 (and an additional 2% reduction in 2006) on only those drugs that have been on the
market in Spain

30

---



for
over one year and were not already subject to the reference-price reductions effected in December 2003.



Increase2004

2003

$

%(in thousands)Selling and marketing

$
14,808

$
14,212

$
596

4
%


Selling
and marketing expenses decreased by approximately 5% in constant currency in 2004; however, an increase in the weighted average value of the Euro, in relation to the U.S. Dollar,
had the effect of increasing selling and marketing expenses by approximately $1,351,000, resulting in a net increase of 4% when expressed in U.S. Dollars. Selling and marketing expenses as a
percentage of net product sales decreased to 21% in 2004, compared to 23% of net product sales in 2003.



Increase2004

2003

$

%(in thousands)General and administrative

$
9,126

$
7,001

$
2,125

30
%


General
and administrative expenses for 2004 increased 30% over the prior year. The $2,125,000 increase was the result of increased general and administrative activities required to
support our continued growth and prepare for our anticipated growth in the future. These expenditures include increased costs in the current year for additional employees, outside services, insurance
and other costs to support the growth of our organization and costs associated with our response to the requirements of the Sarbanes-Oxley Act of 2002. General and administrative expenses would have
been approximately $460,000 lower, absent the 2004 increase in the weighted average value of the Euro, in relation to the U.S. Dollar. General and administrative expenses as a percent of total
revenues increased to approximately 12% in 2004, from approximately 11% of total revenues in 2003.



Increase2004

2003

$

%(in thousands)Research and development

$
4,419

$
4,295

$
124

3
%


Research
and development expenses in 2004 remained consistent with 2003 in constant currency. An increase in the weighted average value of the Euro, in relation to the U.S. Dollar, had
the effect of increasing research and development expenses by approximately $114,000, representing 92% of the increase when expressed in U.S. Dollars.

In
the first quarter of 2004, we completed and reported the results of a Phase I intranasal insulin trial. Our Phase I trial demonstrated the effective delivery of insulin intranasally
in healthy human subjects. We have recently completed the in-patient stage of a Phase II study of our clinical program for the intranasal delivery of insulin and are in the data analysis
and reporting stages of that study. Additionally, we initiated certain clinical programs to support our strategy for the eventual distribution of certain of our Spanish generic pharmaceutical products
in other countries, including the U.S. In order to further our strategy, we entered into a multi-product collaboration agreement with Perrigo

31

---



Company
to co-develop and market certain generic pharmaceutical products in the U.S. and potentially other markets. We expect to continue to incur costs to conduct clinical trials and
support the required regulatory submissions for our clinical programs. We also incur costs related to pre-clinical programs for product formulation and testing efforts being performed in
the laboratory in our U.S. headquarters and at our facilities in Spain. The expenditures in research and development reflect our focus on projects that are necessary for expansion of our portfolio of
marketed products and clinical trials involving our drug delivery technologies. Although some of our cost estimates are preliminary, and the specific timing is not known, we project that our research
and development expenses in 2005 could be approximately $1,500,000 higher than in the year ended December 31, 2004.



Change2004

2003

$

%(in thousands)Other income (expenses)

$
1,800

$
91

$
1,709

*


---

Other
income (expenses) for the year ended December 31, 2004 increased by $1,709,000 over the same period in the prior year. The increase is primarily due to the reversal of
previously accrued tax assessments totaling $1,467,000 partially offset by interest and penalties totaling $193,000 associated with the settlement of the tax audit of our Spanish subsidiary (see Provision for Income
Taxes) during the second quarter of 2004. We recorded a pre-tax benefit totaling $1,467,000 ($954,000 after taxes) as a
component ofother income (expenses)as the result of the reversal of previously accrued pharmaceutical tax assessments in Spain. These assessments had
been accrued to be paid to the Spanish government to help reduce the impact of the rising health care costs in Spain. Due to recent changes in the pharmaceutical industry in Spain and a change in the
Spanish political environment, the basis for these liabilities no longer exists. Accordingly, these accruals were reversed during the second quarter of 2004.



2004Spain

U.S.

Consolidated(in thousands)Income (loss) before income taxes

$
13,408

$
(2,913
)
$
10,495Provision (benefit) for income taxes


4,693


(990
)

3,702Tax credits, changes in deferred taxes and other


(492
)

1,807


1,315Tax liability, 19982000 audit


604





604Total provision (benefit) for income taxes


4,805


817


5,622Valuation allowance





(817
)

(817
)Net provision (benefit) for income taxes


4,805





4,805Net income (loss)

$
8,603

$
(2,913
)
$
5,690Effective tax rate


36
%

0
%

46
%


A
tax review of our Spanish subsidiary, Laboratories Belmac S.A., by the Spanish tax authorities for the tax years 1998, 1999 and 2000, was completed in the quarter ended June 30,
2004. As a result of this audit, our subsidiary was assessed an additional tax liability of approximately $604,000, which has

32

---



been
recorded as a component ofprovision for income taxesfor the year ended December 31, 2004,and approximately $193,000 for related interest and penalties, which have been recorded as components ofother income and expenses,in the consolidated
income statement for the year ended December 31, 2004.

We
have recorded provisions for foreign income taxes totaling $4,805,000 ($4,201,000 income tax expense on operations plus $604,000 recorded as a result of the 19982000 tax
audit of our Spanish subsidiary) for the year ended December 31, 2004, compared to $5,423,000 for the year ended December 31, 2003. The effective tax rate in Spain for the year ended
December 31, 2004 was 36%; however, when the $604,000 tax audit settlement related to prior years is excluded, the effective tax rate is 31%, compared to the prior year effective rate of 34%.
The provision for foreign income taxes would have been approximately $457,000 lower than reported, absent the increase in the weighted average value of the Euro, in relation to the U.S. Dollar, during
the year ended December 31, 2004.

We
generated additional U.S. federal net operating loss carry-forwards in the year ended December 31, 2004 and 2003 as a result of U.S. pre-tax losses of $2,913,000
and $3,571,000, respectively. As future domestic operating profits cannot be reasonably assured, no tax benefit has been recorded for U.S. losses. Accordingly, we have established a valuation
allowance equal to the full amount of the U.S. deferred tax assets.

Should
we determine that it is more likely than not that we will realize certain of our net deferred tax assets for which we have previously provided a valuation allowance, an adjustment
would be required to reduce the existing valuation allowance. In addition, we operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. These audits can involve
complex issues, which may require an extended period of time for resolution. During 2004, we identified certain tax contingencies that we determined are probable and reasonably estimable.
Consequently, we have included a charge totaling $188,000 related to these contingencies in theprovision for income taxesfor the year ended
December 31, 2004. No other potential tax contingencies were considered to be probable and reasonably estimable as of December 31, 2004. However, there is the possibility that the
ultimate resolution of such potential contingencies could have an adverse effect on our Consolidated Financial Statements in the future.



Change2004

2003

$

%(in thousands)Net income

$
5,690

$
6,097

$
(407
)
-7
%Net income per common share:Basic

$
0.27

$
0.34

$
(0.07
)
-21
%Diluted

$
0.25

$
0.28

$
(0.03
)
-11
%Weighted average common shares outstanding:Basic


20,901


17,997


2,904

16
%Diluted


22,627


21,637


990

5
%


We
reported 2004 income from operations of $8,695,000, compared to 2003 income from operations of $11,429,000. In 2004, the combination of income from operations of $8,695,000 and the
non-operating items, primarily the provision for income taxes of $4,805,000, resulted in 2004 net income of $5,690,000, or $.27 per basic common share ($.25 per diluted common share) on
20,901,000 weighted average basic common shares outstanding (22,627,000 weighted average diluted
common shares outstanding), compared to 2003 net income of $6,097,000, or $.34 per basic common share ($.28 per diluted common share) on 17,997,000 weighted average basic common shares
outstanding (21,637,000 weighted average diluted common shares outstanding).

33

---



Fiscal Year Ended December 31, 2003 Compared To Fiscal Year Ended December 31, 2002

Revenues

|               |                                      |   |        |        |     |    |   |        |        | Increase |   
|-------------- | ------------------------------------ | - | ------ | ------ | --- | -- | - | ------ | ------ | -------- | --
|
|
|Revenues:      |                                      |   |        |        |     |    |   |        |        |          |   
|               | Net product sales                    |   | $      | 62,955 |     | 97 | % | $      | 38,718 |          | 99
|               | Licensing and collaboration revenues |   |        | 1,721  |     | 3  | % |        | 418    |          | 1 
|               |                                      |   |        |        |     |    |   |        |        |          |   
|Total revenues |                                      | $ | 64,676 |        | 100 | %  | $ | 39,136 |        | 100      | % 
|               |                                      |   |        |        |     |    |   |        |        |          |   

Our
total revenues increased 65% from 2002. The increase is primarily attributed to the continuing growth of our Spanish operations and secondarily to the advancement of our proprietary
drug delivery programs in the U.S., as evidenced by the launch of Testim.

The
following is a summary of our revenues by sales channel and top-selling product lines below:

For
the year ended December 31, 2003 (in thousands):

|                              |  | Revenues Within Spain |        |   |   |        |   |   |      
|----------------------------- |  | --------------------- | ------ | - | - | ------ | - | - | -----
|
|Omeprazole                    |  | $                     | 6,099  |   | $ | 13,863 |   | $ |     
|Simvastatin                   |  |                       | 2,176  |   |   | 4,412  |   |   |     
|Enalapril                     |  |                       | 2,610  |   |   | 1,878  |   |   |     
|Codeisan                      |  |                       | 2,713  |   |   |       |   |   |     
|Pentoxifylline                |  |                       |       |   |   | 2,070  |   |   |     
|All other products            |  |                       | 5,463  |   |   | 4,744  |   |   |     
|Sales to licensees and others |  |                       |       |   |   |       |   |   | 9,536
|Licensing and collaborations  |  |                       |       |   |   |       |   |   | 203  
|                              |  |                       |        |   |   |        |   |   |      
|Total Revenues                |  | $                     | 19,061 |   | $ | 26,967 |   | $ | 9,739
|                              |  |                       |        |   |   |        |   |   |      
|% of 2003 Revenues            |  |                       | 29     | % |   | 42     | % |   | 15   

For
the year ended December 31, 2002 (in thousands):

|                              |  | Sales Within Spain |        |   |   |        |   |   |      
|----------------------------- |  | ------------------ | ------ | - | - | ------ | - | - | -----
|
|Omeprazole                    |  | $                  | 5,051  |   | $ | 9,813  |   | $ |     
|Simvastatin                   |  |                    | 322    |   |   | 1,261  |   |   |     
|Enalapril                     |  |                    | 955    |   |   | 1,515  |   |   |     
|Codeisan                      |  |                    | 1,944  |   |   |       |   |   |     
|Pentoxifylline                |  |                    |       |   |   | 1,348  |   |   |     
|All other products            |  |                    | 4,103  |   |   | 2,738  |   |   |     
|Sales to licensees and others |  |                    |       |   |   |       |   |   | 7,406
|Licensing and collaborations  |  |                    |       |   |   |       |   |   |     
|                              |  |                    |        |   |   |        |   |   |      
|Total Revenues                |  | $                  | 12,375 |   | $ | 16,675 |   | $ | 7,406
|                              |  |                    |        |   |   |        |   |   |      
|% of 2002 Revenues            |  |                    | 32     | % |   | 43     | % |   | 19   

34

---



Spanish Operations.The 65% growth in revenues was fueled by an increase in sales of our two major product lines, omeprazole
and simvastatin. Sales of omeprazole and simvastatin increased 61% to $26,550,000 in 2003 compared to $16,447,000 in 2002. The growth of these two product lines accounted for 40% of our growth in
revenues in the current year. An increase in the weighted average value of the Euro, in relation to the U.S. Dollar, had the effect of increasing revenues by approximately $10,449,000, or 27%, during
the year ended December 31, 2003.



|                       |                            |   |        |       |     |    |   |        |       | Increase |   
|---------------------- | -------------------------- | - | ------ | ----- | --- | -- | - | ------ | ----- | -------- | --
|
|
|Branded Product Sales: |                            |   |        |       |     |    |   |        |       |          |   
|                       | Simvastatin                |   | $      | 2,176 |     | 11 | % | $      | 322   |          | 2 
|                       | Enalapril                  |   |        | 2,610 |     | 14 | % |        | 955   |          | 8 
|                       | Omeprazole                 |   |        | 6,099 |     | 32 | % |        | 5,051 |          | 41
|                       | Codeisan                   |   |        | 2,713 |     | 14 | % |        | 1,944 |          | 16
|                       | All other branded products |   |        | 5,463 |     | 29 | % |        | 4,103 |          | 33
|                       |                            |   |        |       |     |    |   |        |       |          |   
|Total branded sales    |                            | $ | 19,061 |       | 100 | %  | $ | 12,375 |       | 100      | % 
|                       |                            |   |        |       |     |    |   |        |       |          |   

Sales
of our branded pharmaceutical products increased by 54% compared to 2002, although they accounted for only 29% of total revenues in 2003 compared to 32% in 2002. Sales of our
branded simvastatin increased by approximately $1,854,000, or approximately 576% from 2002. Sales of our branded enalapril increased by approximately $1,655,000, or approximately 173% from 2002. Sales
of our branded omeprazole increased by approximately $1,048,000, or 21% from 2002. Sales of our branded codeisan increased by approximately $769,000, or approximately 40% from 2002. While we expect to
continue to develop, acquire, and launch new branded products, our focus on generics and sales outside of Spain are expected to increase at a significantly higher pace than that of our branded
products. An increase in the weighted average value of the Euro, in relation to the U.S. Dollar, had the effect of increasing branded net product sales by approximately $3,153,000, or 25%, during the
year ended December 31, 2003.



|                       |                            |   |        |        |     |    |   |        |       | Increase |   
|---------------------- | -------------------------- | - | ------ | ------ | --- | -- | - | ------ | ----- | -------- | --
|
|
|Generic Product Sales: |                            |   |        |        |     |    |   |        |       |          |   
|                       | Omeprazole                 |   | $      | 13,863 |     | 51 | % | $      | 9,813 |          | 59
|                       | Simvastatin                |   |        | 4,412  |     | 16 | % |        | 1,261 |          | 8 
|                       | Pentoxifylline             |   |        | 2,070  |     | 8  | % |        | 1,348 |          | 8 
|                       | Enalapril                  |   |        | 1,878  |     | 7  | % |        | 1,515 |          | 9 
|                       | All other generic products |   |        | 4,744  |     | 18 | % |        | 2,738 |          | 16
|                       |                            |   |        |        |     |    |   |        |       |          |   
|Total generic sales    |                            | $ | 26,967 |        | 100 | %  | $ | 16,675 |       | 100      | % 
|                       |                            |   |        |        |     |    |   |        |       |          |   

Sales
of our generic pharmaceutical products increased by 62% compared to 2002. Sales of our generic omeprazole increased by approximately $4,050,000, or approximately 41% from 2002.
Sales of our generic simvastatin increased by approximately $3,151,000, or approximately 250% from 2002. Sales of our generic pentoxifylline increased by approximately $722,000, or approximately 54%
from 2002. Generic products launched in 2003, such as trimetazedine and paroxetine, accounted for approximately

35

---



$1,600,000
of our 2003 revenues. An increase in the weighted average value of the Euro, in relation to the U.S. Dollar, had the effect of increasing generic net product sales by approximately
$4,461,000, or 27%, during the year ended December 31, 2003.



|                              |  |   |        |  |   | Increase | 
|----------------------------- |  | - | ------ |  | - | -------- | 
|
|
|Sales to licensees and others |  | $ | 16,927 |  | $ | 9,668    | 

In
addition to manufacturing our own products, our Spanish manufacturing facility supplies branded and generic products to 14 entities in Spain which market these products under their
own name and with their own labeling. Additionally, we have entered into license and supply agreements with more than 15 entities to sell our products outside of Spain. Revenues generated in 2003 from
sales to licensees and others have increased by approximately 75% from 2002, and represented 26% of total revenues in 2003, compared to 25% of total revenues in 2002. An increase in the weighted
average value of the Euro, in relation to the U.S. Dollar, had the effect of increasing revenues generated by sales to licensees and others by approximately $2,800,000, or 29%, during the year ended
December 31, 2003.

Licensing and Collaboration Revenues.Licensing and collaboration revenues now account for 3% of total revenues and increased
by approximately $1,303,000, or approximately 312%, in 2003 and include milestone payments and royalties from the commercialization and continued sales of Testim. We have also recognized revenues
totaling $203,000 during the year ended December 31, 2003, related to product licensing activities in Europe, which we have included in the Consolidated Income Statements as licensing and collaboration
revenues.

Gross Profit.Gross profit increased by approximately 69% from 2002. Approximately $14,315,000, or 92% of the increase, is
due to the 63% increase in net product sales (and slightly improved gross margins in 2003) and $1,303,000, or 8% of the increase, is due to the increased licensing and collaboration revenues in the
current year. Our gross margins on net product sales in 2003 increased slightly to 58.0% compared to 57.4% in 2002 as a result of economies of scale (allocation of fixed costs over a larger number of
units, reducing the per-unit cost), partially offset by lower margins of generic products, which typically have lower prices, and the sales of certain of our products in the month of
December 2003 at reduced selling prices. We experienced an increase in gross profit of 42% in local currency in 2003 compared to 2002. An increase in the weighted average value of the
Euro, in relation to the U.S. Dollar, had the effect of increasing gross profit by approximately $6,065,000 during the year ended December 31, 2003.



|                      |  |   |        |  |   | Increase | 
|--------------------- |  | - | ------ |  | - | -------- | 
|
|
|Selling and marketing |  | $ | 14,212 |  | $ | 10,400   | 

Selling
and marketing expenses increased by approximately 37% from 2002. The $3,812,000 increase, of which approximately 75% represented increased sales force costs and approximately 25%
represented increased promotion and marketing programs, was instrumental in achieving a 63% increase in net product sales. However, the increase in the weighted average value of the Euro, in relation
to the U.S. Dollar, had the effect of increasing selling and marketing expenses by

36

---



approximately
$2,361,000 in 2003, accounting for approximately 62% of the increase. Selling and marketing expenses as a percentage of net product sales decreased to 23% in 2003 compared to 27% of net
product sales in 2002.



|                           |  |   |       |  |   | Increase | 
|-------------------------- |  | - | ----- |  | - | -------- | 
|
|
|General and administrative |  | $ | 7,001 |  | $ | 4,902    | 

General
and administrative expenses increased 43% from 2002. The $2,099,000 increase was the result of increased general and administrative activities required to support our revenue
growth in 2003 and prepare for our anticipated future growth. Such expenditures included costs of additional employees, outside services, occupancy costs, corporate communications, insurance, etc.
General and administrative expenses as a percent of total revenues decreased to 11% in 2003, compared to 13% of total revenues in 2002. General and administrative expenses would have been
approximately $642,000 lower in 2003, absent the increase in the weighted average value of the Euro, in relation to the U.S. Dollar.



|                         |  |   |       |  |   | Increase | 
|------------------------ |  | - | ----- |  | - | -------- | 
|
|
|Research and development |  | $ | 4,295 |  | $ | 2,960    | 

Research
and development expenses increased approximately 45% from 2002. The $1,335,000 increase is due to pre-clinical programs underway in collaboration with universities
and with product formulation and testing efforts being performed in the laboratory in our U.S. headquarters and at our facility in Zaragoza, Spain.



|                                         |  | 2003 |       
|---------------------------------------- |  | ---- | ------
|
|
|Income (loss) before income taxes        |  | $    | 15,091
|Provision (benefit) for income taxes     |  |      | 5,092 
|Valuation allowance                      |  |      |      
|                                         |  |      |       
|Net provision (benefit) for income taxes |  |      | 5,092 
|                                         |  |      |       
|Net income (loss)                        |  | $    | 9,999 
|                                         |  |      |       
|Effective tax rate                       |  |      | 34    
|                                         |  |      |       

We
recorded a provision for foreign income taxes totaling $5,092,000 (approximately 34% of the Spanish pretax income of $15,091,000) for the year ended December 31, 2003 compared
to a provision for foreign income taxes of $2,534,000 (approximately 37% of the Spanish pretax income of $6,913,000) in 2002. The 2003 provision for Spanish income taxes results from reporting taxable
income from operations in Spain, whereas the 2002 Spanish provision for income taxes included approximately $2,304,000 as a result of reporting taxable income from operations in Spain and
approximately $230,000 as a result of capital gains taxes arising from the sale of Biolid®, Lactoliofil® and other drug licenses.

37

---



The
2003 provision for foreign income taxes would have been approximately $854,000 lower than reported, absent the increase in the weighted average value of the Euro, in relation to the U.S. Dollar.

Our
U.S. Company recorded a provision for foreign income taxes payable totaling $331,000 for the year ended December 31, 2003. This amount represents payments due to the Spanish
tax authorities by our U.S. Company for withholding taxes on certain of our intercompany fee arrangements with our Spanish subsidiaries. No such amounts were recorded in prior years.

We
generated additional U.S. federal net operating loss carry-forwards in 2003 and 2002 as a result of U.S. pretax losses of ($3,571,000) and ($2,743,000), respectively. However, since
we are not assured of future profitable domestic operations, we have recorded a valuation allowance for any future tax benefit of such losses in the U.S. Therefore, no tax benefit has been recognized
with respect to U.S. losses reported in 2003 or 2002.



|                                            |         |   |       |        |   | Increase |       
|------------------------------------------- | ------- | - | ----- | ------ | - | -------- | ------
|
|
|Net income                                  |         | $ | 6,097 |        | $ | 1,636    |       
|                                            |         |   |       |        |   |          |       
|Net income per common share:                |         |   |       |        |   |          |       
|                                            | Basic   |   | $     | 0.34   |   | $        | 0.10  
|                                            |         |   |       |        |   |          |       
|                                            | Diluted |   | $     | 0.28   |   | $        | 0.08  
|                                            |         |   |       |        |   |          |       
|Weighted average common shares outstanding: |         |   |       |        |   |          |       
|                                            | Basic   |   |       | 17,997 |   |          | 16,569
|                                            |         |   |       |        |   |          |       
|                                            | Diluted |   |       | 21,637 |   |          | 19,798
|                                            |         |   |       |        |   |          |       

We
reported 2003 income from operations of $11,429,000 compared to 2002 income from operations of $4,032,000 (including the $650,000 pre-tax gain on sale of the Biolid,
Lactoliofil and other drug licenses). The combination of income from operations of $11,429,000 and the non-operating items, primarily the provision for income taxes of $5,423,000, resulted
in 2003 net income of $6,097,000, or $.34 per basic common share ($.28 per diluted common share) on 17,997,000 weighted average basic common shares outstanding (21,637,000 weighted average diluted
common shares outstanding), compared to 2002 net income of $1,636,000, or $.10 per basic common share ($.08 per diluted common share) on 16,569,000 weighted average basic common shares outstanding
(19,798,000 weighted average diluted common shares outstanding).

38

---



Selected Quarterly Financial Data

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

|                                            |         | Fiscal 2003 |        | Fiscal 2004
|------------------------------------------- | ------- | ----------- | ------ | -----------
|
|
|
|Total revenues                              |         | $           | 14,988 |            
|Cost of net product sales                   |         |             | 6,121  |            
|                                            |         |             |        |            
|Gross profit                                |         |             | 8,867  |            
|Operating expenses                          |         |             | 6,213  |            
|Gain on sale of drug licenses               |         |             |       |            
|                                            |         |             |        |            
|Income from operations                      |         |             | 2,654  |            
|Other income (expenses)                     |         |             | 29     |            
|Provision for income taxes                  |         |             | 1,151  |            
|                                            |         |             |        |            
|Net income                                  |         | $           | 1,532  |            
|                                            |         |             |        |            
|Net income per common share:                |         |             |        |            
|                                            | Basic   |             | $      | 0.09       
|                                            |         |             |        |            
|                                            | Diluted |             | $      | 0.08       
|                                            |         |             |        |            
|Weighted average common shares outstanding: |         |             |        |            
|                                            | Basic   |             |        | 17,455     
|                                            |         |             |        |            
|                                            | Diluted |             |        | 20,350     
|                                            |         |             |        |            

---

Liquidity and Capital Resources

Total assets increased 21% from $100,463,000 at December 31, 2003 to $121,930,000 at December 31, 2004, while stockholders' equity increased 18%
from $76,165,000 at December 31, 2003 to $89,657,000 at December 31, 2004. The increase in stockholders' equity reflects primarily net income of $5,690,000,
the positive impact of the fluctuation of the Euro/US Dollar exchange rate which totaled $4,553,000 and the net proceeds from the exercise of stock options and warrants totaling $3,083,000.

Working
capital increased 2% from $46,181,000 at December 31, 2003 to $47,114,000 at December 31, 2004, primarily as a result of proceeds from exercises of options and
warrants totaling $3,083,000 and profits during the year ended December 31, 2004. These amounts were partially offset by additions to fixed assets and the purchase of active pharmaceutical
ingredient manufacturing assets, as well as investments in drug licenses.

Cash,
cash equivalents and marketable securities decreased 14% from $40,645,000 at December 31, 2003 to $34,758,000 at December 31, 2004, primarily as a result of additions
to fixed assets totaling $10,049,000, the purchase of API manufacturing assets for $3,309,000, and additions to drug licenses and related costs of $1,204,000, partially offset by net proceeds received
from exercises of stock options and warrants totaling $3,083,000 and cash provided by operating activities of $4,233,000. Also included in cash and cash equivalents at December 31, 2004 are
approximately $3,684,000 of short-term liquid investments considered to be cash equivalents.

39

---



Receivables
increased from $18,036,000 at December 31, 2003 to $27,860,000 at December 31, 2004 as a direct result of the increase in net product sales and the effect of
fluctuations in foreign currency exchange rates. Trade receivables comprise 85% of total 2004 receivables, totaling $23,586,000. Receivables at December 31, 2004 also include royalties
receivable totaling $1,882,000 and taxes receivable totaling $2,428,000. Receivables increased by approximately $7,867,000 in local currency, and fluctuations in foreign currency exchange rates
further increased receivables reported in U.S. Dollars by approximately $1,957,000. Write-offs of our receivables representing uncollectible accounts have not had a material effect on our
financial position, results of operations or cash flows. Inventories increased from $7,106,000 at December 31, 2003 to $10,258,000 at December 31, 2004, primarily as a result of raw
materials purchases and strategic increases in finished goods inventories in anticipation of continuing demand for our generic products. Inventories increased by approximately $2,333,000 in local
currency, and fluctuations in foreign currency exchange rates further increased inventories reported in U.S. Dollars by approximately $819,000.

The
combined total of accounts payable and accrued expenses increased from $17,257,000 at December 31, 2003 to $23,217,000 at December 31, 2004, primarily due an increase
in co-marketing costs payable of approximately $2,481,000, increases in amounts owed for purchases of fixed assets and drug licenses of $2,265,000 and the effect of fluctuations in foreign
currency exchange rates (approximately $1,787,000), partially offset by a $1,467,000 decrease in accrued expenses as a result of the reversal of previously accrued tax assessments.

Short-term
borrowings and current portion of long-term debt increased from $1,985,000 at December 31, 2003 to $2,785,000 at December 31, 2004, as a
result of additional net borrowings of approximately $595,000 and the effect of fluctuations in foreign currency exchange rates. The weighted average interest rate on our short-term
borrowings is 5.0%.

Long-term
debt, which totaled $369,000 at December 31, 2003, decreased to $349,000 during the year ended December 31, 2004, as a result of classifying $31,000,
the amount due within one year, as current portion of long-term debt. This decrease was partially offset by imputed interest on interest-free loans in Spain and the effect of
fluctuations in foreign currency exchange rates. The weighted average interest rate (including imputed interest) on our long-term debt is 5.7%.

Contractual Obligations

In addition to our short-term borrowings and long-term debt, we have fixed contractual obligations under various lease agreements. Our
contractual obligations were comprised of the following as of December 31, 2004 (in thousands):

|                                                  |  |   |       | Payments Due By Period
|------------------------------------------------- |  | - | ----- | ----------------------
|
|
|Long-term debt, including imputed interest of $65 |  | $ | 445   |                       
|Capital leases                                    |  |   |      |                       
|Operating leases                                  |  |   | 2,131 |                       
|Purchase obligations(1)                           |  |   | 2,234 |                       
|Other long-term liabilities(2)                    |  |   | 2,319 |                       
|                                                  |  |   |       |                       
|Total contractual cash obligations (3)            |  | $ | 7,129 |                       
|                                                  |  |   |       |                       

---

40

---





The
expected timing of payments of the obligations discussed above are estimated based on current information. Timing of payments and actual amounts paid may be different depending on
the time of receipt of goods or services or changes to agreed-upon amounts for obligations. Amounts disclosed as contingent or milestone-based obligations are dependent on the achievement
of the milestones or the occurrence of the contingent events and can vary significantly.

Operating
activities for the year ended December 31, 2004 provided net cash of $4,233,000. Investing activities, primarily additions to machinery and equipment and capital
improvements made to the manufacturing facility in Spain, the purchase of active pharmaceutical ingredients manufacturing assets and additions to drug licenses used net cash of $13,687,000 during the
year ended December 31, 2004. Financing activities, consisting primarily of the proceeds received from the exercise of stock options and
warrants (approximately $3,083,000), and proceeds from net borrowings (approximately $595,000) provided net cash of $3,678,000 during the year ended December 31, 2004.

In
accordance with the terms of the license agreement whereby we granted to Auxilium an exclusive royalty-based worldwide license, to develop, market and sell a topical testosterone gel
containing our CPE-215 technology, we have been earning and receiving royalty payments from Auxilium on Testim sales since the product launch in early 2003 and we expect to continue
receiving royalty payments for the foreseeable future.

We
plan to continue making improvements to our manufacturing facilities during 2005 that include the acquisition of additional manufacturing equipment and expansion of our active
pharmaceutical ingredients manufacturing facility, in order to accommodate our expected growth. We have budgeted approximately $19,200,000 for capital expenditures during 2005. We plan to finance
these expenditures from a combination of cash flow from operations and borrowings.

Seasonality, Effect of Inflation and Liquidity.In the past, we have experienced lower sales in the third calendar quarter
and higher sales in the fourth calendar quarter due to seasonality of our pharmaceutical business. As we market more pharmaceutical products whose sales are seasonal, seasonality of sales may become
more significant. Neither inflation nor changing prices has materially impacted our revenues or income from operations for the periods presented. We expect to have

41

---



sufficient
liquidity to fund operations for at least the next twenty-four months. We continue to search both domestically and internationally for opportunities that will enable us to
continue expanding our business and explore alternative financing sources for these activities, including the possibility of public and/or private offerings of our securities. In appropriate
situations, that will be strategically determined, we may seek financial assistance from other sources, including contribution by others to joint ventures and other collaborative or licensing
arrangements for the development, testing, manufacturing and marketing of products under development.

Off-Balance-Sheet Arrangements

We do not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies and Estimates

Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements in this Annual Report on
Form 10-K for the year ended December 31, 2004. However, certain of our accounting policies are particularly important to the portrayal of our financial position, and results
of operations and cash flows and require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying those policies, our
management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Our critical accounting policies and
estimates include:



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New Accounting Standards

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised), Share-Based Payment. This Statement is a revision
of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS
No. 123 (Revised) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize
stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123 (Revised) is
effective for the first interim or annual reporting period that begins after June 15, 2005. Management of the Company is evaluating the two methods of adoption allowed by SFAS No. 123
(Revised), the modified-prospective transition method and the modified-retrospective transition method, and the related impact on its Consolidated Financial Statements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency.A substantial amount of our business is conducted in Europe and is therefore influenced to the extent to
which there are fluctuations in the U.S. Dollar's value against other currencies, specifically the Euro. The exchange rate at December 31, 2004 and 2003 was .73 Euros and .80 Euros per U.S.
Dollar, respectively. The weighted average exchange rate for the years ended December 31, 2004, 2003 and 2002 was .81 Euros, .89 Euros and 1.06 Euros per U.S. Dollar, respectively. The net
effect of foreign currency translation on the Company's Consolidated Financial Statements during the year ended December 31, 2004 was an increase of $4,553,000 and the cumulative historical
effect was an increase of $9,722,000, as reflected in our Consolidated Balance Sheets asaccumulated other comprehensive income. The carrying value of
assets and liabilities can be materially impacted by foreign currency translation, as can the translated amounts of revenues and expenses. Nonetheless, we do not plan to modify our business practices.

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

Interest Rates.The weighted average interest rate on our short-term borrowings and current portion of
long-term debt is 5.0% and the balance outstanding is $2,785,000 as of December 31, 2004. Our long-term borrowings are non-interest bearing and the balance
outstanding on these borrowings at December 31, 2004 is $445,000 including imputed interest (ranging from 5.2% to 6.0%) of $65,000. Amounts due within one year totaling $31,000 have been
classified as current on the Consolidated Balance Sheet at December 31, 2004. The weighted average interest rate on our long-term borrowings is 5.7%. The effect of an increase in
the interest rate of one percentage point (one hundred basis points) to 6.0% on short-term borrowings and to an average of 6.7% on long-term borrowings would have the effect of
increasing interest expense by approximately $32,000 annually.

Risk Factors

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

Our growth depends on identifying drugs suitable for our drug delivery technologies and expanding our generic and branded drug operations.

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

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not
effectively identify drugs to be used with our technologies, improve the delivery of drugs with our technologies and bring the improved drugs to commercial success, then we may not be able to
continue our growth and we will be adversely affected.

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

The
growth of our generic and branded operations may be adversely impacted by claims by others that our products infringe on the proprietary rights of their existing
"brand-name" products. Companies that produce brand pharmaceutical products routinely bring litigation against companies who seek regulatory approval to manufacture and market generic
forms of their branded products and may attempt to secure injunctions that will prevent the generic competitors from eroding their market share. These companies may allege patent infringement or other
violations of intellectual property rights, which must be decided by the courts.

Products using our technologies are in various stages of development and may not achieve commercial success.

Independently as well as in conjunction with strategic partners, we are investigating the use of our technologies with respect to a variety of pharmaceutical
compounds and products that are in various stages of development. We are unable to predict whether any of these products will receive regulatory approvals or be successfully developed, manufactured or
commercialized. Further, due to the extended testing and regulatory review process required before marketing clearance can be obtained, the time periods before commercialization of any of these
products are long and uncertain. Risks during development include the possibility that:



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If medical doctors do not prescribe our products or the medical profession does not accept our products, our ability to grow our revenues will be limited.

Our business is dependent on market acceptance of our products by physicians, hospitals, pharmacists, patients and the medical community. Willingness to prescribe
our products depends on many factors, including:



Even
though we have received regulatory approval for Testim, and even if we receive regulatory approval and satisfy the above criteria for any of our other product candidates, physicians
may not prescribe our products if we do not promote our products effectively. Factors that could affect our success in marketing our products include:



If
any of our products or product candidates fails to achieve market acceptance, we may not be able to market and sell the products successfully, which would limit our ability to
generate revenue.

We will rely on strategic partners to conduct clinical trials and commercialize products that use our drug delivery technologies.

In light of our resources and the significant time, expense, expertise and infrastructure necessary to bring new drugs and formulations from inception to market,
we are particularly dependent on resources from third parties to commercialize products incorporating our technologies. Our strategy involves forming alliances with others to develop, manufacture,
market and sell our products in the United States and other countries. We entered into an agreement with Perrigo Company in November 2004 and
continue to pursue strategic partners for these purposes. We may not be successful in finding other strategic partners or in otherwise obtaining financing, in which case the development of our
products would be delayed or curtailed.

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

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agreement
entered into with a strategic partner will lead to further agreements or ultimately result in commercialization of a product.

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

If we are unable to meet our responsibilities under any of our agreements, we may lose potential business and be subject to penalties and other damages.

We are a party to a number of agreements pursuant to which we are required to perform certain tasks in accordance with specified schedules. Should we not meet
these deadlines and requirements, our counterparties can take actions specified in these agreements which could substantially reduce the amount of revenues the Company would receive or terminate the
related agreements. Additionally, in accordance with the terms of these agreements, the Company may be forced to pay penalties or other damages to our counterparties for breaching these agreements.

We
expect to enter into additional agreements in the future. These agreements may impose various development, funding or other obligations on us. If we breach any of these obligations,
the counterparty may have the right to terminate the agreement or seek other remedies which could significantly reduce expected profits to the Company.

Disputes
may arise with respect to agreements regarding the manufacturing, development and commercialization of any products, including products which incorporate our intellectual
property. These disputes could lead to delays in commercialization of products incorporating our technologies or termination of the agreements.

A significant portion of our revenues are generated by the sale of products formulated from one active ingredient.

Spanish sales from our omeprazole product line accounted for approximately 22% and 31% of our consolidated total revenues in 2004 and 2003, respectively. The
active pharmaceutical ingredient for our omeprazole products is currently purchased from one supplier. If we lose and cannot effectively replace our supplier or are otherwise unable to continue the
sales of our omeprazole products, our revenues would decline significantly.

Pharmaceutical pricing, changes in third-party reimbursement and governmental mandates are uncertain and may adversely affect us.

Our revenues and profitability may be adversely affected by the continuing efforts of governmental and third-party payors to contain or reduce the costs of
healthcare. A substantial portion of our operations consists of marketing and manufacturing, primarily in Spain, generic and branded pharmaceutical products. The use of generic drugs is regulated in
Spain, the U.S. and many other countries, and is subject to many changing and competing public policy considerations. In addition, in certain markets, such as Spain, pricing or profitability of
prescription pharmaceuticals is subject to government control through reimbursement limitations. Specifically, prices for prescription pharmaceutical products in Spain must be approved by Spain's
Ministry of Health. In order to help

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control
rising healthcare costs, the Ministry of Health, in recent years, has encouraged the substitution of generic-equivalent products. In further efforts to reduce healthcare costs, the Ministry of
Health had been contemplating new laws and regulations that would significantly reduce the market prices of certain pharmaceutical products, including generic-equivalent drugs. In late
October 2003, the Spanish government enacted a regulation that reduced the prices that the government reimburses for certain prescription pharmaceutical products. These new prices became
effective on December 26, 2003; however, we voluntarily implemented the lower prices beginning December 1, 2003. The regulation affected six of our chemical entities sold in Spain,
including the chemical entities omeprazole, simvastatin and enalapril, that reduced our 2004 revenues by approximately $13,800,000. In 2005 the Spanish government temporarily suspended the
reference-price system that was implemented by the Spanish government in late 2003 and proposed a 67-point plan to replace the reference price system. The new plan includes a 4.2% price
reduction in 2005 (and an additional 2% reduction in 2006) on only those drugs that have been on the market in Spain for over one year and were not already subject to the reference-price reductions
for 2004.

Successful
commercialization of many of our products, including those using our permeation technologies as well as our generic and branded products, may depend on the availability of
reimbursement for the cost of such products and related treatment from third-party healthcare payors, such as the government, private insurance plans and managed care organizations. Third-party payors
are increasingly challenging the price of medical products and services. Such reimbursement may not be available for any of our products at all or for the duration of the recommended treatment with a
drug, which could materially adversely affect our ability to commercialize that drug. The increasing emphasis on managed care in the U.S. continues to increase the pressure on pharmaceutical pricing.
Some governmental agencies, including those in Spain, can compel companies to continue to produce products that are not profitable for the company due to insufficient supply. In the U.S., there have
been a number of federal and state proposals to implement similar government controls. We anticipate that there will continue to be a number of proposals in the U.S., as has been the case in many
foreign markets. The announcement or adoption of such proposals could adversely affect us. Further, our ability to commercialize our products may be adversely affected to the extent that such
proposals materially adversely affect the business, financial condition and profitability of companies that are prospective strategic partners.

The
cost of healthcare in Spain, the U.S. and elsewhere continues to be a subject of investigation and action by various governmental agencies. Certain resulting legislative proposals
may adversely affect us. For example, governmental actions to further reduce or eliminate reimbursement for drugs may directly diminish our markets. In addition, legislative safety and efficacy
measures may be invoked that lengthen and increase the costs of drug approval processes. Further, social, economic and other broad policy legislation may induce unpredictable changes in the healthcare
environment. We cannot assure you whether any of these measures may be enacted in some form, if at all, or the impact they may have if enacted.

If our clinical trials fail, we will be unable to market products.

Any human pharmaceutical product developed by us would require clearance by the FDA for sales in the United States, by Spain's Ministry of Health for sales in
Spain and by comparable regulatory agencies for sales in other countries. In the case of non-generic products, the process of conducting clinical trials and obtaining FDA and other
regulatory approvals is lengthy and expensive and we cannot be assured of success. In order to obtain FDA approval of any new product candidates using our technologies, an NDA must be submitted to the
FDA demonstrating that the product candidate, based on preclinical research, animal studies and human clinical trials, is safe for humans and effective for its intended use. Positive results from
preclinical studies and early clinical trials do not ensure positive results in more advanced clinical trials designed to permit application for regulatory approval.

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We
may suffer significant setbacks in clinical trials, even in cases where earlier clinical trials show promising results. Any of our new product candidates may produce undesirable side effects in
humans that could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a product candidate. We, the FDA or other regulatory authorities, may suspend our clinical trials at
any time if we or they believe the trial participants face unacceptable health risks or if they find deficiencies in any of our regulatory submissions. Other factors that can cause delay or terminate
our clinical trials include:



Our patent positions and intended proprietary or similar protections are uncertain.

We have filed numerous patent applications and have been granted licenses to, or have acquired, a number of patents. We cannot assure you, however, that our
pending applications will be issued as patents or that any of our issued or licensed patents will afford adequate protection to us or our licensees. We cannot determine the ultimate scope and validity
of patents that are now owned by or may be granted to third parties, the extent to which we may wish, or be required, to acquire rights under such patents or the cost or availability of such rights.
In the event that patent protection for our technologies expire, or are not extended, revenues derived from such technologies may be reduced significantly.

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

As
an example of the risk of infringement claims, in 2003 we were notified that a legal proceeding had been commenced in Madrid against us by Merck & Co. Inc. and its
Spanish subsidiary alleging that we violated their patents in our production of the product simvastatin and in 2004 we were notified that a legal proceeding had been commenced in Madrid against us by
GlaxoSmithKline S.A. and its Spanish subsidiaries alleging that we violated their patents in our production of the product paroxetine. We cannot assure you that similar such actions will not be
brought nor that they will not have an adverse effect on us.

We
also rely on trade secrets, unpatented proprietary technologies and continuing technological innovations in the development and commercialization of our products. We cannot assure you
that others will not independently develop the same or similar technologies or obtain access to our

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

Regulatory approvals must be obtained and maintained for products incorporating our technologies and, if approvals are delayed or withdrawn, we will be unable to commercialize
these products.

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

Our business will suffer if we fail to comply with federal regulations and rules of the Securities and Exchange Commission and New York Stock Exchange relating to corporate
governance reform.

As a public company, we are subject to certain federal regulations and the rules and regulations of the Securities and Exchange Commission and the New York Stock
Exchange. The Sarbanes-Oxley Act of 2002 required more stringent accounting, corporate fraud and securities laws. To implement this legislation, the Securities and Exchange Commission has adopted new
rules and may adopt additional rules pertaining to, among other things, additional disclosure and reporting requirements, including requirements relating to internal control procedures. The New York
Stock Exchange has also adopted various rules relating to corporate governance. Our reputation and financial results could be materially harmed by any failure by us to comply with any current or
future rules or regulations relating to the Sarbanes-Oxley Act or to any other federal corporate or stock exchange reform measures.

Compliance with the requirements of the Sarbanes-Oxley Act of 2002 may require a reallocation of resources that would otherwise be dedicated to operating our business.

The Sarbanes-Oxley Act of 2002 imposed significant new administrative burdens on publicly traded companies. We expect to incur significant incremental costs in
complying with the provisions of the Sarbanes-Oxley Act. We cannot assure you that these additional costs will result in any increase in revenue or that they will not have a material adverse effect on
our financial results. In addition, because we are a small company with relatively few employees, the individuals responsible for complying with the new statutory and regulatory requirements also have
responsibility for business matters. As a result, our business may suffer if these individuals are forced to spend a disproportionate amount of time on compliance matters.

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Implementation of new information systems could cause business interruptions and negatively affect our profitability and cash flows.

We are in the process of implementing a new inventory warehouse system to enhance operational efficiencies and provide more effective management of our logistics.
This implementation will enable us to better meet the challenges related to our continued growth and the needs of our customers. We also plan to upgrade and replace certain of our financial systems to
help enable us to meet the new challenges of the new regulatory environment including regulations imposed by the Sarbanes-Oxley Act of 2002. We expect that, over time, new systems will result in
improved business processes and increased operating efficiencies. As our employees become familiar with the new systems, we expect that some errors may occur, some of which could adversely impact our
business and financial results.
There can be no assurance that the systems will perform as expected or that the anticipated improvements in business processes and operating efficiencies will be achieved. In the event of serious
system malfunctions or deficiencies, we might experience business interruptions, which could adversely impact on our results of operations, financial condition and cash flows.

If we are unable to obtain marketing approvals to sell our products in countries other than Spain, we may not be able to obtain additional revenues from sales in those
countries.

We cannot assure you that products that have obtained marketing approval in Spain will be approved for marketing elsewhere. If we are unable to obtain marketing
approval for our products in countries other than Spain, we may not be able to obtain additional revenues from sales in those countries.

We must comply with Good Manufacturing Practices in the production of pharmaceutical products.

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

We have only one manufacturing facility that can be used to manufacture our pharmaceutical products for sale to others. We have only one manufacturing facility that can be used
to manufacture active pharmaceutical ingredients for sale to others.

All of our manufactured pharmaceutical products are manufactured in one factory in Zaragoza, Spain. Although we have constructed the factory with redundant lines
for our most significant products that are in separate areas of the factory, and installed a fire suppression system, the destruction of the factory by a fire or other catastrophe would have a
material impact on our revenues until we are able to rebuild the factory or secure an alternative manufacturing site.

Similarly,
all of our manufactured active pharmaceutical ingredients are manufactured in one factory in Zaragoza, Spain. A fire or other catastrophe would have a material impact on our
revenues until we are able to rebuild the factory or secure an alternative manufacturing site.

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We operate a significant portion of our business in, and plan to expand further into, markets outside the United States, which subjects us to additional business risks.

During the year ended December 31, 2004, 81% of our revenues were derived from sales made by our Spanish subsidiaries in Spain and 16% of our revenues were
derived from sales made by our Spanish subsidiaries to customers in other foreign countries. We believe that a significant portion of our revenues will continue to be derived from sales in foreign
countries. Conducting business internationally subjects us to a number of risks and uncertainties, including:



Currency fluctuations could have a material adverse impact on our business.

Our revenues may be impacted by fluctuations in local currencies due to the fact that 96% of our revenues currently are generated by our Spanish subsidiaries,
Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. Our Spanish subsidiaries reported an increase in net sales of 1% in constant currency for the year ended December 31, 2004
compared to the prior year. An increase in the value of the Euro, in relation to the U.S. Dollar, had the effect of increasing revenues by approximately $6,502,000 during the year ended
December 31, 2004. We do not currently engage in foreign exchange hedging transactions to manage our foreign currency exposure because much of our expenditures are in the same currency as our
revenues. Our foreign operations expose us to a number of currency related risks, including the following:



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If we cannot keep pace with rapid technological change and meet the intense competition in our industry, we may not succeed.

Our success depends, in part, on achieving and maintaining a competitive position in the development of products and technologies in a rapidly evolving industry.
If we unable to continue to develop and/or acquire competitive products and technologies, our current and potential strategic partners may choose to adopt the drug delivery technologies of our
competitors. We also compete generally with other drug delivery, biotechnology and pharmaceutical companies engaged in the development of alternative drug delivery technologies or new drug research
and testing. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than we do and
represent significant competition for us. Our competitors may succeed in developing competing technologies or obtaining governmental approval for products before we achieve success, if at all. The
products of our competitors may gain market acceptance more rapidly than our products. Developments by competitors may render our existing or proposed products noncompetitive or obsolete.

Our
competitive positions in our generic and branded drug operations as well as with our drug delivery technologies are uncertain and subject to risks. In Spain, and in other countries,
we must demonstrate bioequivalence of our generic products, which may be challenged by branded and other generic competitors as well as regulatory authorities. In order to demonstrate bioequivalence
of our generic products, we must show that the rate and extent of absorption and levels of concentration of our generic products are not statistically different from innovators' products that have
previously been approved by the regulatory authorities of the respective country, when administered at the same dosage level under similar clinical conditions.

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

We may be unable to meet increasing expenses and demands on our resources from future growth, if any, or to effectively pursue additional business opportunities.

We routinely consider acquisition and investment opportunities, although we have no current agreements or commitments with respect to any acquisitions or
investments. Any future acquisitions or investments would further challenge our resources. If we do not properly meet the increasing expenses and demands on our resources from future growth, we will
be adversely affected. To properly manage our growth, we must, among other things, implement additional and improve existing administrative, financial, marketing, operational and research and
development systems, procedures and controls on a timely basis. We may also need to expand our staff in these and other areas. We may not be able to complete the improvements to our systems,
procedures and controls necessary to support our future operations in a timely manner. We may not be able to hire, train, integrate, retain, motivate and manage required personnel, successfully
integrate acquisitions or investments, nor successfully identify, manage and pursue existing and potential market opportunities. We plan to invest approximately $19.2 million in capital
expenditures during the year ending December 31, 2005, to expand our API manufacturing facility, expand our pharmaceutical product manufacturing facility and add new production lines in order
to be able to accommodate the level of operations and growth that is anticipated as a result of the Company's expansion beyond the borders of Spain and the U.S. market. We plan to finance these
expenditures from a combination of cash flow from operations and borrowings. If we fail to generate additional revenue in excess of increased operating expenses in any fiscal period, we may incur
losses.

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Our operations could be adversely affected if we are unable to raise or obtain needed funding.

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

In
addition to development and other costs, we expect to incur capital expenditures from time to time. These capital expenditures will be influenced by our regulatory compliance efforts,
our success, if any, at developing collaborative arrangements with strategic partners, our needs for additional facilities and capital equipment and the growth, if any, of our business in general.
There can be no assurance that we will receive additional funding on favorable terms if at all, or that we will be successful in attracting strategic partners. If we cannot raise funds or engage
strategic partners on acceptable terms when needed, we may not be able to continue our research and development activities, develop or enhance our products and services, take advantage of future
opportunities, grow our business or respond to competitive pressures or unanticipated requirements.

If we undertake an acquisition, we will incur a variety of costs, and we may never realize the anticipated benefits of the acquisition.

One of our strategies for business expansion is the acquisition of additional technologies, products and product candidates. We may attempt to acquire these
product candidates, or other potentially beneficial technologies, through the acquisition of businesses, services or products that we believe are a strategic fit with our business. Although we
currently have no commitments or agreements with respect to any acquisitions, if we undertake an acquisition, the process of integrating the acquired business, technology, service or product may
result in unforeseen operating difficulties and expenditures and may divert significant management attention from our ongoing business operations. Moreover, we may fail to realize the anticipated
benefits of any acquisition for a variety of reasons such as an acquired technology or product candidate proving to not be safe or effective in later clinical trials. We may fund any future
acquisition by issuing equity or debt securities, which could dilute your ownership percentage or limit our financial or operating flexibility as a result of restrictive covenants related to new debt.
Acquisition efforts can consume significant management attention and require substantial expenditures, which could detract from our other programs. In addition, we may devote resources to potential
acquisitions that are never completed.

If we do not successfully manage our growth, our business goals may not be achieved.

Expansion has placed, and is expected to continue to place, a significant strain on our management, operational and financial resources. To manage further growth,
we will be required to continue to improve existing, and implement additional, operational and financial systems, procedures and controls, and hire, train and manage additional employees. Our current
and planned personnel, systems, procedures and controls may not be adequate to support our anticipated growth and we may not be able to hire, train, retain, motivate and manage required personnel. Our
failure to manage growth effectively could limit our ability to achieve our business goals.

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Changes in accounting for expensing of stock options could result in unfavorable charges or require us to change our compensation policies.

We have relied heavily on stock options to compensate existing employees and attract new employees. We currently are not required to record stock-based
compensation charges if the employee's stock option exercise price equals or exceeds the fair value of our common stock at the date of grant. In December 2004, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123 (Revised),Share-Based Payment. This Statement is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to
Employees, and its related implementation guidance. SFAS No. 123 (Revised) focuses primarily on accounting for transactions in which an entity obtains employee services
in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair
value of those awards (with limited exceptions). SFAS No. 123 (Revised) is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005.
Management of the Company is evaluating the two methods of adoption allowed by SFAS No. 123 (Revised), the modified-prospective transition method and the modified-retrospective transition
method, and the related impact on our Consolidated Financial Statements. When we change our accounting policy to record the fair value of stock options granted, our expenses will increase which will
reduce our net income and earnings per share. We may choose to reduce our reliance on stock options as a compensation tool as a result of the impact of recording stock options at their fair value. If
we reduce our use of stock options, it may be more difficult for us to attract and retain qualified employees.

If we cannot attract and retain key personnel, we may not be able to execute our business plan as anticipated.

Our success is dependent on our ability to attract and retain qualified, experienced personnel. We face significant competition in recruiting competent personnel.
Because the location of our headquarters is in an area with relatively few pharmaceutical companies recruiting candidates has been more difficult, as many candidates prefer to work in places with a
broad pharmaceutical industry presence. The loss of key personnel, or the inability to attract and retain additional, competent employees, could adversely affect our business and financial results.

We
have assigned many key responsibilities within our company to, and are dependent on, a relatively small number of individuals. If we lose the services of our Chief Executive Officer,
Chief Financial Officer, Chief Medical Officer, or the General Manager of our Spanish subsidiary, our ability to execute our business plan in the manner we currently anticipate would be adversely
affected. We maintain key person life insurance only for our Chief Executive Officer. We have an employment agreement with each of our key personnel.

We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability claims.

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

Our
inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could inhibit or prevent the commercialization
of pharmaceutical

55

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products
we develop alone or with corporate collaborators. We maintain product liability insurance in the amount of $3 million Euros (approximately $4 million U.S. Dollars) and clinical
trial insurance in connection with our clinical testing activities in various amounts on a study-by-study basis. While management believes that this insurance is reasonable, we
cannot assure you that any of this coverage will be adequate to protect us in the event of a claim. We, or any corporate collaborators, may not be able to obtain or maintain insurance at a reasonable
cost, if at all. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate if any claim arises.
Our agreement with Perrigo Company requires us to secure product liability insurance equal to $10 million upon commercialization of the products being developed. There can be no assurance that
we will be able to secure such an amount of coverage at a reasonable cost or at all or that if secured, that it will be adequate to protect us in the event of a claim.

Our revenues, operating results and cash flows may fluctuate in future periods and we may fail to meet investor expectations, which may cause the price of our common stock to
decline.

Variations in our quarterly and year-end operating results are difficult to predict and may fluctuate significantly from period to period. If our
sales or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. In addition to the other factors discussed under
these "Risk Factors," specific factors that may cause fluctuations in our operating results include:



Forecasting
our revenues is complicated by difficulties in estimating inventory levels at our wholesalers and pharmacies, the timing of purchases by wholesalers and retailers to
replenish inventory and the occurrence and amount of product returns.

Your percentage of ownership and voting power and the price of our common stock may decrease as a result of events that increase the number of our outstanding shares.

As of December 31, 2004, we had the following capital structure:

No. of SharesCommon stock outstanding

21,312,465Common stock issuable upon:Exercise of options which are outstanding

4,087,078Exercise of options which are available for grant

1,079,750Total common stock outstanding assuming exercise of all of the above

26,479,293


As
of December 31, 2004, we had outstanding options to purchase approximately 4,087,078 shares of common stock at exercise prices ranging from $2.00 to $15.83 (exercisable at a
weighted average of $7.44 per share), of which approximately 3,338,800 were then vested and exercisable. We may conduct

56

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future
offerings of our common stock or other securities with rights to convert the securities into shares of our common stock. Exercise of our outstanding options into shares of our common stock may
significantly and negatively affect the market price for our common stock as well as decrease your percentage ownership and voting power.

Our stock is volatile.

The market prices for our securities and for securities of emerging growth companies have historically been highly volatile. During the last two years, the price
of our common stock has ranged from a high of $18.80 to a low of $7.85. Future announcements concerning us or our competitors may have a significant impact on the market price of our common stock.
Factors which may affect our market price include:



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

Delaware law and provisions in our certificate of incorporation, bylaws and stockholder rights plan may prevent or discourage third parties or stockholders from attempting to
replace the management of the Company.

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

Our
certificate of incorporation and bylaws include provisions that also may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition
proposal that a stockholder might consider favorable. Our board of directors is divided into three classes with staggered three-year terms, which makes it more difficult for an acquiror to
change the overall composition of the board in a short period of time. The affirmative vote of at least two-thirds of our outstanding shares is required to approve a merger, a sale or
lease of all or substantially all of our assets, certain other business combinations or dissolution or liquidation, and an affirmative vote of two-thirds of our outstanding shares is
required to amend or repeal any provision in our certificate of incorporation relating to our directors and officers as well as certain other provisions in our certificate of

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incorporation.
Additionally, our certificate of incorporation authorizes our board of directors to issue preferred stock in one or more series with the rights, obligations and preferences of each
series to be determined by our board without stockholder approval. Our staggered board, the super-majority voting provisions and the potential issuance of preferred stock may have the effect of
delaying, preventing or discouraging third parties or stockholders from attempting to replace our management.

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To the same potential effect, we have a stockholder rights plan designed to prevent a potential acquirer from gaining control of us without adequately compensating our shareholders and
to protect us from coercive takeover attempts. The rights will become exercisable only if any person or group of affiliated persons beneficially acquires 15% or more of our common stock. Under certain
circumstances, each holder of a right (other than the person or group who acquired 15% or more of our common stock) is entitled to purchase a defined number of shares of our common stock at 50% of its
market price at the time that the right becomes exercisable.

Item 8. Financial Statements and Supplementary Data

See Item 15 of this Annual Report on Form 10-K.

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

Not applicable.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

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

The
Company's management, with the participation of its principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
as of the end of the period covered by this report. Based on that evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls
and procedures were effective as of December 31, 2004. Although the Company's management continues to evaluate the internal control structure and strengthen its control procedures, particularly
in connection with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, there have been no changes that have materially affected, or are reasonably likely to materially affect the
Company's internal controls over financial reporting during the year ended December 31, 2004.

Internal Control over Financial Reporting

As of the filing of this Annual Report on Form 10-K, we are in the process of testing our internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act, which requires an annual management report assessing the effectiveness of our internal controls over financial reporting, accompanied by
an attestation to this report by our independent registered public accounting firm. The Company is eligible for a 45-day extension offered by the SEC to companies of a certain size for
filing this report and the attestation. We have elected to utilize this 45-day extension and, accordingly, this Annual Report on Form 10-K does not include either the
management report or the attestation. We anticipate completing this process and filing these reports in an amendment to this Form 10-K, which we intend to file in April 2005.
Based on our testing to date, we are not aware of any material weakness in our internal controls over financial reporting and related disclosures.

There
was no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
identified in connection with the evaluation of the Company's internal controls that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, such controls.

Item 9B. Other Information

Not applicable.

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Part III

Item 10. Directors and Executive Officers of the Registrant

|Name               |  | Age |  | Position                                                        
|------------------ |  | --- |  | ----------------------------------------------------------------
|James R. Murphy    |  | 55  |  | Chairman, President, Chief Executive Officer and Director       
|Michael McGovern   |  | 61  |  | Vice Chairman and Director                                      
|Michael D. Price   |  | 47  |  | Vice President, Chief Financial Officer, Treasurer and Secretary
|Adolfo Herrera     |  | 45  |  | President of European Operations                                
|Miguel Fernandez   |  | 74  |  | Director                                                        
|F. Ross Johnson    |  | 73  |  | Director                                                        
|Edward J. Robinson |  | 64  |  | Director                                                        
|John W. Spiegel    |  | 64  |  | Lead Director                                                   

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

Michael McGovernhas served as one of our directors since 1997 and was named Vice Chairman of the Company in October 1999.
Mr. McGovern serves as President of McGovern Enterprises, a provider of corporate and financial consulting services, which he founded in 1975. Mr. McGovern is Chairman of the Board of
Training Solutions Interactive, Inc. and Vice Chairman of the Board of Employment Technologies, Inc. and is a Director on the corporate board of 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.

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

Adolfo Herreraserves as President of the Company's European operations, and has been employed as General Manager of the Company's Spanish
subsidiaries since 1997. Prior thereto, Mr. Herrera served as General Manager of Laboratorios Llorente-Juventus Group from 1993 to 1997, where he was employed since 1990. Prior thereto,
Mr. Herrera was employed by the Public Health Ministry in Spain. Mr. Herrera received his degree in Veterinary Medicine from Complutense University in Madrid, Spain in 1982, his Master's
degree in Biotechnology from the School of

60

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Chemistry
Science at Complutense University in Madrid, Spain in 1989 and his MBA degree from Instituto de Empresas in Madrid, Spain in 1994.

Miguel Fernandezhas served as one of our directors since 1999. Mr. Fernandez served from 1980 to 1996 as President of the
International Division and corporate Vice President at Carter-Wallace, Inc., where he was responsible for all product lines outside of the United States. Prior thereto, Mr. Fernandez was
employed for approximately eight years by SmithKline & French, where his last position was President of the division that included France, Portugal and Switzerland. Mr. Fernandez
attended the University of British Columbia in Canada and received an M.B.A. from the Ivey School of Business at the University of Western Ontario in London, Ontario, Canada. Mr. Fernandez has
been retired since 1996.

F. Ross Johnsonhas served as one of our directors since 2004. Mr. Johnson has been the Chairman and Chief Executive Officer of RJM
Group, a management advisory and investment firm, since 1989. Prior to 1989, Mr. Johnson was the Chairman of RJR/Nabisco, Inc., a public diversified holding company, having held various
senior executive positions in RJR/Nabisco, Inc. and its predecessors, Standard Brands and Nabisco Brands since 1971. He received a Bachelor of Commerce from the University of Manitoba, Canada
and a Master of Commerce from the University of Toronto, Canada. Mr. Johnson serves on the boards of directors of AuthentiDate Holding Corporation and EdgeStone Capital Partners and serves on
the advisory boards of Power Corporation of Canada and Wachovia Bank-Florida, Bennett Advisory GroupPalm Beach and Black & McDonald Ltd.

Edward J. Robinsonhas served as one of our directors since 2004. Mr. Robinson served as Chief Operating Officer of Meditrust
Operating Company, a healthcare REIT, in 1998, President and Chief Operating Officer of Avon Products, Inc., a public beauty products company, from 1993 to 1997, and Executive Vice President
and Chief Financial Officer of Avon Products, Inc. from 1989 to 1992. Previously, he held various positions with RJR Nabisco and its predecessor companies, Standard Brands and Nabisco Brands,
including Executive Vice President, Chief Financial Officer, Vice PresidentTreasurer and Senior Vice PresidentController. He received a B.A. in Business Administration from
Iona College. Mr. Robinson is a Certified Public Accountant licensed by the State of New York. Mr. Robinson has been retired since 1998.

John W. Spiegelhas served as one of our directors since June 2002. Mr. Spiegel served as Vice Chairman and Chief Financial
Officer of SunTrust Banks, Inc. from August 2000 until August 2004. Prior to
August 2000, Mr. Spiegel was an Executive Vice President and Chief Financial Officer of SunTrust Banks since 1985. Mr. Spiegel also serves on the Board of Directors of the Bank
Administration Institute, Rock-Tenn Company, S1 Corporation and Colonial Properties Trust. Mr. Spiegel is also a trustee of the Woodruff Arts Center, the High Museum of Art, the
Atlanta College of Art and Children's Healthcare of Atlanta, and is a member of the Dean's Advisory Council of the Goizueta Business School at Emory University. Mr. Spiegel received an MBA from
Emory University.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and any persons who own more than 10% of
any class of our equity securities, to file certain reports relating to their ownership of such securities and changes in such ownership with the Securities and Exchange Commission and the New York
Stock Exchange and to furnish us with copies of such reports. To the best of our knowledge during the year ended December 31, 2004, all Section 16(a) filing requirements have been
satisfied.

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Availability of Information

As required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, on October 8, 2004, our Chief Executive Officer submitted
the Annual CEO Certification to the New York Stock Exchange, certifying, without qualification, that he was not aware of any violation by the Company of the New York Stock Exchange's corporate
governance listing standards.

We
filed with the SEC as exhibits to this Annual Report on Form 10-K for the year ended December 31, 2004 (which exhibits are identified as Exhibit 31.1
and Exhibit 31.2) certifications by our Chief Executive Officer and Chief Financial Officer regarding the quality of the Company's public disclosures in accordance with Section 302 of
the Sarbanes-Oxley Act of 2002.

Our
Corporate Governance Guidelines, Code of Business Conduct and Ethics, Audit Committee Procedures for Handling Complaints, Nominating and Corporate Governance Committee Charter, Audit
Committee Charter and Compensation Committee Charter are available on our website atwww.bentleypharm.com.The information is also available in print to
any shareholder who requests it. Additionally, copies of our reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K may be accessed from our
website, free of charge, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. Alternatively, these
reports can be accessed through a query at the website of the Securities and Exchange Commission atwww.sec.gov.

Item 11. Executive Compensation

The information called for by this item is incorporated by reference to our definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information called for by this item is incorporated by reference to our definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A.

Item 13. Certain Relationships and Related Transactions

The information called for by this item is incorporated by reference to our definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A.

Item 14. Principal Accounting Fees and Services

The information called for by this item is incorporated by reference to our definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A.

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Part IV

Item 15. Exhibits and Financial Statement Schedules

|    |  |                                                                                                                                                                                                  |  |                                                                                     |  | Page Herein
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------- |  | -----------
|(a) |  | The following documents are filed as a part of this report:                                                                                                                                      |  |                                                                                    
|    |  | (1)                                                                                                                                                                                              |  | Financial Statements:                                                               |  |            
|    |  |                                                                                                                                                                                                  |  | Consolidated Financial Statements of Bentley Pharmaceuticals, Inc. and Subsidiaries |  | F-1 to F-31
|    |  | (2)                                                                                                                                                                                              |  | Financial Statement Schedules:                                                      |  |            
|    |  |                                                                                                                                                                                                  |  | None                                                                                |  |            
|    |  | (3)                                                                                                                                                                                              |  | ExhibitsSee index beginning on page 63                                             |  |            
|(b) |  | The exhibits filed as a part of this annual report on Form 10-K are listed on the Exhibit Index immediately preceding the signature page. The Exhibit Index is incorporated herein by reference.

63

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Articles of Incorporation of the Registrant, as amended and restated. (Reference is made to Appendix B to the Registrant's Definitive Proxy Statement for the Annual Meeting of Stockholders filed on May 18, 1999,
Commission File No. 1-10581,which exhibit is incorporated herein by reference.)                                                                                                                                                                                                         
|3.2            |  | Amendment of Restated Articles of Incorporation of the Registrant. (Reference is made to Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended June 30, 2004, filed August 6, 2004, Commission File No. 1-10581,which
exhibit is incorporated herein by reference.)                                                                                                                                                                                                                               
|3.3            |  | Bylaws of the Registrant, as amended and restated. (Reference is made to Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended March 31, 2004, filed May 10, 2004, Commission File No. 1-10581,which exhibit is
incorporated herein by reference.)                                                                                                                                                                                                                                                
|4.1            |  | Renewed Rights Agreement dated as of December 21, 2004 between Bentley Pharmaceuticals, Inc. and American Stock Transfer & Trust Company, as Rights Agent, including the form of Rights certificate as Exhibit B thereto and the
Summary of Rights to Purchase Series A Junior Participating Preferred Stock as Exhibit C thereto. (Reference is made to Exhibit 4.1 to the Registrant's Form 8-K, filed December 21, 2004, Commission File No. 1-10581,
which exhibit is incorporated herein by reference.)
|10.1*          |  | Registrant's Amended and Restated 1991 Stock Option Plan. (Reference is made to Appendix D to the Registrant's Definitive Proxy Statement for the Annual Meeting of Stockholders filed on May 18, 1999, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)                                                                                                                                                                                                                    
|10.2*          |  | Form of Non-qualified Stock Option Agreement under the Registrant's 1991 Stock Option Plan. (Reference is made to Exhibit 4.25 to the Registrant's Form 10-K for the year ended June 30, 1992, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)                                                                                                                                                                                                                             
|10.3*          |  | Registrant's 2001 Employee Stock Option Plan. (Reference is made to Appendix B to the Registrant's Definitive Proxy Statement for the Annual Meeting of Stockholders filed on April 9, 2001, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)                                                                                                                                                                                                                               
|10.4*          |  | Registrant's 2001 Directors' Stock Option Plan. (Reference is made to Appendix C to the Registrant's Definitive Proxy Statement for the Annual Meeting of Stockholders filed on April 9, 2001, Commission File No. 1-10581, which exhibit
is incorporated herein by reference.)                                                                                                                                                                                                                             
|10.5*          |  | Form of Stock Option contract under the Registrant's 2001 Employee Stock Option Plan. (Reference is made to Exhibit 4.8 to the Registrant's Form 10-K for the year ended December 31, 2001, Commission File No. 1-10581, which exhibit
is incorporated herein by reference.)                                                                                                                                                                                                                                
|10.6*          |  | Form of Stock Option contract under the Registrant's 2001 Directors' Stock Option Plan. (Reference is made to Exhibit 4.9 to the Registrant's Form 10-K for the year ended December 31, 2001, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)                                                                                                                                                                                                                              
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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|10.7*  |  | Amendment No. 1 to the Registrant's 2001 Employee Stock Option Plan. (Reference is made to Exhibit 4.10 to the Registrant's Form 10-K for the year ended December 31, 2003, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)                                                                                                                             
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8*  |  | Amendment No. 2 to the Registrant's 2001 Employee Stock Option Plan. (Reference is made to Exhibit 4.11 to the Registrant's Form 10-K for the year ended December 31, 2003, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)                                                                                                                             
|10.9*  |  | Amendment No. 1 to the Registrant's 2001 Directors' Stock Option Plan. (Reference is made to Exhibit 4.12 to the Registrant's Form 10-K for the year ended December 31, 2003, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)                                                                                                                           
|10.10* |  | Amendment No. 2 to the Registrant's 2001 Directors' Stock Option Plan. (Reference is made to Exhibit 4.13 to the Registrant's Form 10-K for the year ended December 31, 2003, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)                                                                                                                           
|10.11* |  | Employment Agreement dated as of January 1, 2002 between the Registrant and James R. Murphy. (Reference is made to Exhibit 10.1 to the Registrant's Form 10-K/A Amendment #1 for the year ended December 31, 2001, Commission
File No. 1-10581, which exhibit is incorporated herein by reference.)                                                                                      
|10.12* |  | Employment Agreement dated as of January 1, 2004 between the Registrant and Robert M. Stote, M.D. (Reference is made to Exhibit 10.2 to the Registrant's Form 10-K for the year ended December 31, 2003, Commission File
No. 1-10581, which exhibit is incorporated herein by reference.)                                                                                                
|10.13* |  | Employment Agreement dated as of January 1, 2002 between the Registrant and Michael D. Price. (Reference is made to Exhibit 10.3 to the Registrant's Form 10-K/A Amendment #1 for the year ended December 31, 2001, Commission
File No. 1-10581, which exhibit is incorporated herein by reference.)                                                                                     
|10.14* |  | Employment Agreement dated as of January 1, 2002 between the Registrant and Robert J. Gyurik. (Reference is made to Exhibit 10.4 to the Registrant's Form 10-K/A Amendment #1 for the year ended December 31, 2001, Commission
File No. 1-10581, which exhibit is incorporated herein by reference.)                                                                                     
|10.15  |  | Agreement between the Registrant and Hsu dated February 1, 1999, effective as of December 31, 1998. (Reference is made to Exhibit 7.1 to the Registrant's Form 8-K filed February 26, 1999, Commission File No. 1-10581,
which exhibit is incorporated herein by reference.)                                                                                                             
|10.16  |  | License Agreement between the Registrant and Auxilium A2, Inc. dated May 31, 2000, including Amendment No. 1 thereto dated October 2000 and Amendment #2 dated May 31, 2001. (Reference is made to
Exhibit 10.10 to the Registrant's Form 10-K/A Amendment #2 for the year ended December 31, 2001, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)     
|10.17  |  | Supply Agreement, License Agreement and Rights Agreement between Laboratorios Belmac, S.A., Laboratorios Davur, S.L. and Teva Pharmaceutical Industries Ltd. dated July 18, 2000. (Reference is made to Exhibit 10.12 to the Registrant's
Form 10-K/A Amendment #2 for the year ended December 31, 2001, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)
|       |  |                                                                                                                                                                                                                                                                                                                                                                                          

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|10.18  |  | Amendment No. 3 dated September 6, 2002 to License Agreement between the Registrant and Auxilium Pharmaceuticals, Inc. dated May 31, 2000. (Reference is made to Exhibit 10.10 to the Registrant's Form 10-K for the year
ended December 31, 2002, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19  |  | License Agreement between the Registrant and Auxilium Pharmaceuticals, Inc. dated May 31, 2001 relating to products using Dihydrotestosterone. (Reference is made to Exhibit 10.12 to the Registrant's Form 10-K for the year ended
December 31, 2002, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)                                          
|10.20  |  | Amendment No. 1 dated September 6, 2002 to License Agreement between the Registrant and Auxilium Pharmaceuticals, Inc. dated May 31, 2001 related to products using Dihydrotestosterone. (Reference is made to Exhibit 10.13 to
the Registrant's Form 10-K for the year ended December 31, 2002, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)
|21.1** |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                  
|23.1** |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                        
|31.1** |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                          
|31.2** |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                          
|32.1** |  | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                          
|32.2** |  | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                          

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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:                          

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. MURPHYJames R. Murphy       |  | Chairman, President, Chief Executive Officer and Director (principal executive officer)                       |  | March 16, 2005
|/s/MICHAEL MCGOVERNMichael McGovern     |  | Vice Chairman and Director                                                                                    |  | March 16, 2005
|/s/MICHAEL D. PRICEMichael D. Price     |  | Vice-President, Chief Financial Officer, Treasurer and Secretary (principal financial and accounting officer) |  | March 16, 2005
|/s/MIGUEL FERNANDEZMiguel Fernandez     |  | Director                                                                                                      |  | March 16, 2005
|/s/F. ROSS JOHNSONF. Ross Johnson       |  | Director                                                                                                      |  | March 16, 2005
|/s/EDWARD J. ROBINSONEdward J. Robinson |  | Director                                                                                                      |  | March 16, 2005
|/s/JOHN W. SPIEGELJohn W. Spiegel       |  | Lead Director                                                                                                 |  | March 16, 2005

---





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

|                                                                                                                           |  | Page
|-------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                                    |  | F-2 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                                               |  | F-3 
|Consolidated Income Statements and Statements of Comprehensive Income
for the years ended December 31, 2004, 2003 and 2002 |  | F-4 
|Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2004, 2003 and 2002            |  | F-5 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002                                 |  | F-6 
|Notes to Consolidated Financial Statements                                                                                 |  | F-8 

F-1

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of Bentley Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related
consolidated income statements and statements of comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/
Deloitte & Touche LLP

Boston,
Massachusetts
March 16, 2005

F-2

---





BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                           | December 31,
2004             |         | December 31,
2003 |       
|------------------------------------ | --------------------------------------------------------------------------------------------------------- | ----------------------------- | ------- | ----------------- | ------
|
|ASSETS                               |                                                                                                           |                               |         |                   |       
|Current assets:                      |                                                                                                           |                               |         |                   |       
|                                     | Cash and cash equivalents                                                                                 |                               | $       | 34,230            |       
|                                     | Marketable securities                                                                                     |                               |         | 528               |       
|                                     | Receivables, net                                                                                          |                               |         | 27,860            |       
|                                     | Inventories, net                                                                                          |                               |         | 10,258            |       
|                                     | Deferred taxes                                                                                            |                               |         | 479               |       
|                                     | Prepaid expenses and other                                                                                |                               |         | 1,355             |       
|                                     |                                                                                                           |                               |         |                   |       
|                                     |                                                                                                           | Total current assets          |         |                   | 74,710
|                                     |                                                                                                           |                               |         |                   |       
|Non-current assets:                  |                                                                                                           |                               |         |                   |       
|                                     | Fixed assets, net                                                                                         |                               |         | 30,849            |       
|                                     | Drug licenses and related costs, net                                                                      |                               |         | 14,863            |       
|                                     | Restricted cash                                                                                           |                               |         | 1,000             |       
|                                     | Other                                                                                                     |                               |         | 508               |       
|                                     |                                                                                                           |                               |         |                   |       
|                                     |                                                                                                           | Total non-current assets      |         |                   | 47,220
|                                     |                                                                                                           |                               |         |                   |       
|                                     |                                                                                                           | $                             | 121,930 |                   | $     
|                                     |                                                                                                           |                               |         |                   |       
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                           |                               |         |                   |       
|Current liabilities:                 |                                                                                                           |                               |         |                   |       
|                                     | Accounts payable                                                                                          |                               | $       | 17,048            |       
|                                     | Accrued expenses                                                                                          |                               |         | 6,169             |       
|                                     | Short-term borrowings                                                                                     |                               |         | 2,754             |       
|                                     | Current portion of long-term debt                                                                         |                               |         | 31                |       
|                                     | Deferred income                                                                                           |                               |         | 1,594             |       
|                                     |                                                                                                           |                               |         |                   |       
|                                     |                                                                                                           | Total current liabilities     |         |                   | 27,596
|                                     |                                                                                                           |                               |         |                   |       
|Non-current liabilities:             |                                                                                                           |                               |         |                   |       
|                                     | Deferred taxes                                                                                            |                               |         | 2,319             |       
|                                     | Long-term debt                                                                                            |                               |         | 349               |       
|                                     | Deferred income                                                                                           |                               |         | 1,944             |       
|                                     | Other                                                                                                     |                               |         | 65                |       
|                                     |                                                                                                           |                               |         |                   |       
|                                     |                                                                                                           | Total non-current liabilities |         |                   | 4,677 
|                                     |                                                                                                           |                               |         |                   |       
|Commitments and contingencies        |                                                                                                           |                               |         |                   |       
|Stockholders' equity:                |                                                                                                           |                               |         |                   |       
|                                     | Preferred stock, $1.00 par value, authorized 2,000
shares, issued and outstanding, none                   |                               |         |                  |       
|                                     | Common stock, $.02 par value, authorized 100,000
shares, issued and outstanding, 21,312 and 20,573 shares |                               |         | 426               |       
|                                     | Stock purchase warrants (to purchase zero and 420
shares of common stock)                                 |                               |         |                  |       
|                                     | Additional paid-in capital                                                                                |                               |         | 140,418           |       
|                                     | Accumulated deficit                                                                                       |                               |         | (60,909           | )     
|                                     | Accumulated other comprehensive income                                                                    |                               |         | 9,722             |       
|                                     |                                                                                                           |                               |         |                   |       
|                                     |                                                                                                           | Total stockholders' equity    |         |                   | 89,657
|                                     |                                                                                                           |                               |         |                   |       
|                                     |                                                                                                           | $                             | 121,930 |                   | $     
|                                     |                                                                                                           |                               |         |                   |       

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

F-3

---





BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES        CONSOLIDATED INCOME STATEMENTS        AND STATEMENTS OF COMPREHENSIVE INCOME

|                                                    |                                      | For the Year Ended
December 31, |       
|--------------------------------------------------- | ------------------------------------ | ------------------------------- | ------
|
|
|Revenues:                                           |                                      |                                 |       
|                                                    | Net product sales                    |                                 | $     
|                                                    | Licensing and collaboration revenues |                                 |       
|                                                    |                                      |                                 |       
|                                                    |                                      | Total revenues                  |       
|Cost of net product sales                           |                                      |                                 | 34,551
|                                                    |                                      |                                 |       
|Gross profit                                        |                                      |                                 | 38,842
|                                                    |                                      |                                 |       
|Operating expenses:                                 |                                      |                                 |       
|                                                    | Selling and marketing                |                                 |       
|                                                    | General and administrative           |                                 |       
|                                                    | Research and development             |                                 |       
|                                                    | Depreciation and amortization        |                                 |       
|                                                    |                                      |                                 |       
|                                                    |                                      | Total operating expenses        |       
|                                                    |                                      |                                 |       
|Income from operations before sale of drug licenses |                                      |                                 | 8,695 
|Gain on sale of drug licenses                       |                                      |                                 |      
|                                                    |                                      |                                 |       
|Income from operations                              |                                      |                                 | 8,695 
|                                                    |                                      |                                 |       
|Other income (expenses):                            |                                      |                                 |       
|                                                    | Interest income                      |                                 |       
|                                                    | Interest expense                     |                                 |       
|                                                    | Other, net                           |                                 |       
|                                                    |                                      |                                 |       
|Income before income taxes                          |                                      |                                 | 10,495
|Provision for income taxes                          |                                      |                                 | 4,805 
|                                                    |                                      |                                 |       
|Net income                                          |                                      | $                               | 5,690 
|                                                    |                                      |                                 |       
|Net income per common share:                        |                                      |                                 |       
|                                                    | Basic                                |                                 | $     
|                                                    |                                      |                                 |       
|                                                    | Diluted                              |                                 | $     
|                                                    |                                      |                                 |       
|Weighted average common shares outstanding:         |                                      |                                 |       
|                                                    | Basic                                |                                 |       
|                                                    |                                      |                                 |       
|                                                    | Diluted                              |                                 |       
|                                                    |                                      |                                 |       
|Net income                                          |                                      | $                               | 5,690 
|Other comprehensive income:                         |                                      |                                 |       
|                                                    | Foreign currency translation gains   |                                 |       
|                                                    |                                      |                                 |       
|Comprehensive income                                |                                      | $                               | 10,243
|                                                    |                                      |                                 |       

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

F-4

---





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

|                             |                                         | $.02 Par Value
Common Stock |       |   |     |    |   |     |      |   |         |       
|---------------------------- | --------------------------------------- | --------------------------- | ----- | - | --- | -- | - | --- | ---- | - | ------- | ------
|
|
|
|
|Balance at December 31, 2001 |                                         | 14,585                      |       | $ | 292 |    | $ | 433 |      | $ | 97,501  |       
|                             | Offering of common stock, net           |                             | 2,500 |   |     | 50 |   |     |     |   |         | 22,058
|                             | Exercise of stock options and warrants  |                             | 304   |   |     | 6  |   |     | (2   | ) |         | 1,369 
|                             | Equity based compensation               |                             | 15    |   |     |   |   |     |     |   |         | 156   
|                             | Foreign currency translation adjustment |                             |      |   |     |   |   |     |     |   |         |      
|                             | Net income                              |                             |      |   |     |   |   |     |     |   |         |      
|                             |                                         |                             |       |   |     |    |   |     |      |   |         |       
|Balance at Decmber 31, 2002  |                                         | 17,404                      |       |   | 348 |    |   | 431 |      |   | 121,084 |       
|                             | Exercise of stock options and warrants  |                             | 3,111 |   |     | 62 |   |     | (98  | ) |         | 15,258
|                             | Equity based compensation               |                             | 58    |   |     | 2  |   |     |     |   |         | 508   
|                             | Foreign currency translation adjustment |                             |      |   |     |   |   |     |     |   |         |      
|                             | Net income                              |                             |      |   |     |   |   |     |     |   |         |      
|                             |                                         |                             |       |   |     |    |   |     |      |   |         |       
|Balance at Decmber 31, 2003  |                                         | 20,573                      |       |   | 412 |    |   | 333 |      |   | 136,850 |       
|                             | Exercise of stock options and warrants  |                             | 725   |   |     | 14 |   |     | (333 | ) |         | 3,393 
|                             | Equity based compensation               |                             | 14    |   |     |   |   |     |     |   |         | 175   
|                             | Foreign currency translation adjustment |                             |      |   |     |   |   |     |     |   |         |      
|                             | Net income                              |                             |      |   |     |   |   |     |     |   |         |      
|                             |                                         |                             |       |   |     |    |   |     |      |   |         |       
|Balance at December 31, 2004 |                                         | 21,312                      |       | $ | 426 |    | $ |    |      | $ | 140,418 |       
|                             |                                         |                             |       |   |     |    |   |     |      |   |         |       

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

F-5

---





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

|                                      |                                                                                   | For the Year Ended
December 31,                                       |                                          
|------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------------- | -----------------------------------------
|
|
|Cash flows from operating activities: |                                                                                   |                                                                       |                                          
|                                      | Net income                                                                        |                                                                       | $                                        
|                                      | Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                       |                                          
|                                      |                                                                                   | Gain on sale of drug licenses                                         |                                          
|                                      |                                                                                   | Depreciation and amortization                                         |                                          
|                                      |                                                                                   | Forgiveness of related party notes                                    |                                          
|                                      |                                                                                   | Equity-based compensation expense                                     |                                          
|                                      |                                                                                   | Other non-cash items                                                  |                                          
|                                      |                                                                                   | (Increase) decrease in assets and increase
(decrease) in liabilities: |                                          
|                                      |                                                                                   |                                                                       | Receivables                              
|                                      |                                                                                   |                                                                       | Inventories                              
|                                      |                                                                                   |                                                                       | Deferred income taxes                    
|                                      |                                                                                   |                                                                       | Prepaid expenses and other current assets
|                                      |                                                                                   |                                                                       | Other assets                             
|                                      |                                                                                   |                                                                       | Accounts payable and accrued expenses    
|                                      |                                                                                   |                                                                       | Deferred income                          
|                                      |                                                                                   |                                                                       | Other liabilities                        
|                                      |                                                                                   |                                                                       |                                          
|                                      |                                                                                   |                                                                       |                                          
|                                      |                                                                                   |                                                                       |                                          
|Cash flows from investing activities: |                                                                                   |                                                                       |                                          
|                                      | Proceeds from sale of investments                                                 |                                                                       |                                          
|                                      | Purchases of investments                                                          |                                                                       |                                          
|                                      | Purchase of API manufacturing assets                                              |                                                                       |                                          
|                                      | Proceeds from sale of drug licenses                                               |                                                                       |                                          
|                                      | Additions to fixed assets                                                         |                                                                       |                                          
|                                      | Additions to drug licenses and related costs                                      |                                                                       |                                          
|                                      |                                                                                   |                                                                       |                                          
|                                      |                                                                                   |                                                                       |                                          
|                                      |                                                                                   |                                                                       |                                          

(Continued
on following page)

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

F-6

---



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

|                                                                                             |                                                  | For the Year Ended
December 31, |       
|-------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------- | ------
|
|
|Cash flows from financing activities:                                                        |                                                  |                                 |       
|                                                                                             | Proceeds from exercise of stock options/warrants |                                 | $     
|                                                                                             | Proceeds from offering of common stock, net      |                                 |       
|                                                                                             | Proceeds from borrowings                         |                                 |       
|                                                                                             | Repayment of borrowings                          |                                 |       
|                                                                                             | Increase in restricted cash                      |                                 |       
|                                                                                             |                                                  |                                 |       
|                                                                                             |                                                  |                                 |       
|                                                                                             |                                                  |                                 |       
|Effect of exchange rate changes on cash                                                      |                                                  |                                 | 613   
|Net (decrease) increase in cash and cash equivalents                                         |                                                  |                                 | (5,163
|Cash and cash equivalents at beginning of year                                               |                                                  |                                 | 39,393
|                                                                                             |                                                  |                                 |       
|Cash and cash equivalents at end of year                                                     |                                                  | $                               | 34,230
|                                                                                             |                                                  |                                 |       
|Supplemental Disclosures of Cash Flow Information                                            |                                                  |                                 |       
|The Company paid cash during the year for:                                                   |                                                  |                                 |       
|                                                                                             | Interest                                         |                                 | $     
|                                                                                             |                                                  |                                 |       
|                                                                                             | Taxes                                            |                                 | $     
|                                                                                             |                                                  |                                 |       
|Supplemental Disclosures of Non-Cash Financing
and Investing Activities                      |                                                  |                                 |       
|The Company has issued Common Stock as equity-based compensation in lieu of cash as follows: |                                                  |                                 |       
|                                                                                             | Shares                                           |                                 |       
|                                                                                             |                                                  |                                 |       
|                                                                                             | Amount                                           |                                 | $     
|                                                                                             |                                                  |                                 |       
|Amounts included in year-end accounts payable for
fixed asset and drug license purchases     |                                                  | $                               | 3,986 
|                                                                                             |                                                  |                                 |       

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

F-7

---





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

NOTE 1HISTORY AND OPERATIONS

Bentley Pharmaceuticals, Inc. and Subsidiaries (which may be referred to as Bentley Pharmaceuticals, Bentley, or the Company), headquartered in the U.S.,
is an international specialty pharmaceutical company, incorporated in the State of Delaware, focused on:



Bentley's
pharmaceutical product sales and licensing activities are based primarily in Spain, where it has a significant commercial presence and manufactures and markets approximately
120 pharmaceutical products through three wholly-owned Spanish subsidiaries; Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. These products represent various dosage strengths and
product formulations of more than 30 chemical entities in four primary therapeutic areas: cardiovascular, gastrointestinal, neurological and infectious diseases. The Company continually adds to its
product portfolio in response to increasing market demand for generic and branded therapeutic agents and, when appropriate, divests portfolio products considered to be redundant or that have become
non-strategic. Although most of the Company's sales of these products are currently in the Spanish market, it has recently focused on increasing sales in other European countries and other
geographic regions through strategic alliances with companies in these territories. In April 2004, the Company purchased a manufacturing facility located in Zaragoza, Spain that specializes in
the manufacture of active
pharmaceutical ingredients. The facility has been approved by the U.S. Food and Drug Administration for the manufacture of one ingredient for marketing and sale in the U.S. The Company manufactures
and markets these products through its subsidiary, Bentley API.

The
Company has U.S. and international patents and other proprietary rights to technologies that facilitate the absorption of drugs. Bentley is developing products that incorporate its
drug delivery technologies and has licensed applications of its proprietary CPE-215® drug delivery technology to Auxilium Pharmaceuticals, Inc., which launched
Testim® in the U.S. market, in February 2003. Testim, which incorporates Bentley's CPE-215 drug delivery technology, is a gel indicated for testosterone replacement
therapy. Bentley continues to seek other pharmaceutical and biotechnology companies to form additional strategic alliances to facilitate the development and commercialization of other products using
its drug delivery technologies, including product candidates that deliver insulin to diabetic patients intranasally and that treat nail fungus infections topically.

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation and foreign currency translation

The consolidated financial statements include the accounts of Bentley Pharmaceuticals, Inc. and its wholly-owned subsidiaries: Pharma de
Espana, Inc. and its wholly-owned subsidiaries, Bentley A.P.I S.L. and Laboratorios Belmac S.A. and its wholly-owned subsidiaries, Laboratorios Davur S.L. and Laboratorios Rimafar S.L.; Bentley
Park, L.L.C.; Bentley Healthcare Corporation and its wholly-owned subsidiary, Belmac Hygiene, Inc.; Belmac Health Corporation; Belmac Holdings, Inc. and its wholly-owned subsidiary,
Belmac A.I., Inc.; B.O.G. International Finance, Inc.; and Belmac Jamaica, Ltd. All inter-company balances have been eliminated in consolidation. The financial position and
results of operations of the Company's foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities of each foreign subsidiary are translated at the rate
of exchange in effect

F-8

---



at
the end of the period. Revenues and expenses are translated at the average exchange rate for the period. Foreign currency translation gains and losses are credited to or charged against other
comprehensive income in the Consolidated Balance Sheets. Foreign currency gains and losses arising from cash transactions are credited to or charged against current earnings. The weighted average
exchange rate for the years ended December 31, 2004, 2003 and 2002 was .81 Euros, .89 Euros and 1.06 Euros per U.S. Dollar, respectively. The net effect of foreign currency translation on the
Company's Consolidated Financial Statements during the year ended December 31, 2004 was an increase of $4,553,000, which has been included inother comprehensive
income.The cumulative historical effect of foreign currency translation as of December 31, 2004 was an increase of $9,722,000 as reflected in accumulated other comprehensive income.

Use of estimates

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

Cash and cash equivalents and restricted cash

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

Included
incash and cash equivalentsat December 31, 2004 and 2003 are approximately $3,684,000 and $29,156,000, respectively, of
short-term investments considered to be cash equivalents, as the original maturity dates of such investments were three months or less when purchased.

The
Company acquired intellectual property during the year ended December 31, 2003 for $1,000,000 plus future royalties on sales and licensing income. In connection with the
acquisition, the Company obtained a renewable, irrevocable letter of credit in the amount of $1,000,000 in favor of the assignor to guarantee future royalty payments. The $1,000,000 used to secure the
letter of credit has been classified asrestricted cashin the Consolidated Balance Sheets as of December 31, 2004 and 2003.

Marketable securities

The Company has investments in Spanish government treasury bills, with maturities of greater than three months when purchased, totaling $528,000 and $1,252,000 as
of December 31, 2004 and 2003, respectively, which are classified as available-for-sale. The Company's investments are carried at amortized cost, which approximates fair
value due to the short-term nature of these investments. Accordingly, no unrealized gains or losses have been recognized with respect to these investments. Should the fair values differ
significantly from the amortized costs, unrealized gains or losses would be included as a component ofother comprehensive income.

Inventories

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

F-9

---



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:

YearsBuildings and improvements

30Equipment

37Furniture and fixtures

57Other

5


Expenditures
for replacements and improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized, while expenditures for maintenance and
repairs are charged to operations as incurred. Leasehold improvements are amortized over the life of the respective lease. 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 amortized on a straight-line basis for periods not exceeding fifteen years from the dates of
acquisition. Values of such assets are reviewed at least annually by the Company, by comparing the carrying amounts to their estimated future undiscounted cash flows, and adjustments are made for any
diminution in value. In accordance with the guidelines in Statement of Financial Accounting Standards ("SFAS") No. 142,Goodwill and Other Intangible
Assets, the Company determined it has one reporting unit. The Company performed its annual review for diminution in value and has concluded that no diminution in value has
occurred. The
Company has also reassessed the useful lives of its drug licenses and related costs and has determined that the estimated useful lives are appropriate for determining amortization expense.

Fair value of financial instruments

The carrying amounts of cash, cash equivalents, marketable securities, receivables, accounts payable, accrued expenses and short-term borrowings
approximate fair value because of their short-term nature. The carrying amounts of the Company's long-term obligations approximate fair value, when considering the amounts
outstanding at December 31, 2004 and 2003.

The
fair value information presented herein is based on information available to management as of December 31, 2004. 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.

Revenue recognition

Revenue on product sales is recognized when persuasive evidence of an arrangement exists, the price is fixed and final, delivery has occurred and there is a
reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of product at a specified price and considers
delivery to have occurred when the

F-10

---



customer
takes possession of the product. The Company provides its customers with a limited right of return. Revenue is recognized upon delivery and a reserve for sales returns is recorded when
considered appropriate. The Company has demonstrated the ability to make reasonable and reliable estimates of product returns in accordance with SFAS No. 48,Revenue
Recognition When Right of Return Exists,and of allowances for doubtful accounts based on significant historical experience.

Revenue
from service, research and development, and licensing and supply agreements is recognized when the service procedures have been completed or as revenue recognition criteria have
been met for each separate unit of accounting as defined in Emerging Issues Task Force ("EITF") Issue No. 00-21,Accounting for Revenue Arrangements with
Multiple Deliverablesand SFAS No. 48. The Company has deferred the recognition of approximately $2,147,000 and $1,322,000 of licensing revenue as of December 31,
2004 and 2003, respectively, for which the revenue recognition
requirements had not yet been met. Additionally, the Company deferred the recognition of royalties earned with respect to sales of a licensee's commercialized product that incorporates one of the
Company's proprietary technologies of approximately $1,233,000 and $634,000 as of December 31, 2004 and 2003, respectively, which did not meet the revenue recognition requirements of SFAS
No. 48. Royalties accounted for asdeferred incomein the accompanying Consolidated Balance Sheets, will be recognized as licensing and collaboration revenuesin the accompanying Consolidated Income Statements once product returns can be reasonably estimated or the right of
return has lapsed.

Research and development

Research and development costs are expensed when incurred.

Income taxes

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

Basic and diluted net income per common share

Basic and diluted net income per common share is based on the weighted average number of shares of Common Stock outstanding during each period. The effect of the
Company's outstanding stock options and stock purchase warrants were considered in the diluted net income per share calculation for the years ended December 31, 2004, 2003 and 2002.

The
following is a reconciliation between basic and diluted net income per common share for the years ended December 31, 2004, 2003 and 2002. Dilutive securities issuable for the
years ended December 31, 2004, 2003 and 2002 include approximately zero, 1,441,000 and 1,309,000 incremental shares, respectively, issuable as a result of Class B Warrants, and
approximately 1,726,000, 2,199,000 and 1,920,000 incremental shares, respectively, issuable as a result of various stock options and/or warrants outstanding.

F-11

---





|                                           |  | Basic
EPS |        | Effect of
Dilutive
Securities |   | Diluted
EPS
|------------------------------------------ |  | --------- | ------ | ----------------------------- | - | -----------
|
|Net income                                 |  | $         | 5,690  |                               | $ |           
|Weighted average common shares outstanding |  |           | 20,901 |                               |   | 1,726      
|Net income per common share                |  | $         | 0.27   |                               | $ | (0.02      



|                                           |  | Basic
EPS |        | Effect of
Dilutive
Securities |   | Diluted
EPS
|------------------------------------------ |  | --------- | ------ | ----------------------------- | - | -----------
|
|Net income                                 |  | $         | 6,097  |                               | $ |           
|Weighted average common shares outstanding |  |           | 17,997 |                               |   | 3,640      
|Net income per common share                |  | $         | 0.34   |                               | $ | (0.06      



|                                           |  | Basic
EPS |        | Effect of
Dilutive
Securities |   | Diluted
EPS
|------------------------------------------ |  | --------- | ------ | ----------------------------- | - | -----------
|
|Net income                                 |  | $         | 1,636  |                               | $ |           
|Weighted average common shares outstanding |  |           | 16,569 |                               |   | 3,229      
|Net income per common share                |  | $         | 0.10   |                               | $ | (0.02      

For
the years ended December 31, 2004, 2003 and 2002, warrants and/or options to purchase 672,000, 237,000 and 324,000 shares of Common Stock, respectively, were excluded from the
diluted EPS presentation because their exercise prices were greater than the average fair value of the Common Stock.

Comprehensive income

The Company applies SFAS No. 130,Reporting Comprehensive Income, which requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. The Company's comprehensive income includes foreign currency translation gains (losses) and unrealized gains (losses) on its investments that are
considered available-for-sale. Should the fair values of the Company's marketable equity securities differ significantly from their amortized costs, unrealized gains or losses
would be included as a component ofother comprehensive income.

Equity-based compensation plans

The Company has equity-based employee compensation plans that are described more fully in Note 11. The Company currently accounts for these plans under the
recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related

F-12

---



Interpretations.
However, the Company is required to adopt SFAS No. 123 (Revised),Share-Based Paymentas of the beginning of the first interim
reporting period beginning after June 15, 2005, which will change the method the Company uses to account for its equity-based compensation. SFAS No. 123 (Revised) is explained in more
detail inRecently issued accounting pronouncementsbelow. Stock options granted under these plans have exercise prices equal to or greater than the
market value of the underlying common stock on the dates of grant, which is generally the date on which compensation is measured. In addition to these plans, the Company also sponsors a 401(k) Plan
for eligible employees and matches eligible contributions with shares of the Company's Common Stock. At the discretion of the Compensation Committee of the Board of Directors, the Company may grant
shares of its Common Stock to employees in lieu of cash compensation. The Company recorded equity-based compensation expense of approximately $195,000, $510,000 and $156,000, as a result of such
grants in 2004, 2003 and 2002, respectively. Related equity-based employee compensation costs are reflected in the Consolidated Income Statements and Statements of Cash Flows.

The
following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to equity-based employee compensation:

Year Ended December 31,2004

2003

2002(In Thousands, Except Per Share Data)Net income, as reported

$
5,690

$
6,097

$
1,636Add: Stock-based employee compensation expense included in reported net income


195


510


156Deduct: Total stock-based employee compensation expense determined under fair value method for all awards


(2,978
)

(3,232
)

(3,829
)Pro forma net income (loss)

$
2,907

$
3,375

$
(2,037
)Net income (loss) per share:Basicas reported

$
0.27

$
0.34

$
0.10Basicpro forma

$
0.14

$
0.19

$
(0.12
)Dilutedas reported

$
0.25

$
0.28

$
0.08Dilutedpro forma

$
0.13

$
0.16

$
(0.12
)


The
preceding pro forma results were calculated using the Black-Scholes option pricing model with the following weighted average assumptions (results may vary depending on the
assumptions applied within the model):

Year Ended December 31,2004

2003

2002Risk free interest rate

2.94%

3.86%

5.08%Dividend yield

0.00%

0.00%

0.00%Expected life

5 years

5 years

5 yearsVolatility

48.63%

54.12%

57.61%Fair value of options granted

$5.77

$5.03

$5.58


F-13

---



Stock
or other equity-based compensation for non-employees is currently accounted for under the fair value method as required by SFAS No. 123 and EITF Issue
No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Servicesand other related interpretations. The Company is required to adopt SFAS No. 123 (Revised),Share-Based Paymentas of the beginning of the first interim reporting period that begins after June 15, 2005, which will change the method the Company uses to account for its equity-based compensation. SFAS
No. 123 (Revised) is explained in more detail inRecently issued accounting pronouncementsbelow.

Segments of an enterprise and related information

SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information,redefines how operating
segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company operates in two business segments that are in two
geographical locations. See Note 14 for the disclosures required by SFAS No. 131.

Recently issued accounting pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised),Share-Based
Payment. This Statement is a revision of SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123 (Revised) focuses
primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for
awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123 (Revised) is effective as of the beginning of
the first interim or annual reporting period that begins after June 15, 2005. Management of the Company is evaluating the two methods of adoption allowed by SFAS No. 123 (Revised), the
modified-prospective transition method and the modified-retrospective transition method, and the related impact on its Consolidated Financial Statements.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year's presentation format. Such reclassifications did not have a material effect on
the Company's consolidated financial position, results of operations or cash flows.

F-14

---





NOTE 3RECEIVABLES

Receivables consist of the following:

December 31,2004

2003(In Thousands)Trade receivables (of which $2,754 and $1,914, respectively, collateralize short-term borrowings with Spanish financial institutions)

$
23,586

$
16,233VAT, income and social security taxes receivable


2,428


953Royalties receivable


1,882


884Other


339


12628,235


18,196Lessallowance for doubtful accounts


(375
)

(160
)$
27,860

$
18,036


The
following is a summary of the activity related to our allowance for doubtful accounts:

Year Ended December 31,2004

2003

2002(In Thousands)Balance at beginning of year

$
160

$
100

$
66Provisions charged to costs and expenses


184


102


64Write-offs reducing allowance


(1
)

(64
)

(45
)Effect of foreign currency


32


22


15Balance at end of year

$
375

$
160

$
100


NOTE 4INVENTORIES

Inventories consist of the following:

December 31,2004

2003(In Thousands)Raw materials

$
5,953

$
5,351Finished goods


4,380


1,82910,333


7,180Lessallowance for slow moving inventory


(75
)

(74
)$
10,258

$
7,106


F-15

---



The
following is a summary of the activity related to our allowance for slow moving inventory:

Year Ended December 31,2004

2003

2002(In Thousands)Balance at beginning of year

$
74

$
62

$
54Provisions charged to costs and expenses








Write-offs reducing allowance


(5
)




(1
)Effect of foreign currency


6


12


9Balance at end of year

$
75

$
74

$
62


NOTE 5FIXED ASSETS

Fixed assets consist of the following:

December 31,2004

2003(In Thousands)Land

$
2,573

$
1,900Buildings and improvements


16,076


9,085Equipment


18,448


10,953Furniture and fixtures


1,850


1,497Other


102


4339,049


23,478Lessaccumulated depreciation


(8,200
)

(4,912
)$
30,849

$
18,566


In
order to support the Company's growth in Europe, management is adding additional capacity to its pharmaceutical products manufacturing facility through a series of improvements.
During the year ended December 31, 2004, the Company invested approximately $6,567,000 renovating and expanding the Company's manufacturing and warehouse facilities and approximately $5,197,000
for related machinery and equipment.

In
April 2004, the Company purchased a Spanish manufacturing facility and related machinery, equipment and inventory used to manufacture active pharmaceutical ingredients, for
approximately $3,309,000. The Company is manufacturing and marketing some of these products through its subsidiary, Bentley API. The 11,000 square foot facility is currently FDA approved for one
product, which the Company sells to several customers, including customers in the United States.

Depreciation
expense of approximately $630,000, $368,000 and $212,000 has been charged to operations as a component ofdepreciation and amortization
expensein the Consolidated Income Statements for the years ended December 31, 2004, 2003 and 2002, respectively. The Company has included depreciation totaling
approximately $2,124,000, $1,139,000 and $569,000 incost of net product salesduring the years ended December 31, 2004, 2003 and 2002,
respectively.

F-16

---



NOTE 6DRUG LICENSES AND RELATED COSTS

Drug licenses and related costs consist of the following:

December 31,2004

2003(In Thousands)Drug licenses and related costs

$
20,389

$
17,908Less-accumulated amortization


(5,526
)

(4,262
)$
14,863

$
13,646


The
Company acquired intellectual property during the year ended December 31, 2003 for $1,000,000 plus future royalties on sales and licensing income (See Notes 2 and 15).

Amortization
expense for drug licenses and related costs was approximately $1,140,000, $959,000 and $797,000 for the years ended December 31, 2004, 2003 and 2002, respectively,
and has been recorded indepreciation and amortization expensein the accompanying Consolidated Income Statements.

Amortization
expense for existing drug licenses and related costs for each of the five years ending December 31, 2009 and for all remaining years thereafter is estimated to be as
follows:

Year Ending December 31,(In Thousands)2005

$
1,2192006


1,2192007


1,1352008


1,0232009


1,0232010 and beyond


9,244


NOTE 7RELATED PARTY NOTES

There are no amounts due from executive officers or directors at December 31, 2004 or 2003.

In
January 2002, the Compensation Committee of the Board of Directors agreed to amend loan agreements with certain executive officers of the Company, resulting in the forgiveness
of principal and accrued interest totaling approximately $98,000 in December 2002. These amounts were recorded as compensation expense during the year ended December 31, 2002 and treated
as taxable income to the respective executives.

In
March 2003, the Compensation Committee agreed to further amend the loan agreements, resulting in the forgiveness of the remaining aggregate principal and accrued interest
totaling approximately $302,000. These amounts were recorded as compensation expense during the year ended December 31, 2003 and treated as taxable income to the respective executives.

F-17

---



NOTE 8ACCRUED EXPENSES

Accrued expenses consist of the following:

December 31,2004

2003(In Thousands)Foreign income taxes payable

$
2,218

$
1,940Allowance for sales returns


597


446Accrued payroll and related taxes


2,211


2,060Spanish pharmaceutical taxes payable





1,586Other accrued expenses


1,143


1,071$
6,169

$
7,103


The
following is a summary of the activity related to our allowance for sales returns:

Year Ended December 31,2004

2003

2002(In Thousands)Balance at beginning of year

$
446

$
349

$
402Provisions charged to costs and expenses(a)


721


640


311Write-offs reducing allowance(a)


(618
)

(615
)

(423
)Effect of foreign currency


48


72


59Balance at end of year

$
597

$
446

$
349


---

F-18

---





NOTE 9DEBT

Short-term borrowings consist of the following:

December 31,2004

2003(In Thousands)Trade receivables discounted with Spanish financial institutions, with recourse, effective interest rate is 5.0% and 3.8%, respectively.

$
2,754

$
1,914Revolving lines of credit payable to Spanish financial institutions, weighted average interest rate is 3.3%





1$
2,754

$
1,915


The
weighted average stated interest rate on short-term borrowings outstanding at December 31, 2004 and 2003 was 5.0% and 3.8%, respectively.

The
Company has revolving lines of credit with Spanish financial institutions, which entitle the Company to borrow up to $4,980,000 as of December 31, 2004 at interest rates
ranging from 2.8% to 3.3%. The lines are scheduled to mature on various dates through December 15, 2005 and are renewable. At December 31, 2004, there were no advances outstanding under
the lines of credit. The weighted average interest rate on balances outstanding at December 31, 2003 was 3.3% with interest payable quarterly.

Long-term
debt consists of the following:

December 31,2004

2003(In Thousands)Loans payable to Spanish government, net of unamortized discount of $65 and $83, respectively

$
380

$
369Loans payable for equipment financing





70380


439Less-current portion of long-term debt


(31
)

(70
)Total long-term debt

$
349

$
369


The
weighted average interest rate on long-term debt outstanding at December 31, 2004 and 2003 was 5.7% and 5.6%, respectively.

In
March 2002, the Company entered into a loan agreement to finance the acquisition of manufacturing equipment. The terms of the loan required repayment over a
two-year period at an average interest rate of 2.9%. As of December 31, 2004, all of the original balance has been repaid.

In
November 2002, the Company entered into a loan agreement with the Spanish government as part of a research-funding program. The loan is non-interest bearing and is
payable in equal annual instalments of approximately $17,000 beginning in 2006. Accordingly, the Company imputed interest at the market rate in Spain (5.2%) at the time of the borrowing, and recorded
a discount on the obligation of $33,000 and has classified the obligation at December 31, 2004 and 2003 as non-current. The discount is being amortized over the ten-year
term of the loan.

F-19

---



In
December 2001, the Company entered into a loan agreement with the Spanish government as part of a research-funding program. The loan is non-interest bearing and is
payable in equal annual instalments of approximately $31,000 beginning in 2005. Accordingly, the Company imputed interest at the market rate in Spain (6%) at the time of the borrowing, and recorded a
discount on the obligation of $72,000 and has classified the amount due within one year as current portion of long-term debt and the balance of the obligation at December 31, 2004
as non-current. The discount is being amortized over the ten-year term of the loan.

NOTE 10PREFERRED STOCK

The Company has 2,000,000 shares of Preferred Stock, $1.00 par value, authorized for issuance. As of December 31, 2004 and 2003, no shares of Preferred
Stock were outstanding.

NOTE 11STOCKHOLDERS' EQUITY

At December 31, 2004 the Company had the following Common Stock reserved for issuance under various plans and agreements:

Common Shares(In Thousands)For exercise of outstanding stock options

4,087For future stock option grants

1,0805,167


The
Company has never paid any cash dividends on its Common Stock. The current policy of the Board of Directors is to retain earnings to finance the operation and growth 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.

Common stock transactions

During the year ended December 31, 2004, the Company issued approximately 400,000 shares of Common Stock upon exercise of stock purchase warrants,
approximately 325,600 shares of Common Stock upon exercise of stock purchase options, and approximately 14,400 shares of Common Stock as equity-based compensation in lieu of cash.

During
the year ended December 31, 2003, the Company issued approximately 2,870,000 shares of Common Stock upon exercise of Class B Warrants, approximately 240,000 shares
of Common Stock upon exercise of stock purchase options, and approximately 58,000 shares of Common Stock as equity-based compensation in lieu of cash.

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

General
and administrative expenses for the years ended December 31, 2004, 2003 and 2002 include approximately $73,000, $248,000 and $100,000, respectively, of
non-cash equity-based compensation. Research and development expenses for the years ended December 31, 2004, 2003 and

F-20

---



2002
include approximately $122,000, $262,000 and $56,000, respectively, of non-cash equity-based compensation.

Stock purchase warrants

During the year ended December 31, 2004, approximately 400,000 stock purchase warrants were exercised to acquire an aggregate of 400,000 shares of Common
Stock. The Company received net cash proceeds of approximately $600,000 from such exercises during the year ended December 31, 2004. Approximately 20,000 stock purchase warrants expired
unexercised during the year ended December 31, 2004. There were no stock purchase warrants issued during the year ended December 31, 2004, nor outstanding at December 31, 2004.

During
the year ended December 31, 2003, approximately 5,740,000 Class B Warrants were exercised to acquire an aggregate of 2,870,000 shares of Common Stock. The Company
received net cash proceeds of approximately $14,349,000 from all such exercises during the year ended December 31, 2003. Approximately 3,600 Class B Warrants that were not exercised by
December 31, 2003 expired unexercised.

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

The
table below summarizes warrant activity for the years ended December 31, 2002, 2003 and 2004.

Number of
Common Shares

Weighted
Average Exercise
Price Per Share(In Thousands, Except Per Share Data)Outstanding at December 31, 2001

3,424

$4.68Exercised

(132
)
5.00Outstanding at December 31, 2002

3,292

4.67Exercised

(2,870
)
5.00Expired

(2
)
5.00Outstanding at December 31, 2003

420

2.38Exercised

(400
)
1.50Expired

(20
)
20.00Outstanding at December 31, 2004



$


Stock option plans

The Company has in effect Stock Option Plans (the "Plans"), pursuant to which directors, officers and employees of the Company are eligible to receive grants of
options to purchase the Company's Common Stock. Approximately 5,166,800 shares of Common Stock have been reserved for issuance under the Plans, of which approximately 391,200 are outstanding under the
1991 Plan, approximately 2,261,900 are outstanding under the 2001 Employee and Director Plans and 1,434,000 are outstanding under the Executive Plan as of December 31, 2004. Options are granted
for terms not exceeding ten years from the date of grant. Options may not be granted at a price that is less than 100% of the fair market value on the date the options are granted. Options granted
under the Plans generally vest over

F-21

---



one
or two years. Options to purchase 325,600, 240,500 and 172,300 shares of Common Stock were exercised during the years ended December 31, 2004, 2003 and 2002, respectively, resulting in net
cash proceeds to the Company of approximately $2,483,000, $962,000 and $715,000, respectively.

The
table below summarizes activity in the Company's Plans for the years ended December 31, 2002, 2003 and 2004.

Number of
Common Shares

Weighted Average
Exercise Price(In Thousands, Except Per Share Data)Outstanding at December 31, 2001

2,937

$  5.00Granted

699

10.28Exercised

(172
)
4.15Canceled

(5
)
29.40Outstanding at December 31, 2002

3,459

6.07Granted

731

9.62Exercised

(240
)
4.00Canceled

(30
)
20.08Outstanding at December 31, 2003

3,920

6.75Granted

612

12.60Exercised

(326
)
7.66Canceled

(119
)
10.80Outstanding at December 31, 2004

4,087

$  7.44


The
table below summarizes options outstanding and exercisable at December 31, 2004 (number of options in thousands):

Options Outstanding

Options Currently ExercisableRange of
Exercise
Prices

Number
Outstanding

Weighted
Average
Exercise
Price

Weighted
Average
Remaining Life
(Years)

Number
Exercisable

Weighted
Average
Exercise
Price$
2.00$2.89

476

$
2.86

1.5

476

$
2.863.003.75

559


3.64

1.5

559


3.644.73

500


4.73

1.3

500


4.735.705.88

142


5.84

5.4

142


5.846.006.33

368


6.00

6.4

368


6.007.108.93

415


8.06

7.6

275


7.989.009.80

501


9.70

7.0

480


9.7210.0410.75

338


10.11

8.2

239


10.1211.1311.81

232


11.46

7.4

212


11.4712.3212.55

123


12.48

9.4

50


12.5013.30

381


13.30

9.0




13.4815.83

52


14.02

8.9

38


13.84$
2.00$15.83

4,087

$
7.44

5.3

3,339

$
6.49


F-22

---



Approximately
3,338,800 of the 4,087,100 options outstanding at December 31, 2004 are vested and exercisable at December 31, 2004.

401(k) Retirement Plan

The Company sponsors a 401(k) retirement savings plan (the "401(k) Plan") under which eligible employees may contribute, on a pre-tax basis, up to a
maximum aggregate annual contribution imposed by the Internal Revenue Code of 1986, as amended. All employees who work for the Company in the U.S. are eligible to participate in the 401(k) Plan. All
employee contributions are allocated to the employee's individual account and are invested in various investment options as directed by the employee. Employees' cash contributions are fully vested and
nonforfeitable. The Company made matching contributions to the 401(k) Plan during the years ended December 31, 2004, 2003 and 2002 in the form of approximately 14,400, 11,500 and 9,300 shares,
respectively, of the Company's Common Stock valued at approximately $175,000, $117,000 and $92,000, respectively. All Company matching contributions vest 25% each year for the first four years of each
employee's employment in which the employee works for the Company at least 1,000 hours.

Stockholder Rights Plan

Effective December 21, 2004, the Board of Directors of the Company adopted a new Stockholder Rights Plan that replaced the Company's previous Stockholder
Rights Agreement that expired on December 21, 2004. Pursuant to the Renewed Rights Agreement, the Board of Directors declared a dividend of one Preferred Stock Purchase Right for each
outstanding share of the Company's Common Stock, payable to stockholders of record at the close of business on December 21, 2004. Each right, when exercisable, entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $1.00 per share, at a purchase price of $72.55 per one
one-thousandth of a share of Series A Preferred Stock, subject to adjustment. The plan is designed to prevent a potential acquirer from gaining control of the Company without fairly
compensating all of the Company's stockholders and to protect the Company from coercive takeover attempts. The rights will become exercisable only if a person or group of affiliated persons
beneficially acquire(s) 15% or more of the Company's Common Stock.

In
the event that an acquiring person becomes the beneficial owner of 15% or more of the then outstanding shares of Common Stock (except pursuant to a qualifying offer), each holder of a
right will thereafter have the right to receive, upon payment of the purchase price, shares of Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a
value (based on a formula set forth in the Renewed Rights Agreement) equal to two times the purchase price of the right. The rights are not exercisable until the distribution date and will expire at
the close of business on December 19, 2014, unless earlier redeemed or exchanged by the Company.

F-23

---





NOTE 12PROVISION FOR INCOME TAXES

For all periods presented theincome before income taxesas shown in the Consolidated Income Statements consists
of losses generated in the United States and income derived from foreign operations. See Note 14 for information regarding the components ofincome before income
taxes.

The
provision for income taxes consists of the following:

|                                            |         | Year Ended December 31, |      
|------------------------------------------- | ------- | ----------------------- | -----
|
|
|Current:                                    |         |                         |      
|                                            | Foreign |                         | $    
|Deferred:                                   |         |                         |      
|                                            | State   |                         |      
|                                            | Federal |                         |      
|                                            | Foreign |                         |      
|Tax effect of operating loss carryforwards: |         |                         |      
|                                            | State   |                         |      
|                                            | Federal |                         |      
|Change in valuation allowance               |         |                         | (817 
|                                            |         |                         |      
|Total provision for income taxes            |         | $                       | 4,805
|                                            |         |                         |      

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

|                                              |  | Year Ended December 31, |      
|--------------------------------------------- |  | ----------------------- | -----
|
|
|Statutory federal income taxes                |  | $                       | 3,695
|Permanent differences from foreign subsidiary |  |                         | 492  
|Foreign taxes                                 |  |                         | 604  
|State income taxes                            |  |                         | (90  
|Expiration/Reduction of loss carryforwards    |  |                         | 2,199
|Tax credits                                   |  |                         | (971 
|Other                                         |  |                         | (307 
|Change in valuation allowance                 |  |                         | (817 
|                                              |  |                         |      
|                                              |  | $                       | 4,805
|                                              |  |                         |      

F-24

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

|                               |                                | December 31,              |        
|------------------------------ | ------------------------------ | ------------------------- | -------
|
|
|Deferred tax assets:           |                                |                           |        
|                               | NOL carryforwards              |                           | $      
|                               | Disposition of subsidiary      |                           |        
|                               | Foreign tax on deferred income |                           |        
|                               | Tax credit carryforwards       |                           |        
|                               | Other, net                     |                           |        
|                               |                                |                           |        
|                               |                                | Total deferred tax assets |        
|Foreign deferred tax liability |                                |                           | (2,319 
|Deferred tax liabilities       |                                |                           | (217   
|Valuation allowance            |                                |                           | (24,078
|                               |                                |                           |        
|Deferred tax liability, net    |                                | $                         | (1,840 
|                               |                                |                           |        

A
tax review of the Company's Spanish subsidiary, Laboratorios Belmac, by the Spanish tax authorities for the tax years 1998, 1999 and 2000, was completed in the second quarter of 2004.
As a result of this audit, Laboratorios Belmac was assessed an additional tax liability of approximately $604,000, which has been recorded as a component ofprovision for
income taxesfor the years ended December 31, 2004. In addition, related interest and penalties of approximately $193,000 have been recorded as components of other income (expenses)for the year ended December 31, 2004.

The
Company has established a valuation allowance equal to the full amount of the domestic deferred tax asset, as future domestic operating profits cannot be assured. The Company has a
current deferred tax asset of $479,000 and a non-current deferred tax liability of $2,319,000 due to temporary differences arising as a result of the Company's Spanish subsidiary recording
the gain on the sale of drug licenses and the corresponding taxes for Spanish statutory purposes during the years ended December 31, 2001 and 2002. The deferred tax asset is a result of various
temporary differences and tax credit carryforwards.

Should
the Company determine that it is more likely than not that it will realize certain of its deferred tax assets for which it had previously provided a valuation allowance, an
adjustment would be required to reduce the existing valuation allowance. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in those jurisdictions. These
audits can involve complex issues, which may require an extended period of time for resolution. Although the Company believes that adequate consideration has been made for such issues, there is the
possibility that the ultimate resolution of such issues could have an adverse effect on the Company's results of operations.

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

At
December 31, 2004, the Company has NOL carryforwards of approximately $45,391,000 available to offset U.S. taxable income. The NOL carryforwards include the benefit of
disqualifying dispositions of approximately $690,000, the tax effect ($273,000) of which will be credited to additional paid-in capital if and when realized. The Company calculates that
use of its NOL carryforrwards may

F-25

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be
limited each year as a result of stock option and warrant issuances resulting in an ownership change of more than 50% of the Company's outstanding equity. If not offset against future taxable
income, the NOL carryforwards will expire in tax years 2007 through 2024. During the year ended December 31, 2004, the Company determined that a portion of its State NOL carryforwards,
generated during prior periods, are no longer available in the states that the Company does business in. The Company has therefore reduced the deferred tax benefit related to its State NOL
carryforwards by $2,199,000. Capital loss carryforwards totaling approximately $27,562,000 expired unused during the year ended December 31, 2002.

The
valuation allowance (decreased) increased by approximately $(817,000), $1,950,000 and ($9,520,000) for each of the years ended December 31, 2004, 2003 and 2002, respectively.

NOTE 13SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)

The following tables contain condensed information from the Company's Consolidated Income Statements for each quarter of the years ended December 31, 2004,
2003 and 2002. The Company has derived this data from its unaudited quarterly financial statements. The Company believes that the following information reflects all normal recurring adjustments
necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

|                                            |         | For The Three Months Ended
|------------------------------------------- | ------- | --------------------------
|
|
|Total revenues                              |         | $                         
|Cost of net product sales                   |         |                           
|                                            |         |                           
|Gross profit                                |         |                           
|Operating expenses                          |         |                           
|                                            |         |                           
|Income from operations                      |         |                           
|Other income (expenses)                     |         |                           
|Provision for income taxes                  |         |                           
|                                            |         |                           
|Net income                                  |         | $                         
|                                            |         |                           
|Net income per common share:                |         |                           
|                                            | Basic   |                           
|                                            |         |                           
|                                            | Diluted |                           
|                                            |         |                           
|Weighted average common shares outstanding: |         |                           
|                                            | Basic   |                           
|                                            |         |                           
|                                            | Diluted |                           
|                                            |         |                           

F-26

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|                                            |         | For The Three Months Ended
|------------------------------------------- | ------- | --------------------------
|
|
|Total revenues                              |         | $                         
|Cost of net product sales                   |         |                           
|                                            |         |                           
|Gross profit                                |         |                           
|Operating expenses                          |         |                           
|                                            |         |                           
|Income from operations                      |         |                           
|Other income (expenses)                     |         |                           
|Provision for income taxes                  |         |                           
|                                            |         |                           
|Net income                                  |         | $                         
|                                            |         |                           
|Net income per common share:                |         |                           
|                                            | Basic   |                           
|                                            |         |                           
|                                            | Diluted |                           
|                                            |         |                           
|Weighted average common shares outstanding: |         |                           
|                                            | Basic   |                           
|                                            |         |                           
|                                            | Diluted |                           
|                                            |         |                           

|                                            |  | For The Three Months Ended
|------------------------------------------- |  | --------------------------
|
|
|Total revenues                              |  | $                         
|Cost of net product sales                   |  |                           
|                                            |  |                           
|Gross profit                                |  |                           
|Operating expenses                          |  |                           
|Gain on sale of drug licenses               |  |                           
|                                            |  |                           
|Income from operations                      |  |                           
|Other income (expenses)                     |  |                           
|Provision for income taxes                  |  |                           
|                                            |  |                           
|Net income                                  |  | $                         
|                                            |  |                           
|Net income per common share:                |  |                           
|Basic                                       |  | $                         
|                                            |  |                           
|Diluted                                     |  | $                         
|                                            |  |                           
|Weighted average common shares outstanding: |  |                           
|Basic                                       |  |                           
|                                            |  |                           
|Diluted                                     |  |                           
|                                            |  |                           

---

F-27

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NOTE 14BUSINESS SEGMENT INFORMATION

The Company, headquartered in the U.S., is an international specialty pharmaceutical company focused on advanced drug delivery technologies and pharmaceutical
products. Bentley's proprietary drug technologies enhance or facilitate the absorption of pharmaceutical compounds across various membranes. The Company's Spanish subsidiaries, Laboratorios Belmac,
Laboratorios Davur and Laboratorios Rimafar, manufacture and market a growing portfolio of generic and branded pharmaceuticals in Europe for the treatment of cardiovascular, gastrointestinal,
infectious and neurological diseases. The Company's Spanish subsidiary, Bentley API, manufactures and markets active pharmaceutical ingredients. In the U.S., the Company's activities consist primarily
of licensing, product research and development, business development activities, corporate management and administration.

Set
forth in the tables below is certain financial information with respect to the Company's business and geographical segments for the years ended December 31, 2004, 2003 and
2002. The segments use the same accounting policies as those described in the summary of significant accounting policies in Note 2.

|                                                 |  | Year Ended December 31, 2004
|------------------------------------------------ |  | ----------------------------
|
|
|Total revenues                                   |  | $                           
|Interest income                                  |  |                             
|Interest expense                                 |  |                             
|Depreciation and amortization expense            |  |                             
|Income (loss) before income taxes                |  |                             
|Provision for income taxes                       |  |                             
|Net income (loss)                                |  |                             
|Fixed assets                                     |  |                             
|Drug licenses and related costs                  |  |                             
|Total assets                                     |  |                             
|Total liabilities                                |  |                             
|Expenditures for drug licenses and related costs |  |                             
|Expenditures for fixed assets                    |  |                             

F-28

---



|                                                 |  | Year Ended December 31, 2003
|------------------------------------------------ |  | ----------------------------
|
|
|Total revenues                                   |  | $                           
|Interest income                                  |  |                             
|Interest expense                                 |  |                             
|Depreciation and amortization expense            |  |                             
|Income (loss) before income taxes                |  |                             
|Provision for income taxes                       |  |                             
|Net income (loss)                                |  |                             
|Fixed assets                                     |  |                             
|Drug licenses and related costs                  |  |                             
|Total assets                                     |  |                             
|Total liabilities                                |  |                             
|Expenditures for drug licenses and related costs |  |                             
|Expenditures for fixed assets                    |  |                             

|                                                 |  | Year Ended December 31, 2002
|------------------------------------------------ |  | ----------------------------
|
|
|Total revenues                                   |  | $                           
|Interest income                                  |  |                             
|Interest expense                                 |  |                             
|Depreciation and amortization expense            |  |                             
|Income (loss) before income taxes                |  |                             
|Provision for income taxes                       |  |                             
|Net income (loss)                                |  |                             
|Fixed assets                                     |  |                             
|Drug licenses and related costs                  |  |                             
|Total assets                                     |  |                             
|Total liabilities                                |  |                             
|Expenditures for drug licenses and related costs |  |                             
|Expenditures for fixed assets                    |  |                             

Interest
income and interest expense are based upon the actual results of each operating segment's assets and borrowings.

Revenues
from one customer exceeded 10% of consolidated total revenues during the year ended December 31, 2004, accounting for 13% of 2004 consolidated total revenues and 4% of
the consolidated receivables balance at December 31, 2004. Revenues from one customer exceeded 10% of consolidated total revenues during the year ended December 31, 2003, accounting for
14% of 2003 consolidated total revenues and 7% of the consolidated receivables balance at December 31, 2003. Revenues from one customer exceeded 10% of consolidated total revenues during the
year ended December 31, 2002, accounting for 14% of 2002 consolidated total revenues and 8% of the consolidated receivables balance at December 31, 2002.

F-29

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NOTE 15COMMITMENTS AND CONTINGENCIES

The Company is obligated to pay certain royalty payments upon commercialization of products using its CPE-215 technology acquired in 1999 and its
intellectual property acquired in 2003 (See Notes 2 and 6).

The
Company has entered into renewable employment agreements with key executives and certain other personnel, which agreements provide for salaries, potential bonuses and other benefits
in exchange for services provided. The employment agreements also provide for certain compensation in the event of termination or change in control of the Company. The Company is currently obligated
to
pay approximately $1,500,000 in 2005 under such agreements, which are scheduled to expire on December 31, 2005.

During
the year ended December 31, 2004, management of the Company identified certain tax contingencies that were determined to be probable and reasonably estimable. Consequently,
the Company has included a charge totaling $188,000 related to these contingencies in theprovision for income taxesin the accompanying Consolidated
Income Statements. No other potential tax contingencies were considered probable and reasonably estimable by the Company at December 31, 2004. However, there is the possibility that the
ultimate resolution of such potential contingencies could have an adverse effect on the Company's Consolidated Financial Statements.

The
Company leases certain equipment and facilities under non-cancelable operating leases, which expire through the year 2008. Total charges to operations under operating
leases were approximately $991,000, $911,000 and $785,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Future minimum lease payments under operating leases are as
follows:

Year Ending December 31,(In Thousands)2005

$
1,1672006


7282007


2242008


122009 and beyond





On
February 4, 2002, the Company was notified that a legal proceeding had been commenced against it by Merck & Co. Inc. and its Spanish subsidiary, Merck
Sharp & Dohme de España, S.A., alleging that the Company violated their patents in its production of simvastatin products and requested an injunction ordering the Company not to
manufacture or market the products. The case was brought against the Company's Spanish subsidiaries in the 39th First Instance Court of the City of Madrid. After a hearing
on February 18, 2002, the court refused to grant the requested injunction and dismissed the case on February 25, 2002, awarding court costs and legal fees to the Company. Merck has
appealed the award of fees. Merck re-instituted its claim against the Company in another proceeding brought in the 19th First Instance Court of the City of Madrid, of which
the Company received notice on January 23, 2003. This case also alleged violation of Merck's patents in the production of simvastatin products, requested an order that we cease manufacturing
the products and demanded damages during the period of manufacture. After a trial with respect to this matter held on February 19 and 20, 2004, the court, on April 8, 2004, ruled in
favor of the Company, again awarding the Company court costs and legal fees. Merck has subsequently appealed this ruling.

On
January 10, 2004, the Company was notified that a legal proceeding had been commenced against it by Smith Kline Beecham PLC, Smith Kline Beecham, S.A. and GlaxoSmithKline S.A.
alleging

F-30

---



that
the Company violated their patents in its production of paroxetine products and they requested an order requiring the Company to not manufacture or market the products. The case was brought
against the Company's Spanish subsidiaries in the 50th First Instance Court of the City of Madrid. This proceeding followed a preliminary injunction that the same plaintiffs attempted to
bring against the Company in 2003, which was dismissed. The Company filed a response to this suit in February 2004 that included a counterclaim requesting that the court declare the asserted
patent invalid. The Company intends to vigorously oppose this claim as it believes the claim is without merit. The Company's paroxetine product line was launched in 2003.

In
September 2004, a legal action was filed against Bentley in the U.S. (District Court for the District of Delaware) by Ethypharm S.A. France and its Spanish affiliate, a
French-based drug delivery company, primarily claiming misappropriation of unspecified alleged trade secrets in connection with the manufacture of omeprazole since March 2002 by Laboratorios
Belmac, one of our Spanish subsidiaries. A related claim was previously brought against Laboratorios Belmac in the 72nd First Instance Court of the City of Madrid requesting preliminary
inquiries into possible patent infringement, which remains unresolved. The Company intends to vigorously defend against the claims in the U.S. and Spain.

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

F-31

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