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

                                    FORM 10-K

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

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 for the fiscal year ended December 31, 1996
                                           -----------------
                                       OR

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

                         Commission File Number 1-10581

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

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

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

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

           Securities registered pursuant to section 12(b) of the Act:

Title of each class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
Common Stock,  $.02 par value          American Stock Exchange and Pacific Stock
                                        Exchange

12% Convertible Senior                 American Stock Exchange and Pacific Stock
 Subordinated Debentures                Exchange

Class  A Redeemable Warrants           American Stock Exchange and Pacific Stock
                                        Exchange

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

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

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

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

    Title of Class         Aggregate Market Value     As of Close of Business on
    --------------         ----------------------     --------------------------
Common Stock, $.02 par value      $10,443,375               March 27, 1997

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      3,348,195                 March 27, 1997


                       DOCUMENTS INCORPORATED BY REFERENCE

  Proxy Statement for the 1997 Annual Meeting of Stockholders - Incorporated by
                   Reference into Part III of this Form 10-K


<PAGE>


                                     PART I


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

GENERAL

Bentley Pharmaceuticals, Inc. is an international pharmaceutical and health care
company engaged  primarily in the  manufacturing,  marketing and distribution of
pharmaceutical products in Spain and France, with limited distribution of health
care  products  in the United  States.  The  Registrant's  operations  in France
consist of the  brokerage  of fine  chemicals,  sourcing  of raw  materials  and
pharmaceutical   intermediates  and  the  distribution  of  ethical  drugs.  The
Registrant  has  entered   negotiations  to  sell  its  French  subsidiary  (see
"--Pharmaceutical  Marketing  and Sales in France").  In Spain,  the  Registrant
develops and  registers  late stage  products,  and  manufactures,  packages and
distributes both its own and other companies'  pharmaceutical  products.  In the
United States, the Registrant markets disposable linens to emergency  healthcare
services  which  are  manufactured   under  contract.   The  percentage  of  the
Registrant's  total  revenues  for the year ended  December  31,  1996 which are
attributable  to its  operations  in  France,  Spain and the  United  States are
approximately  50%,  49% and 1%,  respectively.  The  Registrant's  chemical and
pharmaceutical  operations  in  France  and  Spain  are a  result  of  its  1991
acquisition of Chimos S.A. and the establishment of a pharmaceutical  subsidiary
in France,  Laboratoires Belmac S.A. ("Laboratoires Belmac") (these two entities
in France have since been  merged  into one entity  named  Chimos/LBF  S.A.  and
referred  to  herein  as  Chimos)  and the  1992  acquisition  of  Rimafar  S.A.
(subsequently  renamed and  referred  to herein as  Laboratorios  Belmac  S.A.),
respectively.

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





                                        2

<PAGE>



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

                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                 -------------------------------
                                                    1996      1995      1994
                                                  -------   -------   -------

Pharmaceutical and Consumer Health Care Products  $22,924   $31,188   $26,826

Disposable Linen Products                             209       249       184
                                                  -------   -------   -------

Total                                             $23,133   $31,437   $27,010
                                                  =======   =======   =======



PRODUCT LINES

The Registrant currently manufactures, markets and sells pharmaceutical products
in Spain, distributes pharmaceutical and biotechnology products and brokers fine
chemicals  in France,  and  markets  and sells  disposable  linens in the United
States.

PHARMACEUTICAL MANUFACTURING AND MARKETING IN SPAIN

Laboratorios  Belmac S.A., the Registrant's  subsidiary in Spain  ("Laboratorios
Belmac"),  manufactures,  markets and sells  pharmaceutical  products whose four
primary  categories  are  cardiovascular,  gastrointestinal,  neurological,  and
infectious   diseases.   The   Registrant   manufactures   over  60   types   of
pharmaceuticals  in its facility in  Zaragoza,  Spain both for its own sales and
under contract for others. The manufacturing facility was recently renovated and
brought into full  compliance with European Union Good  Manufacturing  Practices
(GMPs). Among the products  Laboratorios Belmac manufactures and/or distributes,
each of which is registered with Spain's Ministry of Health, are:

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

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


                                        3

<PAGE>




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

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

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

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

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

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

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

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

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

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

                                        4

<PAGE>



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

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

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

           Clisemina(R).  Clisemina  (doxycycline) is a tetracycline  antibiotic
used for a multitude of infectious diseases.

           Amantadina  Juventus(R).  Amantadina  Juventus is an oral  anti-viral
agent used in the treatment of viral  infections  and also has  applications  in
treating Parkinson's Disease.

           Belmacina(R). Belmacina is a ciprofloxacin antibiotic. The Registrant
sold its Spanish  marketing rights to Belmacina to CEPA, a Spanish  company,  in
1994 for 200 million Spanish Pesetas (approximately  $1,556,000) and the related
trademark to CEPA for 50 million  Spanish  Pesetas  (approximately  $380,000) in
1995. The Registrant maintains the right to manufacture and export this product.
Belmacina  was acquired by the  Registrant in September  1992 for  approximately
$577,000. The gain on sale of the marketing rights (approximately  $884,000) was
included in the  Registrant's  income for the year ended  December 31, 1994. The
Registrant recorded the gain on the sale of the related trademark (approximately
$380,000) as deferred revenue in its consolidated  financial  statements for the
year ended December 31, 1994, and recognized such revenue in 1995. See Note 6 of
Notes to Consolidated Financial Statements.

           Rimafungol(R).    Rimafungol    is   the    Registrant's    form   of
cyclopiroxolamine,  a  broad-spectrum  antifungal  product for  treating  fungal
infections of the skin and vagina.

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

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

Controlvas and Belmazol,  together,  represent approximately 57% of the sales of
Laboratorios Belmac.

As the Spanish government did not recognize international conventions for patent
protection for pharmaceutical products until 1992, the Registrant,  while owning
the  right  to  manufacture   the  drugs   described  above  as  well  as  other
pharmaceuticals, will often be one of several companies

                                        5

<PAGE>



which has the right to manufacture and sell substantially similar products.  The
Spanish regulatory  authorities  specify the amounts each company can charge for
its products.  Therefore, the Registrant's competitors may sell similar products
at the same,  higher or lower  prices.  Many of these  competitors  are  larger,
better capitalized and have more developed sales networks than the Registrant.

The Registrant  maintains an internal marketing and sales staff of approximately
55, including 41 employees and 14 independent sales  representatives  working on
commission in Spain to market the pharmaceuticals it produces.  The Registrant's
sales force competes by emphasizing highly individualized customer service.

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

CONTRACT  MANUFACTURING.  Since Laboratorios Belmac currently utilizes less than
100% of its plant capacity to manufacture its own products,  Laboratorios Belmac
has  engaged  in  contract  manufacturing  of  pharmaceuticals  owned  by  other
companies  such as  Rhone-Poulenc's  subsidiary  Natterman  S.A.,  Ciba  Geigy's
subsidiary  Zyma,  Fournier,  Italpharmaco,  Beijing  Pharmaceutical,  Instituto
Llorente,  Laboratorios  Juventus,  S.A.  and  Ethypharm.  Other  contracts  are
contemplated   in  the  near   future.   The   Registrant   manufactures   these
pharmaceuticals  to its  customers'  specifications,  packaging  them  with  the
customers  labels.  Occasionally,  to assure  product  uniformity  and  quality,
employees  of  these  customers  will  work  at the  Registrant's  manufacturing
facility.  As  a  result  of  Spain's  entry  into  the  European  Union,  Spain
implemented new  pharmaceutical  manufacturing  standards and the Registrant was
required  to  modify  its  facility  to  comply  with  these  regulations.  Such
renovations  were  accomplished by Laboratorios  Belmac without  interruption of
sales or distribution.  After an inspection, in July 1995 the operating parts of
the facility were  determined to be in compliance  with European GMPs by Spain's
Ministry of Health.

PHARMACEUTICAL MARKETING AND SALES IN FRANCE

Chimos,  the  Registrant's  subsidiary  in France,  is engaged in the import and
distribution  of specialty  pharmaceutical  products to hospitals  and others in
France.  Chimos has  concentrated  on the sale of "orphan drugs" (drugs used for
the treatment of rare diseases) and biotechnology  products.  The Registrant has
marketed  throughout France over 26 pharmaceutical  products from Europe and the
United States.

Chimos is authorized by France's  Ministry of Health to act as a distributor  of
ethical  drugs.  The  primary  customer  of Chimos  is  Pharmacie  Centrale  des
Hopitaux,  which purchases drugs from Chimos.  Chimos marketed Ceredase,  a drug
used in the  treatment of Gaucher's  Disease,  in France until the  distribution
agreement between Genzyme  Corporation and Chimos expired on March 31, 1996 (see
"--Customers").


                                        6

<PAGE>



Consequently,  the Registrant's sales in France declined significantly beginning
in the second quarter of 1996 as a result of the expiration of the  distribution
agreement.  Notwithstanding  the relative  significance of its sales volume, the
Ceredase  gross  margins as a percentage  of sales were  minimal,  therefore the
impact on  operating  profits was not  material.  The  Registrant  is  exploring
alternative  uses for its working  capital that has  historically  supported the
Ceredase distribution arrangement.

Chimos,  as one of the  authorized  distributors  of Orphan Drugs in France,  is
occasionally  contacted by  manufacturers  of such products outside of France to
act as their distributor. In addition, the Registrant from time to time supplies
Chimos with a list of Orphan Drugs  approved by the FDA in the United States and
Chimos  contacts  their  manufacturers  to seek becoming  their  distributor  in
France.

CHEMICAL  BROKERAGE.  Chimos is  engaged  in the  import and supply in France of
approximately  39  fine  chemicals,   such  as  furosemide,   phenobarbital  and
trihexyphenidyl HCl, used in the manufacture of pharmaceuticals,  from countries
such as Japan,  Taiwan,  China,  Pakistan and several  European  countries.  The
brokerage  of fine  chemicals  by Chimos  provides a necessary  link between the
manufacturer  and  end-user.  The  manufacturer  produces the  chemicals to meet
product  specifications  and provides a certificate of analysis as to the purity
of the  chemicals.  The products are provided to the end-user,  which  generally
verifies the analysis with its own quality control procedures.  Chimos generally
acts as agent for the manufacturer,  arranging for shipping,  import and customs
documentation,  invoicing  and  collection  of  payments.  Chimos  also  acts on
occasion  on  behalf  of the  end-user,  which  requests  that  Chimos  source a
particular  product from one of its sources or conduct a  world-wide  search for
the product.

The Registrant is currently engaged in negotiations with a subsidiary of a large
European conglomerate to sell its French subsidiary,  Chimos. The transaction is
expected to be finalized  early in the second  quarter of 1997. As no definitive
agreement  has been  signed,  there can be no  assurance  that such sale will be
consummated. Since the expiration of the Ceredase distribution agreement, Chimos
has been  generating  revenues  at the rate of  approximately  $5.5  million per
annum.

MARKETING AND DISTRIBUTION OF DISPOSABLE LINENS IN THE UNITED STATES

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

Healthcare  receives orders for these products at the Registrant's  headquarters
in Tampa, Florida and subcontracts the manufacturing of the disposable linens in
accordance  with  Healthcare's  specifications.  The  raw  materials  for  these
products are  provided by  Healthcare  and stored with one of the  manufacturers
until needed.  Once produced,  the products are shipped directly to the customer
from the manufacturer or held in inventory in anticipation of customer demand.

                                        7

<PAGE>



The supply of disposable linens to health care providers in the United States is
a highly competitive business that includes many large companies. The Registrant
concentrates its marketing on the emergency  services segment of the health care
market, an area which demands greater individual attention.  Healthcare believes
that it competes on the basis of customer service.

Healthcare  advertises this service nationwide through several mediums,  such as
print  advertisements,  trade  shows and  direct  mail  (sales  brochures).  The
manufacture  and sale of disposable  linens is subject to regulation by the FDA,
which monitors the composition and labeling of health care products.

PRODUCTS UNDER DEVELOPMENT

Although the  Registrant  significantly  reduced its  research  and  development
activities when it implemented its austerity program in 1993, the Registrant has
maintained its rights to selected  products.  There can be no assurance that the
Registrant  will have the resources to bring any of these products to market or,
if  such  resources  are  available,  that  the  products  can  be  successfully
developed,  manufactured  or  marketed.  Due to the expense and time  commitment
required to bring a pharmaceutical  product to market, the Registrant is seeking
co-marketing,  licensing and promotional  arrangements and other  collaborations
with  other  international  or  national  pharmaceutical  companies.  Generally,
management  believes that the Registrant can compete more effectively in certain
markets  through   collaborative   arrangements  with  companies  that  have  an
established presence in a particular  geographic area and greater resources than
those of the Registrant.  The Registrant is currently seeking partners to assist
in the further development and marketing of Biolid(R) and Alphanon(R).

           BIOLID(R)

Biolid(R)  is a  non-crystalline  form  of  erythromycin  with a  potential  for
enhanced bioavailability  (quantity absorbed in blood over time compared to dose
received).  Initially,  Biolid was  produced in Europe in a sachet  formulation,
which is a powder formulation  contained in a packet,  which is mixed with water
prior to oral  administration.  This  formulation  for drugs is more  popular in
Europe than in the United States,  necessitating the Registrant's development of
a tablet  formulation  for marketing in the United  States.  The  Registrant was
granted a United States patent for Biolid in June 1992. An international  patent
application  covering  ten  additional  countries  was granted in January  1994.
Regulatory  approval  was received in Spain in 1994 and an  Investigational  New
Drug Application ("IND") is on file with the FDA.

Initial  Sachet  Formulation  Studies.  Five double  blind  clinical  studies of
Biolid,  using its sachet formulation,  were completed in 1992 in a total of 612
patients  in  France,   Germany,   Belgium  and   Holland.   Four  studies  used
roxithromycin  (Rulid,  Hoescht-Roussel)  as a reference drug, and Biolid showed
equal  efficacy  and  tolerance  in  both  lower  and  upper  respiratory  tract
infections in three of the four studies. In the fifth study, Biolid was compared
to   a   third   generation   oral    cephalosporin,    cefpodoxime    (Cefodox,
Hoescht-Roussel),  in upper  respiratory  tract  infections,  and  again,  equal
efficacy and tolerance were observed.

                                        8

<PAGE>




The Registrant has  determined to direct its  development  efforts for Biolid in
the United States to the twice-a-day  tablet  formulation rather than the sachet
formulation. The Registrant has performed several pilot studies between 1992 and
1994, the most recent of which indicated that the tablet,  given with a high fat
meal, had bioavailability  which was approximately 25% better when compared on a
milligram for milligram basis with a competitive  U.S.  tablet of  erythromycin.
These results did not achieve the same level of  bioavailability  as the initial
studies of the sachet  formulation.  Because of wide  variations in the data, an
additional  study  with  a  larger  number  of  subjects  will  be  required  to
definitively determine the relative bioavailability of the tablet formulation as
compared  to  standard  erythromycin.  A study  plan  was  reviewed  by the FDA;
however,  there can be no assurance  that this study will  demonstrate  enhanced
bioavailability.  Management of the Registrant  does not have sufficient data to
be able to  accurately  predict  the  outcome of the  studies at this time.  The
Registrant intends to seek collaborative partners to assist in completion of the
development and subsequent marketing of this product.

           ALPHANON(R)

Alphanon,  the  Registrant's  original  product,  was  designed for the systemic
treatment  of  hemorrhoids.  The  drug  was  originally  developed  as a  liquid
formulation  for  intra-navel  transdermal  application.  A double blind placebo
controlled  study  conducted  in  France  in the  late  1980's  in 220  patients
demonstrated  that Alphanon was effective in the  treatment of  hemorrhoids  and
hemorrhoidal bleeding. This study was conducted prior to the promulgation of and
requirement that clinical studies comply with Good Clinical Practices.

A transdermal  patch, a more convenient  formulation,  has been developed and an
IND is on file with the FDA. The Registrant  satisfactorily  completed a Phase I
clinical study in December 1992 and is evaluating its alternatives which include
co-development or divestiture.  The Registrant has discontinued further research
and development related to Alphanon pending licensing or divestiture.

           OTHER PRODUCTS

Phenantramine   Analogue.   Phenantramine   analogue  is  a  pre-clinical  stage
antimalarial  which has shown  effectiveness  against  sensitive  and  resistant
strains of  Plasmodium  falciparum.  The  Registrant  is planning no  additional
in-house  research  and  development  activity at this time with respect to this
compound unless in a licensing or other collaboration.

           PARTNERSHIP VENTURE

In  March  1994  the  Registrant  formed  a  partnership,  through  Healthcare's
wholly-owned subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of
Maximed  Corporation,  which is  headquartered  in New York City, and planned to
market, through this partnership, a range of hydrogel based feminine health care
products,  including  a  contraceptive,  an  antiseptic,  an  antifungal  and an
antibacterial. In December 1994, the Registrant commenced litigation against its
partner  claiming   interference  in  the  management  of  the  partnership  and
misrepresentation under

                                        9

<PAGE>



the  partnership  agreement.  On  January  12,  1996 the  Court  ruled  that the
Registrant's  reliance on its partner's  misrepresentation was not justified and
that the Registrant had performed its  obligations  under the agreement with its
partner.  Accordingly,  the Registrant's  claims as well as the counterclaims of
its partner were  dismissed.  On September  25, 1996,  the  Registrant  filed an
appeal in the United  States  Court of  Appeals  for the  Second  Circuit.  Oral
argument  was heard on February  26, 1997 and a decision is expected  within the
next few months.  Pending  resolution of this dispute,  the  partnership  is not
actively engaged in the development of any products.

SOURCES AND AVAILABILITY OF RAW MATERIALS

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

PATENTS, TRADEMARKS, LICENSES AND REGISTRATIONS

Although  few of the  products  currently  being  sold  by  the  Registrant  are
protected by patents  owned by the  Registrant,  the  Registrant  believes  that
patent and trademark protection of the results of the Registrant's  research and
development  efforts may  contribute  to the future  success of the  Registrant.
Accordingly,  where possible, patents and trademarks will be sought and obtained
in the United States and in all countries of principal marketing interest to the
Registrant.

The  Registrant has filed patent  applications  and has been granted a number of
patents.  However,  there can be no assurance that its pending applications will
be issued as patents  or that any of its issued  patents  will  afford  adequate
protection to the Registrant or its licensees.  In addition, the Registrant also
relies  on   unpatented   proprietary   technology   in  the   development   and
commercialization  of its  products.  There is no assurance  that others may not
independently  develop the same or similar  technology  or obtain  access to the
Registrant's proprietary technology.

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

Patents  for Biolid were  granted in the U.S. in June 1992 and in the  following
European  countries in January 1994:  Austria,  Belgium,  Italy,  Liechtenstein,
Netherlands,  Sweden, Switzerland, U.K., Germany and France. A patent for Biolid
in  Venezuela  was granted in  September  1995 and in Argentina in April 1996. A
U.S. patent for Phenantramine was granted in October 1993. Trademarks for Biolid
are  currently  registered  in France,  Ireland,  Portugal,  Sweden and the U.K.
Alphanon trademarks are currently registered in the U.S. and Australia.

In  addition,   Laboratorios   Belmac  owns   approximately  50  trademarks  for
pharmaceutical  products and one patent which were granted by Spain's  Bureau of
Patents and Trademarks. In Spain,

                                       10

<PAGE>


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

COMPETITION

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

The  Registrant  competes  primarily  in France  and  Spain,  which  are  large,
developed  population  centers  in  Europe  with  populations  of  approximately
58,000,000  and  39,000,000  people,  respectively.   In  addition,  since  both
countries are members of the European Union,  the Registrant  expects to be able
to target the European Union's larger population of approximately 442,000,000 as
harmonization eliminates the barriers between countries.

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

Chimos,   as  a  distributor  and  broker  of  fine  chemicals,   pharmaceutical
intermediates and biotechnology  products,  competes with numerous multinational
companies  as well as companies  in France,  resulting  in low product  margins.
Competition in the supply and  distribution of  pharmaceutical  intermediates is
particularly  strong from a large  number of small  companies  located in Italy,
India, Pakistan and China. Certain large multinational companies also compete in
the  distribution  of fine chemicals  including  Abbott  Laboratories--Chemicals
Division,  The UpJohn Co. and Bayer A.G. The biotechnology industry is currently
less competitive as many of such products are Orphan Drugs with low volumes.





                                       11

<PAGE>



CUSTOMERS

The  incidence of certain  infectious  diseases  which occur at various times in
different areas of the world affects the demand for the Registrant's  antibiotic
products  when they are  marketed  in each  area.  Orders  for the  Registrant's
products are generally  filled on a current basis,  and no order backlog existed
at  December  31,  1996.  Sales  of  approximately  $2,200,000,  $7,300,000  and
$8,000,000 to Pharmacie  Centrale des Hopitaux  accounted for approximately 10%,
23% and 30% of the  Registrant's  sales for the years ended  December  31, 1996,
1995 and  1994,  respectively.  Due to the  March  31,  1996  expiration  of the
Registrant's   distribution   agreement  with  Genzyme   Corporation,   for  the
distribution of Ceredase,  the Registrant  experienced a significant decrease in
sales to this  customer in 1996 (see "--  Pharmaceutical  Marketing and Sales in
France").  No  material  portion  of the  Registrant's  business  is  subject to
renegotiation  of profits or  termination  of  contracts  at the election of any
governmental authority.

RESEARCH AND DEVELOPMENT

The Registrant's  management has shifted the focus from research and development
to a more cost effective strategy of acquiring late-stage  development compounds
that can be marketed within one year as well as currently marketed products.  As
a result of this shift in operations,  the Registrant has decreased its research
and  development  spending  over the past few years.  Research  and  development
activities have been  performed,  under contract,  by various  universities  and
consulting research laboratories.  The Registrant has a research and development
portfolio of two pharmaceutical  products. (See "--Products under Development.")
One product is  protected  by a patent in the United  States.  Patent and patent
applications  have also been filed in other  countries of marketing  interest to
the  Registrant.  INDs are on file  with the FDA for the  macrolide  antibiotic,
Biolid, and the transdermal anti-hemorrhoidal patch, Alphanon.

The Registrant spent $29,000,  $444,000 and $759,000 in the years ended December
31, 1996, 1995 and 1994,  respectively,  on research and development to discover
and develop new  products and  processes  and to improve  existing  products and
processes. Expenditures were concentrated in the development of products for the
treatment of  infectious  diseases.  These  decreases are a result of a thorough
review  of  research  and  development  activities  with  the  establishment  of
priorities  based on both  technical and  commercial  criteria.  The  Registrant
intends to continue to carefully manage such expenditures in view of its limited
resources.

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

REGULATION

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

                                       12

<PAGE>



and cost  incurred in  obtaining  and  maintaining  the approval to market newly
developed and existing products.

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


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

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

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

                                       13

<PAGE>



review of an NDA. In  addition,  the sponsor  that  obtains the first  marketing
approval  for a  designated  Orphan Drug for a given  indication  is eligible to
receive marketing exclusivity for a period of seven years.

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

France.  Most of the activities of Chimos are not regulated by France's Ministry
of Health,  since  pharmaceuticals  in France are  regulated at the level of the
manufacturer,  as they produce the products, and pharmacists, as they distribute
the products to the public. Chimos' distribution activities are not regulated.

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

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

Many  countries,  directly  or  indirectly  through  reimbursement  limitations,
control the selling price of certain  health care  products.  Furthermore,  many
developing  countries  limit  the  importation  of raw  materials  and  finished
products. In western Europe, efforts are under way by the European

                                       14

<PAGE>



Union to harmonize  technical  standards for many products,  including drugs and
medical  devices,  and to make  more  uniform  the  requirements  for  marketing
approval from the various regulatory agencies.

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

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

EMPLOYEES

The Registrant and its subsidiaries  employ  approximately 110 people, 7 of whom
are employed in the United  States,  5 in France and 98 in Spain as of March 27,
1997.  Of  such  employees,   approximately   35  are  principally   engaged  in
manufacturing  activities,  55 in sales and marketing,  including 14 independent
sales representatives,  and 20 in management and administration. In general, the
Registrant considers its relations with its employees to be good.

FINANCIAL INFORMATION RELATING TO GEOGRAPHIC AREAS AND FOREIGN OPERATIONS

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



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

UNITED STATES

The Registrant's  corporate  headquarters are located at One Urban Centre, Suite
548, 4830 West Kennedy  Boulevard,  Tampa,  Florida 33609 and presently  include
4,900 square feet which are occupied in accordance  with a lease agreement which
expires in 1998.

SPAIN

Manufacturing  is performed at the Registrant's  facilities in Zaragoza,  Spain.
These  facilities  were  renovated in 1995 to comply with the  requirements  for
European GMPs. The  facilities,  which are owned by the  Registrant,  consist of
approximately  45,000 square feet located in a prime  industrial park and seated
on sufficient  acreage that would allow for future expansion.  The manufacturing
facility  is capable of  producing  tablets,  capsules,  suppositories,  creams,
ointments,  lotions,  liquids  and  sachets,  as  well  as  microgranulated  and
microencapsulated

                                       15

<PAGE>



products.  The facility also includes analytical chemistry,  quality control and
quality assurance laboratories.  The GMPs certification allows the Registrant to
undertake  contract  manufacturing for a number of international  pharmaceutical
companies either engaged in or contemplating  emergence into the Spanish market.
The  Registrant's  administrative  offices  in Spain  are  located  in Madrid in
approximately  3,000  square feet of  renovated,  leased  offices,  which leases
expire in 1998.

FRANCE

Chimos is located in Paris, France in leased office space of approximately 2,000
square feet, which leases expire in 1998.

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

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

Michael M. Harshbarger,  a former member of the Registrant's  Board of Directors
and its former  President and Chief  Executive  Officer filed a suit against the
Registrant in November  1993, in the Circuit  Court of the  Thirteenth  Judicial
Circuit, State of Florida, Hillsborough County Civil Division, alleging wrongful
termination.  The plaintiff is seeking monetary damages in excess of $1,400,000.
The Registrant views his claim as meritless and intends to vigorously oppose it.
The  Registrant  has  filed a  counterclaim  against  Harshbarger  for  wrongful
conversion and civil theft,  fraud and deceit,  and breach of contract,  seeking
the return of  corporate  assets  removed  by  Harshbarger  and for  restitution
related to  expenses of a personal  nature  that he charged to the  Registrant's
accounts. The Registrant amended its counterclaim to include breach of fiduciary
duty.  The  Registrant  is seeking  damages  from  Harshbarger,  relating to its
counterclaim,  in  excess  of  $1,000,000.  Harshbarger  attempted  to  use  the
Americans  with  Disabilities  Act (the "ADA") as a defense to the  Registrant's
counterclaim;  however,  the  judge  ruled in favor of the  Registrant's  recent
motion to strike Harshbarger's ADA defense.  Harshbarger's  counsel then filed a
motion to withdraw from the case, citing irreconcilable  differences.  The judge
granted this motion on March 21, 1997.

In  March  1994  the  Registrant  formed  a  partnership,  through  Healthcare's
wholly-owned subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of
Maximed  Corporation,  which is  headquartered  in New York City, and planned to
market, through this partnership, a range of hydrogel based feminine health care
products,  including  a  contraceptive,  an  antiseptic,  an  antifungal  and an
antibacterial. In December 1994, the Registrant commenced litigation against its
partner  claiming   interference  in  the  management  of  the  partnership  and
misrepresentation under the partnership agreement. On January 12, 1996 the Court
ruled that the Registrant's reliance on its partner's  misrepresentation was not
justified  and that the  Registrant  had  performed  its  obligations  under the
agreement with its partner.  Accordingly, the Registrant's claims as well as the
counterclaims  of its  partner  were  dismissed.  On  September  25,  1996,  the
Registrant filed an

                                       16

<PAGE>



appeal in the United  States  Court of  Appeals  for the  Second  Circuit.  Oral
argument  was heard on February  26, 1997 and a decision is expected  within the
next few months.  Pending  resolution of this dispute,  the  partnership  is not
actively engaged in the development of any products.

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

Not applicable.

                                     PART II


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

On July 31, 1990 and March 27, 1996, the Registrant's Common Stock began trading
on the American  Stock  Exchange and the Pacific Stock  Exchange,  respectively,
under the  symbol  BNT.  The  following  table sets forth the high and low sales
prices for the Common Stock as reported on the American  Stock  Exchange for the
periods  indicated.  All prices for the period  prior to July 25, 1995 have been
adjusted to give retroactive effect to a one-for-ten  reverse stock split of the
Registrant's Common Stock effected on that date.


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

March 31, 1995                    $7.50                     $3.13

June 30, 1995                      9.38                      3.75

September 30, 1995                 8.63                      4.13

December 31, 1995                  4.63                      2.06



March 31, 1996                    $2.88                     $2.06

June 30, 1996                      4.13                      2.13

September 30, 1996                 3.94                      2.38

December 31, 1996                  3.75                      2.50


As of March 27,  1997  there were  2,117  holders of record of the  Registrant's
Common Stock,  excluding shares held in street name. No dividends have ever been
declared or paid on the  Registrant's  Common Stock and the Registrant  does not
anticipate paying any dividends in the forseeable future.

                                       17

<PAGE>




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

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

SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
                                                          Fiscal Year Ended                    Six Months Ended   Fiscal Year
                                                             December 31,                         December 31,   Ended June 30,
                                        -----------------------------------------------------     ------------   --------------

(In thousands, except per share data)    1996(1)        1995(2)        1994(2)        1993(3)        1992(4)        1992(5)
                                        --------       --------       --------       --------       --------       --------
<S>                                     <C>            <C>            <C>            <C>            <C>            <C>
Sales                                   $ 23,133       $ 31,437       $ 27,010       $ 19,849       $  9,708       $ 13,138

Cost of sales                             15,638         25,586         21,931         15,100          5,899          8,871
                                        --------       --------       --------       --------       --------       --------

Gross margin                               7,495          5,851          5,079          4,749          3,809          4,267

Operating expenses                         8,794          8,198          9,050         14,722         23,493         14,758
                                        --------       --------       --------       --------       --------       --------

Other (income) expense                     1,620            (21)          (393)           263           (153)           320
                                        --------       --------       --------       --------       --------       --------

Net loss before extra-ordinary item     $ (2,473)          --             --             --             --             --
                                        ========       ========       ========       ========       ========       ========

Net loss                                $ (2,919)      $ (2,326)      $ (3,578)      $(10,236)      $(19,531)      $(10,811)
                                        ========       ========       ========       ========       ========       ========

Net loss per Common Share before
  extra-ordinary item                   $   (.79)      $   (.83)      $  (1.56)      $  (6.32)      $ (16.60)      $ (11.12)
                                        ========       ========       ========       ========       ========       ========

Net loss per Common Share               $   (.92)      $   (.83)      $  (1.56)      $  (6.32)      $ (16.60)      $ (11.12)
                                        ========       ========       ========       ========       ========       ========

Weighted average number of Common
Shares outstanding                         3,334          2,999          2,395          1,655          1,203            997
                                        ========       ========       ========       ========       ========       ========
</TABLE>

<TABLE>
<CAPTION>

BALANCE SHEET INFORMATION
                                                   At December 31,                    At June 30,
                                ---------------------------------------------------   -----------
(In thousands)                  1996(1)    1995(2)    1994(2)    1993(3)    1992(4)     1992(5)
                                -------    -------    -------    -------    -------     -------
<S>                            <C>        <C>        <C>        <C>        <C>         <C>
Working capital (deficiency)   $  4,265   $  3,113   $  1,928   $  2,043   $ (3,842)   $  8,449

Non-current assets                6,746      6,523      5,644      5,937     13,497      18,643

Total assets                     16,558     16,290     16,332     16,160     21,953      38,753

Non-current liabilities           5,513      2,252        336      2,821      2,349       2,626

Redeemable Preferred Stock        2,203      2,068      2,256      2,218      7,401       7,164

Common Stockholders'
Equity (deficit)                  3,295      5,316      4,980      2,941        (95)     17,352
</TABLE>


See explanations on the following page.



                                       18

<PAGE>




(1)  Revenues declined beginning in the second quarter of 1996, due to the March
     31, 1996 expiration of the distribution agreement for the product Ceredase,
     which accounted for approximately 60% of the Registrant's  revenues in 1995
     and  approximately 54% of its revenues in the quarter ended March 31, 1996.
     Ceredase gross margins, as a percent of sales, were approximately 5% during
     the  quarter  ended  March 31,  1996;  therefore,  the impact on  operating
     profits is not considered to be material. The registrant completed a public
     offering in February 1996,  whereby it issued $6,900,000 of 12% convertible
     subordinated debentures and warrants. Consequently, the Registrant incurred
     interest expense totalling  $1,227,000 in 1996. The Registrant  incurred an
     extra-ordinary  charge of $446,000,  representing the unamortized  discount
     and issuance  costs at the date of repayment of Notes from its October 1995
     private placements. Operating expenses for the year ended December 31, 1996
     include  approximately  $340,000,  representing  a provision  for  goodwill
     impairment  related  to  Chimos.  See  Notes  1, 8, 13 and 14 of  Notes  to
     Consolidated Financial Statements.

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

(3)  The year ended  December  31,  1993  includes  the  effects of writing  off
     capitalized costs with respect to the sachet formulation of Biolid(R),  its
     noncrystalline  form of  erythromycin  and a  charge  to  earnings  for the
     settlement  of  class  action  litigation.  See  Notes 6 and 10 of Notes to
     Consolidated Financial Statements.

(4)  The  Registrant  changed  its  fiscal  year end to  December  31  effective
     December 31, 1992 and sold its  marketing  rights in France to Amodex(R) on
     January 20,  1993.  The six months ended  December  31, 1992 include  other
     non-recurring charges totaling $9,321,000.

(5)  The  Registrant  acquired  100% of the shares of Chimos in August 1991 and,
     accordingly,  for  accounting  purposes,  was no longer  considered  in the
     development  stage of operations.  The Registrant also acquired 100% of the
     shares  of  Laboratorios  Belmac in  February  1992,  as well as  Amodex(R)
     trademark and licensing rights in France in December 1991.


                                       19
<PAGE>






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

GENERAL

The Registrant is an international  pharmaceutical  and health care company with
its  primary  focus  on  the   manufacturing,   marketing  and  distribution  of
pharmaceutical and health care products.  Substantially all of its revenues have
come from its operations in France and Spain;  however,  the Registrant  markets
disposable linens to emergency healthcare services in the United States.

The Registrant incurred a net loss before  extra-ordinary item of $2,473,000 and
a net loss of $2,919,000  for the year ended  December 31, 1996.  The Registrant
intends to continue to focus its efforts on business activities which management
believes should result in operating profits in the future, of which there can be
no assurance.  To improve its results, the Registrant's management will focus on
increasing  higher  margin   pharmaceutical   and  health  care  product  sales,
controlling  expenses through its austerity program,  careful  prioritization of
research and development  projects  resulting in continued low overall  research
and development  expenditures,  and potentially acquiring marketable products or
profitable companies in the United States or Europe that are compatible with the
Registrant's  strategy for growth.  (See  "--Liquidity and Capital  Resources.")
Currently,  the  profit  margins  for  the  products  sold  by the  Registrant's
subsidiary  in Spain  are  significantly  higher  than  those  generated  by the
Registrant's   subsidiary  in  France.  The  Company  is  currently  engaged  in
negotiations  with a subsidiary  of a large  European  conglomerate  to sell its
French subsidiary,  Chimos. The transaction is expected to be finalized early in
the second  quarter of 1997. As no definitive  agreement has been signed,  there
can be no assurance that such sale will be consumated. Sales generated by Chimos
began to  decline  in the  second  quarter  of 1996 due to the  expiration  of a
distribution  agreement for the product  Ceredase.  Since the expiration of this
distribution  agreement,  Chimos  has been  generating  revenues  at the rate of
approximately  $5.5 million per annum. For business  segment  information on the
Registrant's  operations  outside  the  United  States,  see Note 12 of Notes to
Consolidated Financial Statements.

RESULTS OF OPERATIONS

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

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

Sales and Cost of Sales. The 26% decrease in revenues is primarily  attributable
to a 52% decrease in sales by the Registrant's  French  subsidiary,  Chimos,  to
$11,624,000,  which  was  partially  offset  by a 68%  increase  in sales by the
Registrant's Spanish subsidiary,  Laboratorios  Belmac, to $11,299,000,  for the
year ended December 31, 1996. As previously reported,

                                       20

<PAGE>



revenues declined  beginning in the second quarter of 1996, due to the March 31,
1996 expiration of its distribution  agreement for the product  Ceredase,  which
accounted for approximately  60% of the Registrant's  revenues in the year ended
December  31,  1995.  Ceredase  gross  margins,  as a  percent  of  sales,  were
approximately 5%;  therefore,  the impact on operating profits is not considered
to be material.  Gross margins for the year ended  December 31, 1996 improved to
32% when  compared  to gross  margins of 19% in the prior year,  primarily  as a
result of the more rapid rate of growth in sales at Laboratorios  Belmac,  whose
sales generate  significantly higher gross margins than those of Chimos, as well
as  the  loss  of  low-margin  Ceredase  sales.  The  Registrant's  distribution
operations   in  France,   Chimos,   generate   relatively   low  gross  margins
(approximately  12% for the year  ended  December  31,  1996) as  opposed to the
Registrant's  Spanish  subsidiary,  Laboratorios  Belmac,  which is experiencing
substantially higher margins  (approximately 53% for the year ended December 31,
1996).

Operating Expenses. Selling, general and administrative expenses were $7,923,000
for the year ended  December 31, 1996 compared to $7,204,000 for the prior year.
Overall,   selling,  general  and  administrative  expenses  increased  and  the
composition  changed as a result of increased  selling expenses  incurred by the
Spanish  subsidiary,  which are  necessary  in order to sustain the  increase in
sales  volume  that the  Spanish  sales  force has  generated  in the year ended
December  31, 1996.  This  increase was offset in part by a decrease in selling,
general  and  administrative  expenses by Chimos,  primarily  due to the loss of
Ceredase sales,  during the year ended December 31, 1996. The Registrant intends
to continue its efforts to control general and  administrative  expenses as part
of its austerity program in its effort to reach and maintain profitability.

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

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

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

Other  Income/Expense.  Interest  expense  was  $1,227,000  for the  year  ended
December 31, 1996 compared to $563,000 for the prior year. The $664,000 increase
reflects  interest  expense  arising  primarily  from (i) the Notes  sold by the
Registrant in its October 1995 private placements, which

                                       21

<PAGE>



Notes were paid with the proceeds of the Public  Offering  completed in February
1996 and (ii) the  Debentures  sold in the February  1996 Public  Offering.  The
Registrant  incurred an  extra-ordinary  charge of  $446,000,  representing  the
unamoritized  discount and issuance  costs at the date of repayment of the Notes
from its October 1995 private  placements.  Interest income was $103,000 for the
year ended December 31, 1996 compared to $3,000 for the prior year. The increase
was with respect to interest  earned on the proceeds of the Public  Offering and
cash collected from Ceredase receivables which have been temporarily invested in
short-term interest bearing investments included in cash and cash equivalents in
the Balance Sheet.

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

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

FISCAL YEAR ENDED DECEMBER 31, 1995 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1994

The Registrant  reported revenues of $31,437,000 and a net loss of $2,326,000 or
$.83 per common share for the year ended  December 31, 1995 compared to revenues
of  $27,010,000  and a net loss of  $3,578,000 or $1.56 per common share for the
prior year.

Sales and Cost of Sales. The 16% increase in revenues is primarily  attributable
to an increase in sales by the Registrant's  subsidiary in France, Chimos, which
distributes  specialty  pharmaceutical  products  and fine  chemicals in France.
Consolidated  gross  margins  for the year  ended  December  31,  1995  remained
consistent  at 19% when  compared to the prior year,  including  the effect of a
$571,000  charge  to  cost  of  sales  in the  year  ended  December  31,  1995,
representing  an  increase  in the  Registrant's  reserves  for slow  moving  or
obsolete inventory in Europe. The Registrant's distribution operations in France
(Chimos)  (whose sales  accounted for  approximately  78% of revenues)  generate
relatively low gross margins as opposed to the Registrant's  Spanish subsidiary,
Laboratorios  Belmac (whose sales accounted for  approximately 21% of revenues),
and is experiencing  substantially  higher margins. The Registrant expects sales
in 1996  to  decline  as a  result  of the  March  31,  1996  expiration  of its
distribution   agreement  for  the  product,   Ceredase,   which  accounted  for
approximately 60% of its revenues in 1995. Ceredase

                                       22

<PAGE>



gross margins, as a percent of sales, have been minimal;  therefore,  the impact
on operating profits is not expected to be material.

Operating   Expenses.   Selling,   general  and  administrative   expenses  were
$7,204,000,  or 23% of sales,  for the year ended  December 31, 1995 compared to
$7,716,000, or 29% of sales, for the prior year. The decrease from 29% to 23% of
sales is primarily  attributable  to cost control  measures  implemented  by the
Registrant.  The Registrant  intends to continue its efforts to control  general
and  administrative  expenses as part of its austerity  program in its effort to
reach and maintain profitability.

Research and development  expenses were $444,000 for the year ended December 31,
1995  compared to $759,000  for the prior year.  The 42%  decrease  reflects the
results of a thorough review of all research and development  activities and the
establishment of priorities  based upon both technical and commercial  criteria.
During this  period,  the  Registrant  did not  commence  any new  research  and
development programs. The Registrant intends to continue to carefully manage its
research  and  development  expenditures  in the  future in view of its  limited
resources.

Depreciation and amortization expenses remained relatively unchanged at $550,000
for the year ended December 31, 1995 compared to $575,000 in the prior year.

Other Income/Expense.  Interest expense was $563,000 for the year ended December
31, 1995  compared to $423,000  for the prior year.  The 33%  increase  reflects
approximately  $348,000 of fourth quarter  interest  arising  primarily from the
Notes sold by the  Registrant in its October 1995 private  placements  and, to a
lesser  degree,  interest on higher average  outstanding  balances on short term
borrowings, which are used to finance working capital needs. Interest income was
$3,000 for the year ended  December 31, 1995  compared to $123,000 for the prior
year. The $120,000  decrease  reflects the Registrant's use of its resources for
working capital needs, resulting in reduced earnings on liquid assets.  Interest
expense and interest income will both be higher in 1996 than in 1995 as a result
of the  Registrant's  February  1996 public  offering  of Units (as  hereinafter
defined)  (See "--  Liquidity  and  Capital  Resources  --  Financings").  Other
(income)  expense,  net, of ($581,000)  for the year ended  December 31, 1995 is
primarily  comprised  of  income  of  ($360,000)  related  to  a  settlement  of
litigation (see Note 13 of Notes to Consolidated  Financial  Statements) and the
($380,000) gain recognized upon the sale of the Registrant's Belmacina trademark
in Spain,  which  was  previously  reflected  in the  Registrant's  consolidated
financial statements as deferred revenue as of December 31, 1994. The Registrant
has since  transferred  the trademark to the purchaser and collected the balance
of the related receivable in the fourth quarter of 1995. Other (income) expense,
net,  also includes the effect of a reversal of an  over-accrual  of a liability
related to the proposed  sale of Biolid,  which did not occur,  in the amount of
($375,000),  offset  by a charge  of  $533,000  for  cancellation  of the  stock
subscription  receivable  and  related  interest  from a former  officer  of the
Registrant.  One-half of the loss  (approximately  $37,000)  incurred by Maximed
Pharmaceuticals,  the Registrant's partnership with Maximed Corporation, is also
included in other  (income)  expense,  net, in the year ended December 31, 1995.
Although the Registrant is in a dispute with its partner, and has ceased funding
the  partnership's  activities  until  such  dispute  is  resolved,  appropriate
operating  costs have been  accrued  and charged to  operations  during the year
ended December 31, 1995.

                                       23

<PAGE>



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

Total assets  increased from  $16,290,000 at December 31, 1995 to $16,558,000 at
December 31, 1996, while Common  Stockholders'  Equity decreased from $5,316,000
at December 31, 1995 to $3,295,000 at December 31, 1996.  The decrease in Common
Stockholders'  Equity  reflects  primarily the February 1996 Public  Offering of
Units,  offset by a  fluctuation  in the exchange  rates of European  currencies
compared to the U.S. Dollar and the loss incurred by the Registrant for the year
ended December 31, 1996.

The Registrant's  working capital increased from $3,113,000 at December 31, 1995
to $4,265,000 at December 31, 1996. The increase in working capital is primarily
attributable to the proceeds from the February 1996 Public Offering of Units.

Cash and cash  equivalents  increased  from  $1,120,000  at December 31, 1995 to
$4,425,000 at December 31, 1996.  The increase in cash and cash  equivalents  is
primarily  attributable to the completion of a Public Offering of its securities
in February 1996 and collection of receivables for sales of Ceredase.

Receivables  decreased  from  $6,836,000  at December 31, 1995 to  $3,632,000 at
December 31, 1996, primarily as the result of the decline in sales by its French
subsidiary,  Chimos, as a result of the expiration of the Ceredase  distribution
agreement  as of March 31,  1996.  The  Registrant  reduced its  receivables  by
$4,999,000  since that date  primarily by  collecting  receivables  for sales of
Ceredase,  which were utilized to reduce accounts payable balances by $1,233,000
and to reduce the amount of short-term  borrowings  by $544,000  during the nine
months ended December 31, 1996. A significant  portion of the Registrant's trade
receivables arise from sales of  pharmaceutical  and health care products to the
French  government.  Payment  terms for such sales are typically 90 to 100 days;
the Registrant has not experienced any material delinquent accounts. Inventories
also  decreased  to $945,000 at December  31,  1996  compared to  $1,054,000  at
December  31,  1995,  primarily  due to  the  decline  in  sales  by the  French
subsidiary and the corresponding reduction in inventory levels.

Although the combined total of accounts payable and accrued  expenses  decreased
from  $5,455,000  at December  31, 1995 to  $4,528,000  at December 31, 1996 and
short term borrowings decreased slightly from $1,197,000 at December 31, 1995 to
$1,014,000  at  December  31,  1996,  as  discussed  above,  such  balances  are
significantly  reduced  below  their  March 31,  1996  balances,  as a result of
application  of cash  collected  from  receivables  during the nine months ended
December 31, 1996.

Fixed assets,  net decreased from  $4,084,000 at December 31, 1995 to $3,544,000
at December 31, 1996,  partly due to a fluctuation in foreign currency  exchange
rates and partly due to the  disposal of certain  unnecessary  fixed  assets and
write-off  of  leasehold  improvements  by the


                                       24
<PAGE>



Registrant  associated  with its  relocation  to smaller,  more cost  effective,
office space in April 1996 partially  offset by  improvements to fixed assets in
Spain.

Other  non-current  assets increased 31% from $1,319,000 at December 31, 1995 to
$1,727,000  at  December  31,  1996 and  long  term  debt  increased  281%  from
$1,354,000 at December 31, 1995 to $5,164,000 at December 31, 1996, primarily as
a result of the Public Offering of Units in February 1996. The increase in other
non-current assets was partially offset by the provision for goodwill impairment
of $340,000.

Investing  activities,  including the purchase of investments available for sale
of $166,000 and the addition of fixed assets,  used net cash of $175,000  during
the year ended December 31, 1996.  Financing  activities  (primarily the sale of
Units  in  a  Public  Offering  in  February  1996)  provided  net  proceeds  of
$3,707,000,  after repayment of $1,770,000 of long term debt, for the year ended
December 31, 1996.  Operating  activities  for the year ended  December 31, 1996
used net cash of $73,000. The loss on the disposal of fixed assets and write-off
of  leasehold  improvements  associated  with  the  Registrant's  relocation  to
smaller, more cost effective office space in April 1996 was $79,000.

Seasonality.  In the past, the Registrant has experienced lower sales in certain
calendar  quarters of each year.  Should the  Registrant  begin large sales of a
pharmaceutical product whose sales are seasonal, seasonality of sales may become
more significant.

Currency.  A  substantial  amount of the  Registrant's  business is conducted in
Spain and France and is  therefore  influenced  by the extent to which there are
fluctuations  in the dollar's  value  against such  countries'  currencies.  The
effect of foreign currency  fluctuations on long lived assets for the year ended
December  31,  1996 was a decrease  of $487,000  and the  cumulative  historical
effect  was  a  decrease  of  $1,081,000,   as  reflected  in  the  Registrant's
Consolidated  Balance  Sheets  in the  "Liabilities  and  Stockholders'  Equity"
section.  Although exchange rates fluctuated  significantly in recent years, the
Registrant does not believe that the effect of foreign  currency  fluctuation is
material to the  Registrant's  results of operations as the expenses  related to
much of the Registrant's  foreign currency  revenues are in the same currency as
such revenues. The Registrant relies primarily upon financing activities to fund
the  operations of the  Registrant in the United States and has not  transferred
significant  amounts into or out of the United States in the recent past. In the
event that the  Registrant  is required to fund United  States  operations  with
funds  generated in Spain or France,  currency rate  fluctuations  in the future
could have a significant impact on the Registrant. However, at the present time,
the Registrant does not anticipate  altering its business plans and practices to
compensate for future currency fluctuations.

Financings.  To finance its operations, in October 1995 the Registrant conducted
two private placements of its securities. In the first placement, the Registrant
sold to certain purchasers for an aggregate purchase price of $720,000,  120,000
shares  of the  Registrant's  Common  Stock  and  12%  promissory  notes  in the
aggregate  principal  amount of $720,000  which became  payable in full upon the
earlier of July 31, 1996 or the closing of a public offering of the Registrant's
securities.  In the second placement,  the Registrant sold to certain purchasers
for an aggregate  purchase price of  $1,050,000,  131,250 shares of Common Stock
and 12% promissory  notes in


                                       25

<PAGE>



the aggregate  principal  amount of $1,050,000 which became payable in full upon
the earlier of September  30, 1996 or the  completion  of a public  offering.  A
Public Offering was completed in February 1996 and all of such notes were repaid
at that time or converted into Units.

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

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

Management  expects that as a result of  completing  its recent  financings,  by
carefully  prioritizing  research and development  activities and continuing its
austerity  program,  the  Registrant  should have  sufficient  liquidity to fund
operations into 1998. The Registrant,  however, continues to explore alternative
sources for financing  its business.  In  appropriate  situations,  that will be
strategically  determined,  the Registrant may seek  financial  assistance  from
other  sources,  including  contribution  by others to joint  ventures and other
collaborative  or  licensing   arrangements   for  the   development,   testing,
manufacturing  and  marketing  of  products  under  development  and the sale of
certain of the assets of, or one or more of, its  subsidiaries.  The  Company is
currently  engaged  in  negotiations  with  a  subsidiary  of a  large  European
conglomerate to sell its French subsidiary,  Chimos. The transaction is expected
to be finalized early in the second quarter of 1997. As no definitive  agreement
has been signed,  there can be no assurance  that such sale will be  consumated.
Sales  generated by Chimos began to decline in the second quarter of 1996 due to
the expiration of a distribution  agreement for the product Ceredase.  Since the
expiration of this distribution  agreement,  Chimos has been generating revenues
at the rate of approximately $5.5 million per annum.


                                       26

<PAGE>




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

The statements contained in or incorporated by reference into this Annual Report
on Form 10-K which are not historical facts contain forward looking  information
with respect to plans, projections or future performance of the Registrant,  the
occurrence of which involve certain risks and uncertainties that could cause the
Registrant's  actual  results to differ  materially  from those  expected by the
Registrant,  including the history of operating  losses;  uncertainty  of future
financial  results;  possible  negative  cash  flow from  operating  activities;
additional  financing  requirements;  no  assurance  of  successful  and  timely
development  of new  products;  risks  inherent in  pharmaceutical  development;
dependance on regulatory  approvals;  uncertainty of  pharmaceutical  pricing or
profitability;   unpredictability  of  patent  protection;  rapid  technological
change;  competition;  and  other  uncertainties  detailed  in the  Registrant's
Registration  Statement on Form S-1 (SEC File No. 33-65125)  declared
effective by the Securities and Exchange Commission on February 14, 1996.

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

See Item 14 of this Form 10-K.



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

Not applicable.



                                    PART III



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

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

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


James R. Murphy         47      Chairman, President,           III       1993
                                Chief Executive Officer
                                and Director

Robert M. Stote, M.D.   57      Senior Vice President,         III       1993
                                Chief Science Officer and
                                Director

Michael D. Price        39      Vice President,                II        1995
                                Chief Financial Officer,
                                Treasurer, Secretary and
                                Director

                                       27

<PAGE>




Randolph W. Arnegger    52      Director                       II        1994

Charles L. Bolling      73      Director                       II        1991

Doris E. Wardell        58      Director                       I         1994



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

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

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

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




                                       28

<PAGE>



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

DORIS E. WARDELL has been a consultant  in the health care  industry  since July
1995,  assisting  clients with  solutions with respect to patient care and nurse
satisfaction  issues.  Prior  thereto,  she  was  Assistant   Professor/Clinical
Services  Coordinator  at the  University  of Utah College of Nursing from April
1994 to July 1995,  and was  previously  involved  in  Integrated  Care  special
projects at  Allegheny  General  Hospital,  serving as Acting Vice  President of
Nursing at  Allegheny  General  Hospital  from  September  1992 to June 1994 and
Assistant Vice President of Nursing from December 1989 to September 1992.  Prior
thereto,  Mrs.  Wardell  served as Vice  President of  Administration  at Beaver
Medical Center from April 1987 to November 1989.  From March 1980 to April 1987,
she was  employed by Chestnut  Hill  Hospital as Vice  President  of Nursing and
Director of Nursing Services from August 1978 to March 1980.

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

The Registrant's  Articles of Incorporation and By-Laws provide for a classified
Board of Directors. The Board is divided into three classes, designated Class I,
Class II and Class III. The director  included in Class I above will hold office
until the 1997 Annual Meeting of Stockholders.  The directors  included in Class
II above will hold office  until the 1998 Annual  Meeting of  Stockholders.  The
directors  included  in Class III above will hold  office  until the 1999 Annual
Meeting of Stockholders.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities  Exchange Act of 1934, as amended,  requires the
Registrant's executive officers and directors, and any persons who own more than
10% of any class of the Registrant's equity securities,  to file certain reports
relating to their  ownership of such  securities  and changes in such  ownership
with the Securities and Exchange  Commission and the American Stock Exchange and
to furnish the  Registrant  with  copies of such  reports.  To the  Registrant's
knowledge  during the year ended  December  31, 1996,  all Section  16(a) filing
requirements have been satisfied.



                                       29

<PAGE>




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

The  information  called for by this item is  incorporated  by  reference to the
Registrant's   definitive  Proxy  Statement  for  the  1997  Annual  Meeting  of
Stockholders to be filed pursuant to Regulation 14A.



ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
           --------------------------------------------------------------

The  information  called for by this item is  incorporated  by  reference to the
Registrant's   definitive  Proxy  Statement  for  the  1997  Annual  Meeting  of
Stockholders to be filed pursuant to Regulation 14A.



ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
           ----------------------------------------------

The  information  called for by this item is  incorporated  by  reference to the
Registrant's   definitive  Proxy  Statement  for  the  1997  Annual  Meeting  of
Stockholders to be filed pursuant to Regulation 14A.


                                       30

<PAGE>


                                     PART IV

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

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


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

      (1)  Financial Statements:

      Independent Auditors' Report                                       F-1

      Consolidated Balance Sheets as of December 31, 1996 and
      1995                                                               F-2

      Consolidated Statements of Operations for the years
      ended December 31, 1996, 1995 and 1994                             F-3

      Consolidated Statements of Changes in Common Stockholders'
      Equity for the years ended December 31, 1996, 1995 and 1994        F-4

      Consolidated Statements of Cash Flows for the years ended
      December 31, 1996, 1995 and 1994                                F-5 to F-6

      Notes to Consolidated Financial Statements                         F-7

      (2)  Financial Statement Schedule:

      Independent Auditors' Report on Financial Statement Schedule       F-27

      Schedule II - Valuation and qualifying accounts and reserves       F-28

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


                                       31

<PAGE>




                                  EXHIBIT INDEX

           (3)        Exhibits filed as part of this report:

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

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

3.2            By-Laws of the Registrant, as amended and restated. (Reference is
               made to Exhibit 3.2 to the Registrant's  Form 10-K filed June 30,
               1989, Commission File No. 1-10581,  which exhibit is incorporated
               herein by reference.)

3.3            Amendment  to By-Laws of the  Registrant.  (Reference  is made to
               Exhibit 3.2(a) to the Registrant's Amendment No. 1 on Form S-3 to
               Form S-1  Registration  Statement,  Commission File No. 33-35941,
               which exhibit is incorporated herein by reference.)

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

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

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

4.4            Registrant's  1991  Stock  Option  Plan.  (Reference  is  made to
               Exhibit 4.6 to the Registrant's  Form 8-K filed October 17, 1991,
               Commission File No. 1-10581, which exhibit is incorporated herein
               by reference.)





                                       32

<PAGE>



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

4.5            Amendment to Registrant's  1991 Stock Option Plan.  (Reference is
               made  to  Exhibit  4.17 to the  Registrant's  Form  10-K  for the
               Transition  Period Ended December 31, 1992,  Commission  File No.
               1-10581, which exhibit is incorporated herein by reference.)

4.6            Amendment to  Registrant's  1991 Stock Option Plan as approved by
               the  shareholders on June 9, 1994.  (Reference is made to Exhibit
               4.16 to the  Registrant's  Form 10-K for the year ended  December
               31,  1994,   Commission  File  No.  1-10581,   which  exhibit  is
               incorporated herein by reference.)

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

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

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

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

4.11           Subscription  Agreement between the Registrant and Western Slops,
               Ltd. dated March 29, 1994.  (Reference is made to Exhibit 4.29 to
               the Registrant's  Form 10-K for the year ended December 31, 1994,
               Commission File No. 1-10581, which exhibit is incorporated herein
               by reference.)

4.12           Subscription   Agreement   between  the  Registrant  and  Shulmit
               Pritziker  dated December 7, 1994.  (Reference is made to Exhibit
               4.32 to the  Registrant's  Form 10-K for the year ended  December
               31,  1994,   Commission  File  No.  1-10581,   which  exhibit  is
               incorporated herein by reference.)


                                       33

<PAGE>



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

4.13           Warrants  issued by the  Registrant to Baytree  Associates,  Inc.
               dated October 18, 1995. (Reference is made to Exhibit 4.23 to the
               Registrant's  Registration Statement on Form S-1, Commission File
               No. 33-65125, which exhibit is incorporated herein by reference.)

4.14           Form of Subscription Agreement between the Registrant and various
               purchasers  of Units  consisting of one note and 10,000 shares of
               Common Stock in an October 1995 private placement.  (Reference is
               made to Exhibit 4.1 to the  Registrant's  Form 8-K filed November
               29,  1995,   Commission  File  No.  1-10581,   which  exhibit  is
               incorporated herein by reference.)

4.15           Form of Note dated September 30, 1995 issued by the Registrant to
               the  purchasers  of Units in an October 1995  private  placement.
               (Reference  is made to Exhibit 4.2 to the  Registrant's  Form 8-K
               filed  November  29, 1995,  Commission  File No.  1-10581,  which
               exhibit is incorporated herein by reference.)

4.16           Form of Subscription Agreement between the Registrant and various
               purchasers  of Units  consisting  of one note and 7,500 shares of
               Common Stock in an October 1995 private placement.  (Reference is
               made to Exhibit 4.3 to the  Registrant's  Form 8-K filed November
               29,  1995,   Commission  File  No.  1-10581,   which  exhibit  is
               incorporated herein by reference.)

4.17           Form of Note dated  October 25, 1995 issued by the  Registrant to
               the  purchasers  of Units in an October 1995  private  placement.
               (Reference  is made to Exhibit 4.4 to the  Registrant's  Form 8-K
               filed  November  29, 1995,  Commission  File No.  1-10581,  which
               exhibit is incorporated herein by reference.)

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

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

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


                                       34

<PAGE>



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

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

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

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

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

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

21.1           Subsidiaries  of the  Registrant.  (Reference  is made to Exhibit
               21.1 to the  Registrant's  Form 10-K for the year ended  December
               31,  1994,   Commission  File  No.  1-10581,   which  exhibit  is
               incorporated herein by reference.)

23.1*          Consent of Deloitte & Touche LLP.

27.1*          Financial Data Schedule.

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

(b)  Reports on Form 8-K filed  during the fiscal  quarter  ended  December  31,
     1996:

          None.

     Subsequent to December 31, 1996, the Registrant filed the following Reports
     on Form 8-K:

          None.

                                       35

<PAGE>


                                   SIGNATURES
                                   ----------

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

                                                  BENTLEY PHARMACEUTICALS, INC.

                                                  By:   /s/ James R. Murphy
                                                       -------------------------
                                                       James R. Murphy
                                                       Chairman, President and
                                                       Chief Executive Officer
                                                       Date:  March 27, 1997

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

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

/s/ James R. Murphy           Chairman, President,                March 27, 1997
------------------------      Chief Executive Officer
James R. Murphy               and Director (principal
                              executive officer)

/s/ Robert M. Stote           Senior Vice President,              March 27, 1997
------------------------      Chief Science Officer and
Robert M. Stote, M.D.         Director

/s/Michael D. Price           Vice-President,                     March 27, 1997
------------------------      Chief Financial Officer,
Michael D. Price              Treasurer, Secretary and
                              Director (principal
                              financial and accounting officer)

/s/ Randolph W. Arnegger      Director                            March 27, 1997
------------------------
Randolph W. Arnegger

/s/ Charles L. Bolling        Director                            March 27, 1997
------------------------
Charles L. Bolling

/s/ Doris E. Wardell          Director                            March 27, 1997
------------------------
Doris E. Wardell



<PAGE>


INDEPENDENT AUDITORS' REPORT


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

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Bentley
Pharmaceuticals,  Inc. and subsidiaries  (the "Company") as of December 31, 1996
and 1995,  and the related  consolidated  statements of  operations,  changes in
common  stockholders'  equity,  and cash flows for each of the three years ended
December  31,   1996.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company at December 31, 1996
and 1995,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1996 in conformity  with generally
accepted accounting principles.




/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Tampa, FL
March 27, 1997










                                       F-1


<PAGE>

                          BENTLEY PHARMACEUTICALS, INC.
                           CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)                           December 31,
                                                           --------------------
                                                             1996        1995
                                                           --------    --------
ASSETS
------

Current assets:
 Cash and cash equivalents                                 $  4,425    $  1,120
 Investments                                                    166         161
 Receivables                                                  3,632       6,836
 Inventories                                                    945       1,054
 Prepaid expenses and other                                     644         596
                                                           --------    --------
  Total current assets                                        9,812       9,767
                                                           --------    --------

Fixed assets, net                                             3,544       4,084
Drug licenses and related costs, net                          1,475       1,120
Other non-current assets, net                                 1,727       1,319
                                                           --------    --------
                                                           $ 16,558    $ 16,290
                                                           ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
 Accounts payable                                          $  2,998    $  3,883
 Accrued expenses                                             1,530       1,572
 Short term borrowings                                        1,014       1,197
 Current portion of long term debt                                5           2
                                                           --------    --------
  Total current liabilities                                   5,547       6,654
                                                           --------    --------
Long term debt, net                                           5,164       1,354
                                                           --------    --------
Other non-current liabilities                                   349         898
                                                           --------    --------
Commitments and contingencies
Redeemable preferred stock, $1.00 par value,
 authorized 2,000 shares:
  Series A, issued and outstanding, 60 shares                 2,203       2,068
                                                           --------    --------
Common Stockholders' Equity
 Common stock, $.02 par value, authorized 35,000 shares,
  issued and outstanding, 3,345 and 3,330 shares                 67          66
 Stock purchase warrants (to purchase 8,304 and 547
  shares of common stock)                                       435         150
 Paid-in capital in excess of par value                      71,146      70,047
 Stock subscriptions receivable                                (105)       (105)
 Accumulated deficit                                        (67,167)    (64,248)
 Cumulative foreign currency translation adjustment          (1,081)       (594)
                                                           --------    --------
                                                              3,295       5,316
                                                           --------    --------
                                                           $ 16,558    $ 16,290
                                                           ========    ========


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

                                       F-2

<PAGE>


                          BENTLEY PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)                 For the Year Ended
                                                         December 31,
                                               --------------------------------
                                                 1996        1995        1994
                                               --------    --------    --------

Sales                                          $ 23,133    $ 31,437    $ 27,010

Cost of sales                                    15,638      25,586      21,931
                                               --------    --------    --------


Gross margin                                      7,495       5,851       5,079
                                               --------    --------    --------


Operating expenses:

 Selling, general and administrative              7,923       7,204       7,716

 Research and development                            29         444         759

 Depreciation and amortization                      502         550         575

 Provision for goodwill impairment                  340          --          --
                                               --------    --------    --------

 Total operating expenses                         8,794       8,198       9,050
                                               --------    --------    --------

 Loss from operations                            (1,299)     (2,347)     (3,971)


Other (income) expenses:

 Interest expense                                 1,227         563         423

 Interest income                                   (103)         (3)       (123)

 Other (income) expense, net                         50        (581)       (693)
                                               --------    --------    --------

Loss before extra-ordinary item                  (2,473)     (2,326)     (3,578)

Extra-ordinary item-extinguishment of debt          446          --          --
                                               --------    --------    --------

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

Loss per common share before
 extra-ordinary item                           ($  0.79)   ($  0.83)   ($  1.56)

Extra-ordinary item-
 Extinguishment of debt                           (0.13)         --          --
                                               --------    --------    --------

Net loss per common share                      ($  0.92)   ($  0.83)   ($  1.56)
                                               ========    ========    ========


Weighted average common shares
outstanding                                       3,334       2,999       2,395
                                                  =====       =====       =====




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

                                       F-3

<PAGE>

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

(In thousands, except per share data)
                                                   $.02 Par Value
                                                    Common Stock       Additional                Other
                                                --------------------     Paid-In  Accumulated    Equity
                                                 Shares      Amount      Capital    Deficit   Transactions    Total
                                                --------    --------    --------    --------    --------    --------
<S>                                                <C>      <C>         <C>         <C>         <C>         <C>
Balance at December 31, 1993                       2,070    $     41    $ 63,902    ($58,344)   ($ 2,658)   $  2,941

 Private placements of common stock, net             826          17       4,776        --          --         4,793

 Stock subscriptions receivable                     --          --          --          --        (1,596)     (1,596)

 Stock subscriptions received                       --          --          --          --           693         693

 Conversion of redeemable preferred stock              1        --           129        --          --           129

 Conversion of stock purchase warrants                 2        --            34        --          --            34

 Repurchase of common stock                          (41)         (1)       (620)       --           621        --

 Sale of treasury stock                               42           1         294        --          --           295

 Common stock issued as compensation                   7        --           146        --          --           146

 Common stock issued to settle litigation             70           2         998        --          --         1,000

 Accrual of dividends - preferred stock             --          --          (166)       --          --          (166)

 Foreign currency translation adjustment            --          --          --          --           289         289

 Net loss                                           --          --          --        (3,578)       --        (3,578)
                                                --------    --------    --------    --------    --------    --------

Balance at December 31, 1994                       2,977          60      69,493     (61,922)     (2,651)      4,980

 Private placements of common stock, net             251           5         465        --          --           470

 Stock subscriptions received                       --          --          --          --           562         562

 Stock subscriptions revaluation/cancellation       --          --          (351)       --           883         532

 Conversion of redeemable preferred stock              3        --           340        --          --           340

 Issuance of stock purchase warrants                --          --          --          --           150         150

 Conversion of stock purchase warrants                90           2         212        --          --           214

 Common stock issued as compensation                   9        --            58        --          --            58

 Miscellaneous                                      --            (1)        (18)       --          --           (19)

 Accrual of dividends - preferred stock             --          --          (152)       --          --          (152)

 Foreign currency translation adjustment            --          --          --          --           507         507

 Net loss                                           --          --          --        (2,326)       --        (2,326)
                                                --------    --------    --------    --------    --------    --------

Balance at December 31, 1995                       3,330          66      70,047     (64,248)       (549)      5,316

 Public offering of units, net                      --          --         1,184        --           285       1,469

 Common stock issued as compensation                  15           1          50        --          --            51

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

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

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

 Balance at December 31, 1996                      3,345    $     67    $ 71,146    ($67,167)   ($   751)   $  3,295
                                                ========    ========    ========    ========    ========    ========
</TABLE>



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

                                       F-4

<PAGE>
                          BENTLEY PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                For the Year Ended
                                                                    December 31,
                                                          -----------------------------
(In thousands)                                              1996       1995       1994
                                                          -------    -------    -------
<S>                                                       <C>        <C>        <C>
Cash flows from operating activities:

 Loss before extra-ordinary item                          ($2,473)   ($2,326)   ($3,578)

 Adjustments to reconcile loss before
  extra-ordinary item to net cash used
  in operating activities:

Depreciation and amortization                                 502        550        575

 Other non-cash items                                         468        610        254

 Extra-ordinary item-Extinguishment of debt                  (446)      --         --

 Provision for goodwill impairment                            340       --         --

 Loss on disposal of fixed assets                              79       --         --

 Gain on sale of Belmacina(R)                                --         (380)      (884)

 Cancellation of stock subscription receivable               --          532       --

(Increase) decrease in assets and

 increase (decrease) in liabilities:

   Receivables                                              2,991        150        124

   Inventories                                                 43       (297)       154

   Prepaid expenses and other current assets                 (272)      (270)        20

   Other assets                                               (93)      (160)       349

   Accounts payable and accrued expenses                     (716)    (2,246)       228

   Other liabilities                                         (496)       500       (657)
                                                          -------    -------    -------


    Net cash used in operating activities                     (73)    (3,337)    (3,415)
                                                          -------    -------    -------

Cash flows from investing activities:

 Proceeds from sale of investments                            161        214      1,040

 Purchase of investments                                     (166)      (147)      (116)

 Net change in fixed assets                                  (170)      (603)      --

 Acquistion of Spanish drug license                          --         (156)      --

 Proceeds from sale of Belmacina(R)                          --        1,140        651

 Investment in partnership                                   --          (13)      (648)


 Return of deposit                                           --         --         (793)
                                                          -------    -------    -------
    Net cash (used in) provided by investing activities      (175)       435        134
                                                          -------    -------    -------
</TABLE>

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

                                       F-5
<PAGE>

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

(In thousands)                                               For the Year Ended
                                                                December 31,
                                                       -----------------------------
                                                         1996       1995       1994
                                                       -------    -------    -------
<S>                                                    <C>        <C>        <C>
Cash flows from financing activities:

 Net (decrease) increase in short term borrowings      ($  120)   $   533    ($  397)

Proceeds from public offering of units                   6,900       --         --

Proceeds from private placements:

 Common stock                                             --          544      3,761

 Promissory notes                                         --        1,226       --

Offering costs                                          (1,275)      (187)      (377)

Collection of stock subscription receivable, net          --          506        693

Proceeds from exercise of stock warrants, net             --          214         34

Repayment of long term debt                             (1,770)       (59)      (203)

Payments on capital leases                                 (28)       (33)       (72)
                                                       -------    -------    -------


    Net cash provided by financing activities            3,707      2,744      3,439
                                                       -------    -------    -------


Effect of exchange rate changes on cash                   (154)       (43)      (389)
                                                       -------    -------    -------


Net increase (decrease) in cash and cash equivalents     3,305       (201)      (231)

Cash and cash equivalents at beginning of period         1,120      1,321      1,552
                                                       -------    -------    -------

Cash and cash equivalents at end of period             $ 4,425    $ 1,120    $ 1,321
                                                       =======    =======    =======

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

 Interest                                              $   907    $   222    $   263
                                                       =======    =======    =======
 Taxes                                                    --         --      $     6
                                                       =======    =======    =======

SUPPLEMENTAL  SCHEDULE  OF  NON-CASH  FINANCING ACTIVITIES
The Company has  issued  Common  Stock  in
exchange for services,  rights or in settlement
of litigation as follows (in thousands):

 Shares issued                                              15          9         99
                                                       =======    =======    =======
 Amount                                                $    51    $    58    $ 1,290
                                                       =======    =======    =======
</TABLE>

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

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

                                       F-6
<PAGE>


                          BENTLEY PHARMACEUTICALS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1--HISTORY AND OPERATIONS

Bentley Pharmaceuticals, Inc. (the "Company") is an international pharmaceutical
and health care company engaged  primarily in the  manufacturing,  marketing and
distribution  of  pharmaceutical  products  in France  and Spain,  with  limited
distribution  of health  care  products  in the  United  States.  The  Company's
operations in France  consist of the import and  distribution  of fine chemicals
and the marketing of specialty  pharmaceutical products. The Company has entered
negotiations to sell its French  subsidiary (see Note 13). In Spain, the Company
manufactures,  packages  and  distributes  both  its  own and  other  companies'
pharmaceutical  products.  In the United States,  the Company markets disposable
linens, which are manufactured under contract, to emergency health services.

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

In order to fund operations,  the Company  primarily has issued Common Stock and
other securities. During the year ended December 31, 1995, the Company completed
private   placements  of  its  securities,   which  generated  net  proceeds  of
approximately  $1,583,000.  In February  1996,  the  Company  completed a public
offering of its  securities,  which  generated  net  proceeds  of  approximately
$5,700,000,  a portion of which was used to retire $1,770,000  principal balance
of debt incurred in the private placements mentioned above (see Notes 8 and 14).
The  balance of the net  proceeds  are being  used for  working  capital  needs,
limited  research  and  development  activities,  and possible  acquisitions  of
complementary products, technologies and/or businesses. Management believes that
it now has sufficient resources to fund its operations into 1998.

The  Company's  ultimate  success  is  dependent  upon  its  ability  to  attain
profitable  operations  and  positive  cash  flows.  Management  has shifted the
Company's   strategic   focus   from   a   research   and   development-oriented
pharmaceutical  company to a company seeking to acquire  late-stage  development
compounds that can be marketed in one year, and currently marketed products.  As
a result, the Company has decreased its research and development  budget, and is
carefully  managing its operating costs,  which it has recently reduced via cost
cutting  measures  throughout its  operations.  Management of the Company is now
emphasizing  product  manufacturing  and distribution,  strategic  alliances and
product acquisitions.



                                       F-7

<PAGE>



NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION

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

CASH AND CASH EQUIVALENTS

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

INVESTMENTS AVAILABLE FOR SALE

Investments  available  for sale are  reported at  approximate  market value and
include restricted  Certificates of Deposit,  collateralizing Letters of Credit,
which mature in June 1997. The Certificates of Deposit earn interest at the rate
of 4.8%.  Investments  available  for sale at December 31, 1995 are comprised of
short term investments in France.

INVENTORIES

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





                                       F-8

<PAGE>



FIXED ASSETS

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

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

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

DRUG LICENSES AND RELATED COSTS

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

INVESTMENT IN PARTNERSHIP

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

In December 1994, the Company commenced  litigation against its partner claiming
interference in the management of the partnership  and  misrepresentation  under
the partnership  agreement.  The Court ruled that the Company's  reliance on its
partner's misrepresentation was not justified and that the Company had performed
its obligations under the agreement with its partner. Accordingly, the Company's
claims as well as the counterclaims of its partner were dismissed.  On September
25, 1996,  the Company filed an appeal in the United States Court of Appeals for
the Second Circuit.  Oral argument was heard on February 26, 1997 and a decision
is expected within the next few months.  Pending resolution of this dispute, the
partnership is not actively engaged in the development of any products (see Note
13). In the opinion of management, the

                                       F-9

<PAGE>



carrying  value of its  investment in the  partnership,  accounted for using the
equity  method,  of $553,000  and  $513,000  as of  December  31, 1996 and 1995,
respectively, is not impaired and no reserve is considered necessary.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred.

USES OF ESTIMATES

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

ORIGINAL ISSUE DISCOUNT/DEBT ISSUANCE COSTS

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

AMORTIZATION OF GOODWILL

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

As a result of estimating  the proceeds  from the proposed  sale of Chimos,  the
Company reviewed,  for impairment,  the recoverable value of the carrying amount
of long-lived assets and intangibles.  Based upon this review, the Company fully
reserved  the  remaining  unamortized  goodwill of  approximately  $340,000,  at
December 31, 1996. Goodwill  amortization  expense,  excluding the provision for
impairment,  for the years ended  December 31, 1996,  1995 and 1994 was $38,000,
$38,000 and $40,000, respectively (see Note 13).

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standards  No. 107  "Disclosures  about Fair
Value of Financial  Instruments" (FAS 107) requires  disclosure of the estimated
fair values of certain financial  instruments.  The estimated fair value amounts
have been determined  using available  market  information or other  appropriate
valuation methodologies that require considerable judgement

                                      F-10

<PAGE>



in interpreting market data and developing estimates. Accordingly, the estimates
presented herein are not necessarily  indicative of the amounts that the Company
could  realize  in a  current  market  exchange.  The  use of  different  market
assumptions  and/or  estimation  methodologies may have a material effect on the
estimated fair value  amounts.  Long-term debt is estimated to have a fair value
of  approximately  $8,970,000  as of December 31, 1996.  The carrying  amount of
other financial instruments approximate their estimated fair values.

The fair value information presented herein is based on information available to
management  as of December 31,  1996.  Although  management  is not aware of any
factors that would significantly  affect the estimated fair value amounts,  such
amounts have not been  comprehensively  revalued for purposes of these financial
statements  since that date and,  therefore the current  estimates of fair value
may differ significantly from the amounts presented herein.

STOCK-BASED COMPENSATION PLANS

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

REVENUE RECOGNITION

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

INCOME TAXES

Statement of  Financial  Accounting  Standards  No. 109  "Accounting  for Income
Taxes" (FAS 109) mandates the liability  method in accounting for the effects of
income  taxes for  financial  reporting  purposes.  The Company  adopted FAS 109
effective  January  1, 1993;  however,  this  statement  did not have a material
impact  on the  Company's  consolidated  financial  statements  as a  result  of
establishing  a valuation  allowance  equal to the  deferred  tax asset  arising
primarily from its net operating loss carryforwards.

NET LOSS PER COMMON SHARE

Primary loss per common share is computed by dividing the net loss (adjusted for
accretion of discount and accrued dividends on mandatorily  redeemable preferred
stock) by the  weighted  average  number of shares of Common  Stock  outstanding
during  each  period.   Common  Stock  equivalents  were  not  included  in  the
calculation   of  primary  loss  per  share  as  they  were   determined  to  be
antidilutive.  The Company  effected a  one-for-ten  reverse split of its Common
Stock  on  July  25,  1995  as a  result  of an  amendment  to its  Articles  of
Incorporation  which was approved by the  stockholders  at the Company's  Annual
Stockholders' Meeting held on June 9,

                                      F-11

<PAGE>



1995. All information with respect to per share data and number of common shares
has been retroactively adjusted to give effect to the reverse stock split.

RECLASSIFICATIONS

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

NOTE 3--RECEIVABLES

Receivables consist of the following (In Thousands):

                                                              December 31,
                                                         ----------------------

                                                           1996           1995
                                                         -------        -------

Trade receivables                                        $ 3,529        $ 6,510

Other (Notes 6 and 13)                                       129            487
                                                         -------        -------

                                                           3,658          6,997

Less-allowance for doubtful accounts                         (26)          (161)
                                                         -------        -------

                                                         $ 3,632        $ 6,836
                                                         =======        =======


NOTE 4--INVENTORIES

Inventories consist of the following (In Thousands):

                                                              December 31,
                                                         ----------------------

                                                           1996           1995
                                                         -------        -------

Raw materials                                            $   515        $   374

Work in process                                             --                1

Finished goods                                             1,257          1,498
                                                         -------        -------

                                                           1,772          1,873

Less allowance for slow-moving or obsolete inventory        (827)          (819)
                                                         -------        -------

                                                         $   945        $ 1,054
                                                         =======        =======


                                      F-12

<PAGE>




NOTE 5--FIXED ASSETS

Fixed assets consist of the following (In Thousands):

                                                              December 31,
                                                       ------------------------

                                                         1996             1995
                                                       -------          -------

Land                                                   $ 1,138          $ 1,212

Buildings                                                2,673            2,675

Equipment                                                  828              973

Furniture and fixtures                                     501              642

Leasehold improvements                                     117              335

Equipment under capital lease                               27              149
                                                       -------          -------
                                                         5,284            5,986

Less-accumulated depreciation                           (1,740)          (1,902)
                                                       -------          -------

                                                       $ 3,544          $ 4,084
                                                       =======          =======


Depreciation  expense was  $345,000,  $424,000  and $434,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.


NOTE 6--DRUG LICENSES AND RELATED COSTS, NET

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

                                                              December 31,
                                                       ------------------------

                                                         1996             1995
                                                       -------          -------

Drug licenses and related costs                        $ 1,972          $ 1,526

Less-accumulated amortization                             (497)            (406)
                                                       -------          -------

                                                       $ 1,475          $ 1,120
                                                       =======          =======


In September  1992,  the Company,  through its Spanish  subsidiary  Laboratorios
Belmac,  acquired  the Spanish  license and product  rights to  Belmacina(R),  a
ciprofloxacin  antibiotic,  for  approximately  $577,000.  The Company  sold its
Spanish  license and product rights to  Belmacina(R)  in 1994 for  approximately
$1,556,000 and sold the related  trademark for  approximately  $380,000 in 1995.
The Company received  approximately $651,000 in cash in 1994, net of transaction
costs and a receivable  of  approximately  $1,140,000,  which  included  amounts
related  to the  sale of the  trademark.  The  gain on sale of the  license  and
product rights of approximately

                                      F-13

<PAGE>



$884,000 was included in Other  income/expense,  net for the year ended December
31, 1994 and the gain on the sale of the  related  trademark  was  recorded as a
receivable  and as  deferred  revenue  as of  December  31,  1994.  The  Company
recognized  the gain on the sale of the related  trademark  upon the transfer of
the trademark to the buyer in 1995.

The Company owns all rights, title and interest to Alphanon(R),  a camphor based
anti-hemorrhoidal  drug. In connection with the acquisition of Alphanon(R),  the
Company  agreed to pay for the longer of fifteen years from the first  marketing
of  Alphanon(R)  in each  country or the life of an  Alphanon(R)  patent in each
country,  a royalty fee of 5% of the gross profit from the  manufacture and sale
of the product and 5% of the net royalty  payments  received  from any licensing
agreements of the product.

Amortization  expense  for drug  licenses  and related  costs was  approximately
$119,000,  $88,000 and $102,000 for the years ended December 31, 1996,  1995 and
1994, respectively.

NOTE 7--ACCRUED EXPENSES

Accrued expenses consist of the following (In Thousands):

                                                                December 31,
                                                            --------------------
                                                             1996          1995
                                                            ------        ------

Accrued expenses                                            $1,247        $1,189

Accrued payroll and severance benefits                         283           383
                                                            ------        ------

                                                            $1,530        $1,572
                                                            ======        ======


NOTE 8--DEBT

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

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                       ---------------
                                                                        1996     1995
                                                                       ------   ------
<S>                                                                    <C>      <C>
Trade receivables discounted (with a Spanish financial institution),
with recourse, effective interest rate on the note is 11.6%            $  804   $  705

Revolving line of credit (with a Spanish financial institution),
interest rate 8.5%                                                        154     --

Revolving line of credit (with a French financial institution),
interest rate 7.5%                                                       --        380

Other                                                                      56      112
                                                                       ------   ------

    Total short term borrowings                                        $1,014   $1,197
                                                                       ======   ======
</TABLE>

                                      F-14

<PAGE>



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

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                       ------------------
                                                                         1996       1995
                                                                       -------    -------
<S>                                                                    <C>        <C>
Debentures, maturing February 13, 2006, stated rate of interest
12% (net of $1,753 discount)                                           $ 5,147       --

Promissory notes (issued in a private placement), matured February
1996, stated rate of interest 12% (net of $175 discount)                  --      $   545

Promissory notes (issued in a private placement), matured February
1996, stated rate of interest of 12% (net of $241 discount)               --          809

Capitalized lease obligations, relating to various equipment used by
the Company                                                                 22          2
                                                                       -------    -------

                                                                         5,169      1,356

Less current portion                                                        (5)        (2)
                                                                       -------    -------

     Total long term debt                                              $ 5,164    $ 1,354
                                                                       =======    =======
</TABLE>


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

The weighted average stated interest rate on borrowings  outstanding at December
31, 1996 and 1995 was 11.7% and 12.2% respectively.

The Company  has a $154,000  revolving  line of credit with a Spanish  financial
institution. At December 31, 1996, advances outstanding under the line of credit
were approximately $154,000. The interest rate at December 31, 1996 was 8.5% and
is payable quarterly.

The Company has a $1,000,000  revolving  line of credit with a French  financial
institution, which is collateralized by trade receivables. At December 31, 1996,
there were no advances  outstanding under the line of credit.  The interest rate
at December 31, 1995 was 7.5%, and is payable quarterly.

In October 1995, the Company conducted two private placements of its securities.
In the first placement, the Company sold to certain purchasers, for an aggregate
purchase price of $720,000, 120,000 shares of the Company's Common Stock and 12%
promissory  notes in the aggregate  principal amount of $720,000 (the "A Notes")
which became payable in full upon the earlier of July 31, 1996 or the closing of
a public offering of the Company's securities (a "Public Offering"). The A Notes
were subject to mandatory conversion at a conversion price of $3.00 per share if
no Public  Offering  was  completed by July 31,  1996.  The  purchase  price

                                      F-15

<PAGE>



was allocated  between the A Notes and the shares of the Company's  Common Stock
based upon the relative fair values of these securities on the date of issuance.
Such allocation resulted in recording a discount on the A Notes of approximately
$250,000.  The effective  interest rate on the A Notes was 83%. The A Notes were
paid in full in February 1996,  upon the completion of the Public  Offering (see
Note 14).  As a result of  refinancing  the A Notes with long term  debt,  the A
Notes were classified as long term debt on the Consolidated  Balance Sheet as of
December 31, 1995.

In the second placement, the Company sold to certain purchasers for an aggregate
purchase price of $1,050,000,  131,250 shares of Common Stock and 12% promissory
notes in the  aggregate  principal  amount of  $1,050,000  (the "B Notes") which
became  payable in full upon the earlier of September 30, 1996 or the completion
of a Public  Offering.  The B Notes were subject to mandatory  conversion,  at a
conversion  price equal to the average closing price for the Common Stock quoted
on the American Stock Exchange for the five trading days  immediately  preceding
September 30, 1996. The purchase price was allocated between the B Notes and the
shares of the  Company's  Common  Stock based upon the  relative  fair values of
these securities on the date of issuance.  Such allocation resulted in recording
a discount on the B Notes of approximately $294,000. The effective interest rate
on the B Notes was 75%. The B Notes were paid in full in February 1996, upon the
completion of the Public  Offering (see Note 14). As a result of refinancing the
B Notes with long term debt,  the B Notes were  classified  as long term debt on
the Consolidated Balance Sheet as of December 31, 1995.

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

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

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

Gross and net proceeds (after deducting  underwriting  commissions and the other
expenses  of  the  offering),  were  approximately  $6,900,000  and  $5,700,000,
respectively.  Approximately  $1,770,000 of the net proceeds were used to retire
the principal balance of debt incurred in 1995 private placements (See Note 14).
The balance of the net proceeds,  approximately  $4,000,000,  are being used for
working capital needs.

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


                                      F-16

<PAGE>




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


NOTE 9--REDEEMABLE PREFERRED STOCK

During  1991,  the  Company  issued  290,000  shares  of $1 par  value  Series A
Convertible  Exchangeable  Preferred Stock (the "Series A Preferred  Stock") and
340,000 shares of $1 par value Series B Convertible Exchangeable Preferred Stock
(the "Series B Preferred  Stock") at $25 per share. The issuance of these shares
provided aggregate  proceeds to the Company of $15,750,000.  Since the Preferred
Stock meets the definition of Mandatorily  Redeemable  Preferred  Stock,  it has
been excluded from the Common  Stockholders'  Equity section of the Consolidated
Balance  Sheets.  As of  December  31,  1996 and 1995,  230,000  of the Series A
Preferred  Stock had been  converted  into 51,200 shares of Common Stock and all
340,000  shares of the Series B Preferred  Stock had been  converted into 56,100
shares of Common Stock.

The shares of Series A and B Preferred  Stock were  convertible at the option of
the holders  into Common Stock at any time prior to the close of business on the
date fixed for redemption or exchange,  at an initial  conversion  price for the
Series A Preferred Stock of $115.00 per share (at an initial  conversion rate of
approximately .21739 shares of Common Stock for each share of Series A Preferred
Stock) and for the Series B Preferred  Stock of $160.00 per share (at an initial
conversion  rate of .15625  shares of  Common  Stock for each  share of Series B
Preferred Stock). The conversion rates were adjusted by the Company,  in lieu of
paying cumulative  dividends of 9% per annum to .3088 and .1703 for the Series A
and B Preferred  Stock,  respectively.  The  dividend  payment date for Series A
Preferred  Stock is October 15. The Series A Preferred  Stock has a  liquidation
preference  equal to $25.00 per share,  plus accrued and unpaid  dividends up to
the liquidation date. The Series A Preferred Stock is redeemable for cash at the
option of the Company.  The Series A Preferred Stock is also redeemable for cash
at the option of the holder upon certain  major stock  acquisitions  or business
combinations at $25.00 per share,  plus accrued and unpaid dividends through the
redemption dates. The holders of Preferred Stock have no voting rights except as
required by applicable  law and except that if the equivalent of two full annual
cash  dividends  shall be  accrued  and  unpaid,  the  holders  of the  Series A
Preferred  Stock  shall  have the  right,  as a class,  to elect two  additional
members of the Company's Board of Directors.  As of the date hereof, the holders
of the Series A  Preferred  Stock have not  exercised  their right to elect such
directors.

The Series A Preferred Stock is  exchangeable in whole,  but not in part, at the
option of the Company on any dividend  payment date beginning  October 15, 1993,
for 9% Convertible  Subordinated  Debentures of the Company due 2016. Holders of
Series A Preferred Stock will be entitled to $25 principal  amount of Debentures
for each share of Series A Preferred Stock.


                                      F-17

<PAGE>




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

                                                              Series A
                                                       ------------------------
                                                       SHARES           AMOUNTS
                                                       -------          -------

Balance at December 31, 1994                                70          $ 2,256

     Converted to Common Stock                             (10)            (340)

     Accrual of 9% dividends                              --                152
                                                       -------          -------

Balance at December 31, 1995                                60            2,068

     Accrual of 9% dividends                              --                135
                                                       -------          -------

Balance at December 31, 1996                                60          $ 2,203
                                                       =======          =======


NOTE 10--COMMON STOCKHOLDERS' EQUITY

At December 31, 1996 the Company had the  following  Common  Stock  reserved for
issuances under various plans and agreements: (In Thousands)

                                                        COMMON SHARES
                                                        -------------

For exercise of stock purchase warrants                    12,039

For conversion of debentures                                2,988

For exercise of stock options                               1,860

For other                                                      47
                                                           ------
                                                           16,934
                                                           ======


The Company has never paid any dividends on its Common Stock. The current policy
of the Board of Directors is to retain  earnings to finance the operation of the
Company's business.  Accordingly,  it is anticipated that no cash dividends will
be paid to the holders of the Common Stock in the foreseeable future.  Under the
terms of the Series A Preferred  Stock,  the Company is  restricted  from paying
dividends  on its  Common  Stock so long as there  are  arrearages  on  dividend
payments on the Series A Preferred Stock. There currently are such arrearages.


STOCK PURCHASE WARRANTS

At December  31,  1996,  stock  purchase  warrants to purchase an  aggregate  of
8,304,000  shares of Common Stock were  outstanding,  which were  exercisable at
prices ranging from $2.50 to $120.00 per share,  of which 626,000  warrants have
an exercise  price of $2.50 per share and  7,470,000  warrants  have an exercise
price of $3.00 per share. The warrants expire through

                                      F-18

<PAGE>



December 2004. During the year ended December 31, 1996, the Company issued stock
purchase  warrants to purchase an aggregate of 7,845,000 shares of the Company's
Common Stock,  all of which were granted at exercise  prices which were equal to
or greater than the market price of the  Company's  Common Stock on the dates of
grant.  The  Company  issued  7,470,000  warrants  in  connection  with a public
offering of its  securities.  During the year ended  December 31, 1996, no stock
purchase  warrants were  converted  into shares of the  Company's  Common Stock.
During the year ended December 31, 1995, stock purchase  warrants were converted
into  90,000  shares of the  Company's  Common  Stock at $2.50 per  share.  Such
conversions  yielded  net  proceeds of $214,000 to the Company in the year ended
December 31, 1995.  During the year ended  December  31,  1994,  stock  purchase
warrants  were  converted  into 2,500  shares of the  Company's  Common Stock at
$13.75  per share.  Such  conversions  yielded  net  proceeds  of $34,000 to the
Company in the year ended December 31, 1994.

In addition, the Company has granted warrants outside of the Plans in connection
with private  placements  of its  securities  and as  consideration  for various
services.  These  warrants  have been granted for terms not  exceeding ten years
from the date of grant.  The table below  summarizes  warrant  activity  for the
years ended December 31, 1994, 1995 and 1996.

(IN THOUSANDS EXCEPT PER SHARE DATA)

                                           NUMBER OF                PRICE
                                         COMMON SHARES            PER SHARE
                                         -------------            ---------

Outstanding at December 31, 1993              156

 Granted                                      325              $2.50 - $20.00

 Exercised                                     (2)             $13.75
                                           ------

Outstanding at December 31, 1994              479

 Granted                                      176              $2.50 - $7.50

 Exercised                                    (90)             $2.50

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

Outstanding at December 31, 1995              547

 Granted                                    7,845              $2.50 - $3.00

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

Outstanding at December 31, 1996            8,304
                                           ======



                                      F-19

<PAGE>



COMMON STOCK TRANSACTIONS

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

During the year ended  December 31, 1995,  the Company  issued 846,000 shares of
Common  Stock and 12%  promissory  notes in the  aggregate  principal  amount of
$1,770,000  in  private  placement  transactions,  with  total net  proceeds  of
$1,583,000,  which were  allocated  between the notes and the Common Stock based
upon the  relative  fair  values of each on the dates of  issuance.  Also 10,000
shares of the  Company's  Series A  Preferred  Stock were  converted  into 3,100
shares of Common Stock at the conversion price of $110.00 per share. The Company
also issued 800 shares of Common Stock to Directors as  compensation  during the
year ended December 31, 1995.

During the year ended  December 31, 1994,  the Company  issued 846,000 shares of
Common  Stock in private  placement  transactions,  with total net  proceeds  of
$4,944,000  ($1,596,000  of such proceeds  were recorded as stock  subscriptions
receivable  in the  Common  Stockholders'  Equity  section  of the  Consolidated
Balance  Sheets).  Also,  4,000 shares of the Company's Series A Preferred Stock
were  converted  into 1,100  shares of Common Stock at the  conversion  price of
$115.00 per share.  The Company  also  awarded  7,000  shares of Common Stock to
Directors  as  compensation  and settled  litigation  with  shareholders  of the
Company by issuing to them an aggregate of 70,200  shares of Common Stock in the
year ended December 31, 1994.


STOCK SUBSCRIPTIONS RECEIVABLE

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

STOCK OPTION PLANS

The Company has in effect Stock Option  Plans (the  "Plans"),  pursuant to which
directors,  officers,  and employees of the Company who contribute materially to
the success and  profitability  of the Company are eligible to receive grants of
options for the  Company's

                                      F-20

<PAGE>



Common  Stock.  An  aggregate  of  1,860,000  shares of Common  Stock  have been
reserved for issuance under the Plans,  of which 218,000 are  outstanding  under
the 1991 and 1994 Plans and 1,500,000 are  outstanding  under the Executive Plan
as of December  31,  1996.  Options may be granted for terms not  exceeding  ten
years  from the date of grant  except  for stock  options  which are  granted to
persons owning more than 10% of the total  combined  voting power of all classes
of stock of the Company. For these individuals, options may be granted for terms
not exceeding five years from the date of grant. Options may not be granted at a
price which is less than 100% of the fair  market  value on the date the options
are  granted  (110% in the case of  persons  owning  more  than 10% of the total
combined  voting power of the Company).  Holders of stock  options  exercised no
options during the years ended December 31, 1996 or 1995.

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

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

Net loss                                           ($  6,354)      ($  2,727)

Net loss per common share                          ($   1.95)      ($   0.96)


The  preceding  pro  forma  results  were  calculated  using  the  Black-Scholes
option-pricing  model.  The following  assumptions were used for the years ended
December 31, 1996 and 1995,  respectively:  (1) risk-free interest rates of 6.5%
and 6.4%;  (2) dividend  yield of 0.0% and 0.0%; (3) expected lives of 10 and 10
years; and (4) volatility of 88.1% and 85.0%.  Results may vary depending on the
assumptions  applied within the model. The effects of application of FAS 123 are
not likely to be  representative of the effects on net income or loss for future
years because  options vest over several years and generally  additional  awards
are made each year.

In addition,  the Company has granted options outside of the Plans in connection
with private  placements  of its  securities  and as  consideration  for various
services. These options have been granted for terms not exceeding ten years from
the date of grant.  The table below  summarizes  activity in the Company's Plans
for the years ended December 31, 1994, 1995 and 1996.



                                      F-21

<PAGE>




(IN THOUSANDS EXCEPT PER SHARE DATA)
                                                 NUMBER OF     WEIGHTED AVERAGE
                                               COMMON SHARES    EXERCISE PRICE
                                               -------------    --------------

Outstanding at December 31, 1993                     140          $   70.11

     Granted                                          34          $    6.89

     Canceled                                        (10)         $   64.93
                                                  ------

Outstanding at December 31, 1994                     164          $   54.71

     Granted                                         123          $    3.75

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

Outstanding at December 31, 1995                     213          $   33.04

     Granted                                       1,525          $    3.74

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

Outstanding at December 31, 1996                   1,718          $    6.39
                                                  ======


Options and warrants  outstanding include 8,304,000  warrants,  all of which are
exercisable,  and 1,718,000 options, of which 636,000 are vested and exercisable
at December 31, 1996.

NOTE 11--PROVISION FOR INCOME TAXES

The Company adopted FAS 109,  "Accounting for Income Taxes" effective January 1,
1993,  and  began  recognizing  income  tax  benefits  for  net  operating  loss
carryforwards,  credit carryforwards and certain temporary differences for which
tax benefits have not previously  been recorded.  As a result of the adoption of
FAS 109,  the  Company  has  recognized  a deferred  tax asset of  approximately
$21,000,000  as of December 31, 1996;  however,  the Company has  established  a
valuation  allowance  equal to the full  amount of the  deferred  tax asset,  as
future operating profits cannot be assured. The Company expects to recognize the
benefit of the asset when financial reporting and taxable income is generated.

At  December  31,  1996,   the  Company  has  net  operating  loss  (the  "NOL")
carryforwards  of  approximately  $38,000,000  available  to offset  future U.S.
taxable income. The Company calculates that its use of the NOL may be limited to
approximately  $3,000,000  each year as a result of stock,  option  and  warrant
issuances  during prior fiscal  years  resulting in an ownership  change of more
than  50% of  the  Company's  outstanding  equity.  Additionally,  approximately
$1,800,000 of the NOL generated in 1995 available to offset future U.S.  taxable
income  will be limited  to  approximately  $300,000  per year over the next six
years due to the  change in tax year end  during  1995.  If not  offset  against
future  taxable  income,  the NOL  carryforwards  will  expire in tax years 1997
through 2011.


                                      F-22

<PAGE>




In  addition,   Chimos  and  Laboratorios   Belmac  have  NOL  carryforwards  of
approximately  $13,300,000  and  $2,700,000  available to offset future  taxable
income for income tax purposes in France and Spain, respectively.  If not offset
against  taxable  income,  the NOL  carryforwards  will expire in various  years
ending 2001.

NOTE 12--BUSINESS SEGMENT INFORMATION ON FOREIGN OPERATIONS

The following is a summary of the results of operations and identifiable  assets
of the Company's wholly-owned foreign subsidiaries as of and for the years ended
December 31, 1996, 1995 and 1994, respectively.

                                                 (IN THOUSANDS)
                                           YEAR ENDED DECEMBER 31, 1996
                              --------------------------------------------------
                                FRANCE       SPAIN        U.S.      CONSOLIDATED
                              --------     --------     --------    ------------

Revenue                       $ 11,625     $ 11,299     $    209      $ 23,133

Net income (loss)             $    178     $    722     $ (3,819)     $ (2,919)

Identifiable assets           $  5,322     $  7,887     $  3,349      $ 16,558


                                                 (IN THOUSANDS)
                                           YEAR ENDED DECEMBER 31, 1995
                              --------------------------------------------------
                                FRANCE       SPAIN        U.S.      CONSOLIDATED
                              --------     --------     --------    ------------

Revenue                       $ 24,452     $  6,736     $    249      $ 31,437

Net income (loss)             $  1,268     $   (313)    $ (3,281)     $ (2,326)

Identifiable assets           $  7,100     $  6,829     $  2,361      $ 16,290


                                                 (IN THOUSANDS)
                                           YEAR ENDED DECEMBER 31, 1994
                              --------------------------------------------------
                                FRANCE       SPAIN        U.S.      CONSOLIDATED
                              --------     --------     --------    ------------

Revenue                       $ 20,257     $  6,569     $    184      $ 27,010

Net income (loss)             $    595     $   (405)    $ (3,768)     $ (3,578)

Identifiable assets           $  6,476     $  7,833     $  2,023      $ 16,332


Total liabilities attributable to foreign operations were $4,472,000, $5,607,000
and $8,428,000 at December 31, 1996, 1995 and 1994, respectively.  There were no
dividends  from foreign  subsidiaries,  and net foreign  currency gains (losses)
reflected in results of operations for the years ended  December 31, 1996,  1995
and 1994 were approximately ($1,000), $3,000 and $66,000, respectively. Sales in
France  for  the  years  ended   December  31,  1996,   1995  and  1994  include
approximately $2,200,000, $7,300,000 and $8,000,000,  respectively, to Pharmacie
Centrale des Hopitaux.

                                      F-23

<PAGE>



NOTE 13-COMMITMENTS AND CONTINGENCIES

The Company is currently  engaged in  negotiations  with a subsidiary of a large
European conglomerate to sell its French subsidiary,  Chimos. The transaction is
expected to be finalized  early in the second  quarter of 1997. As no definitive
agreement  has been  signed,  there can be no  assurance  that such sale will be
consumated.  Sales generated by Chimos began to decline in the second quarter of
1996 due to the expiration of a distribution agreement for the product Ceredase.
Since the expiration of this distribution agreement,  Chimos has been generating
revenues at the rate of  approximately  $5.5  million per annum.  As a result of
estimating the proceeds from the proposed sale of Chimos,  the Company reviewed,
for  impairment,  the  recoverable  value of the carrying  amount of  long-lived
assets  and  intangibles.   Based  upon  this  review  the  Company  charged  to
operations,  a provision  for goodwill  impairment,  representing  the remaining
unamortized Chimos goodwill of approximately $340,000, at December 31, 1996.

On July 15,  1993,  Michael M.  Harshbarger  was  discharged  for cause from the
Company as President and Chief Executive Officer.  At the time of his discharge,
Harshbarger owed the Company approximately $121,000 as a result of expenses of a
personal  nature  which he  charged to the  Company's  accounts  and  removal of
corporate assets for personal use. Harshbarger has sued the Company for wrongful
termination,  seeking  damages  in  excess of  $1,400,000  and the  Company  has
countersued  for  wrongful  conversion  and civil theft,  fraud and deceit,  and
breach of contract, in an effort to recover the amounts owed by Harshbarger. The
Company  amended its  counterclaim  against  Harshbarger for breach of fiduciary
duty and is seeking  damages in excess of $1,000,000.  Harshbarger  attempted to
use the  Americans  with  Disabilities  Act  (the  "ADA")  as a  defense  to the
Company's  counterclaim;  however,  the  judge  ruled in favor of the  Company's
recent motion to strike  Harshbarger's ADA defense.  Harshbarger's  counsel then
filed a motion to withdraw from the case citing irreconcilable differences.  The
judge  granted  this  motion  on March  21,  1997.  In the  opinion  of  current
management,  the amounts will have no material effect on the financial  position
or results of operations of the Company.

Belmac Hygiene, Inc. ("Hygiene"),  a subsidiary of the Company,  filed an action
on  December  9, 1994 in the  United  States  District  Court  for the  Southern
District  of  New  York  against  Medstar,  Inc.   ("Medstar"),   Maximed,  Inc.
("Maximed") and Robert S. Cohen. The defendants are Hygiene's  partners (or such
partner's  control  persons) in the  Company's  partnership  with  Maximed  (the
"Partnership"),  which was  formed  for the  development  and  ultimate  sale of
Maximed's  intra-vaginal  controlled release products.  The action sought (i) to
enjoin the defendants from interfering with the management of the Partnership by
Hygiene's  representatives,   and  (ii)  to  recover  damages  as  a  result  of
defendants'  misrepresentations  and  breach  of  warranty  in  the  Partnership
agreement.  The defendants filed a counterclaim  against  Hygiene.  Medstar also
filed a separate  action on May 4, 1995 in the United States  District Court for
the  Southern  District of New York  against the Company  alleging  that Hygiene
failed to fund the Partnership and seeking $10,000,000 from the Company pursuant
to its guaranty of Hygiene's obligations. The issues were tried, without a jury,
on August 21 through  23,  1995.  Thereafter,  post-trial  briefs  and  proposed
findings of fact and conclusions of law were submitted,

                                      F-24

<PAGE>



and argument was heard on October 25, 1995. On January 12, 1996, the Court ruled
that the Company's reliance on defendants'  misrepresentation  was not justified
and that the  Company  had  performed  its  obligations  under  the  Partnership
agreement.  Accordingly,  the Court rendered its decision  dismissing all claims
and counter-claims  asserted by the parties.  On September 25, 1996, the Company
filed an appeal in the United  States  Court of Appeals for the Second  Circuit.
Oral  argument was heard on February 26, 1997 and a decision is expected  within
the next few months.

The  Company has  determined  that it is exposed to certain  contingencies  with
respect to its  operations  in Spain  totaling  approximately  $175,000  and has
accrued  $113,000  for such  contingencies  that  are  considered  probable  and
included such amount in other non-current liabilities as of December 31, 1996.

The Company is also obligated to pay royalties on sales of the drug  Alphanon(R)
(See Note 6).

An agreement entered into between the Company and Jean-Francois  Rossignol,  its
former  Chairman  and Chief  Executive  Officer,  in August  1993,  entitled the
company to receive aggregate payments of $360,000 upon the  commercialization of
a certain drug.  The Company  received  $160,000 of such amount in December 1995
and the remaining  $200,000 in 1996. The Company recorded the entire $360,000 as
other income in the year ended December 31, 1995.

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



                                      F-25

<PAGE>



The Company leases certain of its assets under noncancellable  operating leases.
Total charges to operations under operating leases were approximately  $448,000,
$493,000 and  $360,000,  for the years ended  December 31, 1996,  1995 and 1994,
respectively.  Future  minimum  lease  payments  under  operating  leases are as
follows:

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

                           1997                  $375
                           1998                   315
                           1999                   185
                           2000                    92
                           2001 and thereafter     --

NOTE 14-EXTRA-ORDINARY ITEM

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















                                      F-26

<PAGE>





INDEPENDENT AUDITORS' REPORT



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

We   have   audited   the   consolidated   financial   statements   of   Bentley
Pharmaceuticals,  Inc. and subsidiaries (the "Company") as of December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
and have issued our report  thereon  dated  March 27,  1997;  such  consolidated
financial  statements and report are included elsewhere in this Annual Report on
Form 10-K.  Our audits also  included the  financial  statement  schedule of the
Company   listed  in  Item  14.  This  financial   statement   schedule  is  the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audits. In our opinion,  such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole,  presents fairly in all material  respects the information set forth
therein.




/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Tampa, Florida
March 27, 1997



                                      F-27


<PAGE>

                          BENTLEY PHARMACEUTICALS, INC.

                                   SCHEDULE II

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>

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

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

For the year ended December 31, 1995          291,000        88,000        27,000              --         406,000

For the year ended December 31, 1994          247,000       102,000          --         $58,000 (b)       291,000


Goodwill:

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

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

For the year ended December 31, 1994          108,000        40,000          --                --         148,000


Reserve for inventory obsolescence:

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

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

For the year ended December 31, 1994                0       248,000          --                --         248,000


</TABLE>
------------------------
(a)  Effect of exchange rate fluctuation.

(b)  Due  to  the  Registrant's   sale  of  its  Spanish   marketing  rights  to
     Belmacina(R),  the drug  license and related  accumulated  amortization  of
     approximately  $81,000  were  removed  from the  accounts  and includes the
     effect of exchange rate fluctuation.

(c)  Includes  approximately  $340,000 of unamoritized  goodwill  related to the
     Registrant's  French  subsidiary  that Management has determined may not be
     recovered via the proposed sale of its French subsidiary.

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

                                      F-28