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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 for the fiscal year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 for the transition period from  to .
 Commission file number 1-10581
 Bentley Pharmaceuticals, Inc.
  Delaware
    
    No. 59-1513162(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)Bentley Park2 Holland WayExeter, New Hampshire
    
    03833(Address of principal executive offices)
    
    (Zip Code)
 (603) 658-6100
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.02 par value
    
    New York Stock ExchangePreferred Stock Purchase Rights
    
    New York Stock Exchange
 None
 o þ
 o þ
 þ o
 þ
  Large accelerated filer  o
    
    Accelerated filer  þ
    
    Non-accelerated filer  o
    
    Smaller reporting company  o(Do not check if a smaller reporting company)
 o þ
  Title of Class
    
    Aggregate Market Value *
    
    As of Close of Business onCommon Stock, $0.02 par value
    
    $183,234,580
    
    June 30, 2007
  Title of Class
    
    Shares Outstanding
    
    As of Close of Business onCommon Stock, $0.02 par value
    
    22,449,814
    
    March 15, 2008
  Proxy Statement for the 2008 Annual Meeting of Stockholders  Incorporated by
Reference into Part III of this Annual Report on Form 10-K
 
 *
    
    Excludes the Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock
outstanding at June 30, 2007. This calculation does not reflect a
determination that such persons are affiliates for any other purposes.
Calculation assumes no changes in ownership positions of institutional
holders with ownership positions greater than 5% from positions
reported on their Schedule 13 filings for the year ended December 31,
2006.




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TABLE OF CONTENTS  Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPart IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors and Executive Officers of the Registrant and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesEXHIBIT INDEXSIGNATURESEX-10.17 Letter Agreement, dated December 13, 2007 (Adolfo Herrera Malaga)EX-10.21 Letter Agreement dated March 17, 2008 (Richard P. Lindsay)EX-21.1 SubsidiariesEX-23.1 Consent of Independent Registered Public Accounting FirmEX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO    Table of Contents  
 Part I
 
 Item 1. Business
 Overview
  
    
    Specialty Generics: development, licensing and sales of generic and branded generic
pharmaceutical products and active pharmaceutical ingredients (API) and the manufacturing
of pharmaceuticals for others; and
    
    Drug Delivery: research, development and licensing/commercialization of advanced drug
delivery technologies and pharmaceutical products.
    2




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NYSE) BNT
 Proposed Spin-Off Transaction
   Industry Overview
 Pharmaceutical Industry in Europe
    3




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Drug Delivery Industry
   4




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Our Strategy
  
    
    Specialty Generics: development, licensing and sales of generic and branded generic
pharmaceutical products and active pharmaceutical ingredients (API) and the manufacturing
of pharmaceuticals for others; and
    
    Drug Delivery: research, development and licensing/commercialization of advanced drug
delivery technologies and pharmaceutical products.
  Increase our product sales in Spain through targeted promotion and expansion of our product
portfolio and increase international sales
    5




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Focus on commercializing our CPE-215 ® permeation platform technology and developing proprietary
products based on our other technologies
   Key Drivers of Our Drug Delivery Businesses
  
    
    Continuing growth of Testim royalty revenues,
    
    Establishing a partnership to further develop and commercialize Nasulin,
    
    Identifying and developing new product candidates for our internal pipeline, and
    
    Developing strong alliances providing us scale advantages in clinical research, product
manufacturing and marketing.
 Continued growth of Testim royalty revenues
  Development and commercialization of Nasulin
  6




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Identifying new product candidates that leverage our CPE-215 technology and formulation expertise
   Developing strong alliances providing us scale advantages in clinical research, product
manufacturing and marketing
  
    
    improving efficacy as compared to oral administration, which subjects the drug to the
effects of first pass metabolism;
    
    improving utilization of costly and/or scarce drugs and active ingredients;
    
    expanding the market to patients less suitable for injection, especially children and
the elderly;
    
    improving patient convenience and compliance, and lowering costs relative to a doctors
office visit for an injection;
    
    potentially extending the period of market exclusivity for a branded compound based
on the grant of a patent that incorporates new drug delivery methods;
    
    allowing branded and generic drug companies to differentiate their products from those
of competitors; and
    
    reducing the high capital investment needed to introduce and manufacture injectable
drugs.
  7




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Our Proprietary Drug Technologies
 Proprietary Drug Manufacturing Technologies
  CPE-215, Proprietary Permeation Enhancement Platform Technology
   
    
    Improve compliance and convenience to patients requiring ongoing injection therapies and
provide earlier entry into prophylactic treatment for patients reluctant to injections;
    
    Application to other injectable peptides that can be administered intranasally;
    
    Application to therapeutic molecules that are degraded by passage through the liver or
would benefit from intra-nasal administration to eliminate first-pass metabolism;
    
    Application to a variety of metabolic, neurological, and other serious medical
conditions;
    
    Opportunities for life-cycle extension strategies for existing marketed products; and
    
    Opportunities for allowing product differentiation based on benefits of administration.
 Solubility Enhancement Technology
  Oral Formulation Technologies
  8




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Nanocaplet Technology
  Licensed Product
 Testim, Licensed Topical Testosterone Gel
    ®
 9




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Manufactured and Marketed Products
   Branded Generic Pharmaceutical Products
  10




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Our Branded GenericProduct Name
    
    Active Ingredient
    
    Innovator Product (Company)
    
    Used to TreatBelmalipâ
    
    simvastatin
    
    Zocorâ (Merck)
    
    elevated cholesterolBelmazolâ
    
    omeprazole
    
    PrilosecÒ (AstraZeneca)
    
    gastroesophageal
reflux diseaseCimascal D Forteâ
    
    calcium carbonate
and vitamin D3
    
    Calcite-Dâ (Riva)
    
    osteoporosisCodeisanâ
    
    codeine
    
    Tricodeinâ (Solco)
    
    cough and bronchitisEnalapril Belmacâ
    
    enalapril maleate
    
    Vasotecâ (Merck)
    
    cardiovascular
disease and
hypertensionIbumacÒ
    
    ibuprofen
    
    Motrinâ (McNeil)
    
    rheumatoid arthritisLanzol®
    
    lansoprazole
    
    Prevacidâ (Tap)
    
    gastroesophageal
reflux diseaseMio RelaxÒ
    
    carisoprodol
    
    Somaâ (MedPointe)
    
    muscle spasmsPentoxifilina Belmacâ
    
    pentoxifylline
    
    Trentalâ (Aventis)
    
    peripheral arterial
diseaseSenioralâ
    
    oxymetazoline and
chlorpheniramine
    
    Denoralâ (Aventis)
    
    cold and sinus
congestionXetinÒ
    
    paroxetine
    
    Paxilâ (GlaxoSmithKline)
    
    depression
 Generic Pharmaceutical Products
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Our Generic Product Name
    
    Active Ingredient
    
    Innovator Product (Company)
    
    Used to TreatAmlodapino Davurâ
    
    amlodapine
    
    Norvasc® (Pfizer)
    
    arterial hypertensionAmlodapino RimafarâAmoxicilina Davurâ
    
    amoxicillin
    
    Amoxilâ (GlaxoSmithKline)
    
    infectionsAmoxicilina Belmacâ
    
    trihydrateAmox/Clavulanico Davurâ
    
    amoxicillin/
    
    Augmentinâ
    
    infectionsclavulanate
    
    (GlaxoSmithKline)potassiumAzitromicina Davurâ
    
    azithromycin
    
    Zithromaxâ (Pfizer)
    
    infectionsCardidopa/Levodopa Davurâ
    
    cardidopa/levodopa
    
    Sinemet® (Bristol-Myers Squibb)
    
    Parkinson's diseaseCiprofloxacino Davurâ
    
    ciprofloxacin
    
    Ciproâ (Bayer)
    
    microbial infections,hydrochloride
    
    
    
    including anthraxEbastina Davurâ
    
    ebastine
    
    Ebastel®, Ebastle Forte®
    
    seasonal allergic(Almirall)
    
    rhinitisEnalapril Davurâ
    
    enalapril maleate
    
    Vasotecâ (Merck)
    
    cardiovascular diseaseand hypertensionFinasterida Davurâ
    
    finasteride
    
    Proscar® (Merk)
    
    enlarged prostateFluoxetina Davurâ
    
    fluoxetine
    
    Prozacâ (Eli Lilly)
    
    depressionFluoxetina Rimafarâ
    
    hydrochlorideFluoxetina BelmacâIbuprofeno Davurâ
    
    ibuprofen
    
    Motrinâ (McNeil)
    
    pain, feverLansoprazol Davurâ
    
    lanoprazole
    
    Prevacidâ (TAP)
    
    gastroesophagealLansoprazol Rimafarâ
    
    
    
    
    
    reflux diseaseMirtazapina Davurâ
    
    mirtazapine
    
    Remeronâ (Organon)
    
    depressionOmeprazol Davur â
    
    omeprazole
    
    Prilosecâ (AstraZeneca)
    
    gastroesophagealOmeprazol Rimafarâ
    
    
    
    
    
    reflux diseaseParoxetina Davurâ
    
    paroxetine
    
    Paxilâ (GlaxoSmithKline)
    
    depressionParoxetina RimafarâPentoxifilina Davurâ
    
    pentoxifylline
    
    Trentalâ (Aventis)
    
    peripheral arterialdisease
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Our Generic Product Name
    
    Active Ingredient
    
    Innovator Product (Company)
    
    Used to TreatPravastatina Davurâ
    
    pravastatin
    
    Pravachol® (Bristol-Myers
    
    elevated cholesterolPravastatina Rimafarâ
    
    
    
    Squibb)Selegilina Davurâ
    
    selegiline
    
    Eldeprylâ (Somerset)
    
    Parkinsons diseasehydrochlorideSertralina Davurâ
    
    sertraline
    
    Zoloftâ (Pfizer)
    
    DepressionhydrochlorideSimvastatina Davurâ
    
    simvastatin
    
    Zocorâ (Merck)
    
    elevated cholesterolSimvastatina RimafarâTrimetazidina Davurâ
    
    trimetazedine
    
    Idaptanâ (Servier)
    
    coronary therapy
 Sales to Licensees and Others
  Strategic Alliance with Perrigo Company
  Alliance with Teva
  Manufacturing
  13




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Products in Development
  Product Candidate
    
    Technology
    
    Used to Treat
    
    StatusGeneric products
    
    Various
    
    Various
    
    Bioequivalence
and/or submitted for
approval in the
U.S., Spain, Europe
and other countries.Intranasal insulin
    
    CPE-215
    
    Diabetes
    
    Phase I/II
 Generic Products
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Nasulin, Proprietary Intranasal Insulin Product
     Products Available for Licensing
 Antifungal Nail Lacquer
  15




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Topical Hormonal Therapy
  Intranasal Pain Management
  Intellectual Property
  Material patents related to our CPE-215 technology
 Patent/Technology
    
    Jurisdiction
    
    ExpirationHsieh patents entitled Lactone/cyclic ketone
delivery enhancer relate to the CPE-215
technology platform
    
    United States
Canada
Italy, Luxembourg
    
    
    2008
2010
2011Testosterone gel-macrocyclic enhancer patents
relate to the Testim product
    
    Australia, Bulgaria, Europe, Greece,
Lebanon, Mexico, New Zealand,
Saudi Arabia, South Africa and
Singapore
    
    
    2023United States
    
    
    2025Pharmaceutical Compositions and Methods
patent entitled for Insulin Treatment relates to
the Nasulin product
    
    United States
    
    
    2024Pharmaceutical Compositions and Methods
patent entitled for Peptide Treatment covers
potential products slated for further
development
    
    United States
    
    
    2024
 16




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Other patents and intellectual property
     Research and Development
 TM
 17




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Competition
   Customers
    Financial Information About Geographic Areas
  18




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Seasonality
  Employees
  Regulation
  United States
  
    
    Preclinical testing;
    
    Submission and review by the FDA of an Investigational New Drug Exemption (IND)
Application;
    
    Clinical trials;
    
    Preparation and submission of the NDA; and
    
    FDAs review and approval/disapproval of the NDA.
    
    
    Phase I involves the initial introduction of the pharmaceutical compound into patients
or healthy human volunteers; the emphasis is on testing for dosage tolerance, metabolism,
excretion, clinical pharmacology, safety (adverse effects) and possibly early evidence of
effectiveness.
    
    Phase II involves the first controlled clinical trial involving patients who have the
targeted disease or condition and consists of safety and efficacy studies. The studies may
be divided into early
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Phase II (or II A), during which studies are performed to determine initial efficacy and
late Phase II (or II B) which may consist of placebo-controlled trials in a larger number of
patients.
 
    
    Phase III involves large scale, longer-term, well controlled efficacy and safety studies
within an expanded patient population, frequently at multiple clinical study sites.
      Europe
  20




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Trends in Healthcare Regulation
  21




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Other Regulations
  Available Information
 www.bentleypharm.com www.sec.gov
 22




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Item 1A. Risk Factors
  Our growth depends on identifying drugs suitable for our drug delivery technologies and expanding
our generic and branded generic drug operations.
   Products using our technologies are in various stages of development and may not achieve commercial
success.
  23




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
    
    any or all of the proposed products will be found to be ineffective;
    
    the proposed products will have adverse side effects or will otherwise fail to receive
necessary regulatory approvals;
    
    the proposed products may be effective but uneconomical to market; or
    
    other pharmaceutical companies may market equivalent or superior products.
 If medical doctors do not prescribe our products or the medical profession does not accept our
products, our ability to grow our revenues will be limited.
  
    
    perceived efficacy of our products;
    
    convenience and ease of administration;
    
    prevalence and severity of adverse side effects in both clinical trials and commercial
use;
    
    availability of alternative treatments;
    
    cost effectiveness;
    
    effectiveness of our marketing strategy and the pricing of our products;
    
    publicity concerning our products or competing products; and
    
    our ability to obtain third-party coverage or reimbursement.
  
    
    the effectiveness of our sales force;
    
    the effectiveness of our production, distribution and marketing capabilities;
    
    the success of competing products; and
    
    the availability and extent of reimbursement from third-party payors.
  We will rely on strategic partners to conduct clinical trials and commercialize products that use
our drug delivery technologies.
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If we are unable to meet our responsibilities under any of our agreements, we may lose potential
business and be subject to penalties and other damages.
    A significant portion of our revenues are generated by the sale of products formulated from one
active ingredient.
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An interruption in the sourcing and availability of the active ingredient used in our CPE-215
technology could cause our drug delivery technology product development and commercialization to
slow or stop.
  If any of our product candidates for which we receive regulatory approval do not achieve broad
market acceptance, the revenues that we generate from their sales will be limited.
  
    
    limitations or warnings contained in a products FDA-approved labeling;
    
    changes in the standard of care for the targeted indications for either of our product
candidates could reduce the marketing impact of any superiority claims that we could make
following FDA approval;
    
    limitations inherent in the approved indication for either of our product candidates
compared to more commonly-understood or addressed conditions; and
    
    potential advantages over, and availability of, alternative treatments, including, in
the case of Nasulin, a number of products already used to treat diabetes.
  Pharmaceutical pricing, changes in third-party reimbursement and governmental mandates are
uncertain and may adversely affect us.
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If our clinical trials fail, we will be unable to market products.
  27




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
    
    slow or insufficient patient enrollment;
    
    slow recruitment and completion of necessary institutional approvals at clinical sites;
    
    longer treatment time required to demonstrate efficacy;
    
    lack of sufficient supplies of the product candidate;
    
    adverse medical reactions or side effects in treated patients;
    
    lack of effectiveness of the product candidate being tested;
    
    regulatory requests for additional clinical trials; and
    
    instability of the pharmaceutical formulations.
  We rely on third parties to conduct clinical trials for our product candidates and plan to rely on
third parties to conduct future clinical trials. If these third parties do not successfully carry
out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory
approval for or commercialize our current and future product candidates.
  Our patent positions and intended proprietary or similar protections are uncertain.
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Regulatory approvals must be obtained and maintained for products incorporating our technologies
and, if approvals are delayed or withdrawn, we will be unable to commercialize these products.
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Our business will suffer if we fail to continue to comply with federal regulations and rules of the
Securities and Exchange Commission and New York Stock Exchange relating to corporate governance
reform.
  Sustained compliance with the requirements of the Sarbanes-Oxley Act of 2002 may require a
reallocation of resources that would otherwise be dedicated to operating our business.
  Implementation of new information systems could cause business interruptions and negatively affect
our profitability and cash flows.
  If we are unable to obtain marketing approvals to sell our products in countries other than Spain,
we may not be able to obtain additional revenues from sales in those countries.
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We must comply with Good Manufacturing Practices in the production of pharmaceutical products.
  We are dependent on only one manufacturing facility that can be used to manufacture our
pharmaceutical products and only one manufacturing facility that can be used to manufacture active
pharmaceutical ingredients.
   We operate a significant portion of our business in, and plan to expand further into, markets
outside the United States, which subjects us to additional business risks.
  
    
    unexpected delays or changes in regulatory requirements;
    
    difficulties and costs related to complying with a wide variety of complex foreign laws
and treaties;
    
    delays and expenses associated with tariffs and other trade barriers;
    
    restrictions on and impediments to repatriation of our funds and our customers ability
to make payments to us;
    
    political and economic instability;
    
    acts of terrorism or war;
    
    difficulties and costs associated with staffing and managing international operations
and implementing, maintaining and improving financial controls;
    
    dependence upon independent sales representatives and other indirect resellers who may
not be as effective and reliable as our employees;
    
    inadequate or uncertain protection of intellectual property in foreign countries;
    
    increased difficulty in collecting accounts receivable and longer accounts receivable
cycles in certain foreign countries;
    
    adverse tax consequences or overlapping tax structures; and
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
    
    limitations on the remittance of dividends by foreign subsidiaries.
 Currency fluctuations could have a material adverse impact on our business.
  
    
    fluctuations in currency exchange rates;
    
    limitations on the conversion of foreign currency; and
    
    fluctuations of the carrying value of long lived assets.
  If we cannot keep pace with rapid technological change and meet the intense competition in our
industry, we may not succeed.
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We may be unable to meet increasing expenses and demands on our resources from future growth, if
any, or to effectively pursue additional business opportunities.
  Our operations could be adversely affected if we are unable to raise or obtain needed funding.
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If we undertake an acquisition, we will incur a variety of costs, and we may never realize the
anticipated benefits of the acquisition.
  If we do not successfully manage our growth, our business goals may not be achieved.
  If we cannot attract and retain key personnel, we may not be able to execute our business plan as
anticipated.
   We may incur substantial liabilities and may be required to limit commercialization of our products
in response to product liability claims.
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
    
    withdrawal of clinical trial participants;
    
    termination of clinical trial sites or entire trial programs;
    
    decreased demand for our product candidates;
    
    impairment of our business reputation;
    
    costs of related litigation;
    
    substantial monetary awards to patients or other claimants;
    
    loss of revenues; and
    
    the inability to commercialize our product candidates.
 
 The discovery of any new side effects or negative efficacy findings for our products could
significantly harm our business.
  
    
    a voluntary or involuntary recall or market withdrawal of the applicable product;
    
    labeling changes such as restriction on intended uses, additional contraindications,
warnings, precautions, or adverse reactions that would limit the applicable products
market potential;
    
    a boxed warning on the label;
    
    imposition of post-marketing surveillance studies or risk management programs;
    
    distribution restrictions; and
    
    adverse publicity.
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Our revenues, operating results and cash flows may fluctuate in future periods and we may fail to
meet investor expectations, which may cause the price of our common stock to decline.
  
    
    demand and pricing for our products, including changes in wholesaler purchasing;
    
    government or private healthcare reimbursement policies;
    
    physician, pharmacy and patient acceptance of any of our current or future products;
    
    patterns or cost structures for our products;
    
    introduction of competing products, including generics;
    
    any interruption in the manufacturing or distribution of Testim or any of our future
products;
    
    our operating expenses which fluctuate due to growth of our business;
    
    timing and size of any new product or technology acquisitions we may complete; and
    
    variations in our rates of product returns and allowances.
  Your percentage of ownership and voting power and the price of our common stock may decrease as a
result of events that increase the number of our outstanding shares.
  No. of SharesCommon stock outstanding
    
    
    22,377Common stock issuable upon:Exercise of options which are outstanding
    
    
    3,838Vesting of restricted stock units which are outstanding
    
    
    197Contingently issuable shares
    
    
    60Exercise/vesting of options and restricted stock units
which are available for grant
    
    
    323Total common stock outstanding assuming exercise of
all of the above
    
    
    26,795
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Our stock price is volatile.
  
    
    progress of our relationships with strategic partners;
    
    results of clinical studies and regulatory reviews;
    
    technological innovations by us or our competitors;
    
    market conditions in the pharmaceutical, drug delivery and biotechnology industries;
    
    effect of regulatory authorities on pricing of products;
    
    competitive products;
    
    financings;
    
    sales or the possibility of sales of our common stock;
    
    our results of operations and financial condition;
    
    proprietary rights and related litigation;
    
    public concern as to the safety or commercial value of our products; and
    
    general economic conditions.
  Delaware law and provisions in our certificate of incorporation, bylaws and stockholder rights plan
may prevent or discourage third parties or stockholders from attempting to replace the management
of the Company.
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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
      
 Item 3. Legal Proceedings
   38




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Item 4. Submission of Matters to a Vote of Security Holders
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Part II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
  High
    
    LowFiscal Year Ended December 31, 2006First Quarter
    
    $
    22.90
    
    
    $
    12.78Second Quarter
    
    
    14.19
    
    
    
    9.43Third Quarter
    
    
    13.07
    
    
    
    8.78Fourth Quarter
    
    
    12.90
    
    
    
    8.82Fiscal Year Ended December 31, 2007First Quarter
    
    
    10.34
    
    
    
    7.51Second Quarter
    
    
    13.54
    
    
    
    8.10Third Quarter
    
    
    13.00
    
    
    
    9.05Fourth Quarter
    
    
    15.70
    
    
    
    11.99Fiscal Year Ending December 31, 2008First Quarter (through March 4, 2008)
    
    
    15.89
    
    
    
    13.17
  Dividends
  
 Item 6. Selected Financial Data
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Consolidated Income Statement Data
 For the Year Ended December 31,(in thousands, except per share data)
    
    2003
    
    
    2004(a)
    
    
    2005(b)
    
    
    2006(c)(d)
    
    
    2007(e)Total revenues
    
    $
    64,676
    
    
    $
    73,393
    
    
    $
    97,730
    
    
    $
    109,471
    
    
    $
    124,687Cost of net product sales
    
    
    26,399
    
    
    
    34,893
    
    
    
    46,161
    
    
    
    49,850
    
    
    
    64,010Gross profit
    
    
    38,277
    
    
    
    38,500
    
    
    
    51,569
    
    
    
    59,621
    
    
    
    60,677Operating expenses
    
    
    26,848
    
    
    
    29,805
    
    
    
    35,903
    
    
    
    54,222
    
    
    
    53,275Gain (loss) on sale of drug licenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    (111
    )Other income (expenses)
    
    
    91
    
    
    
    1,800
    
    
    
    729
    
    
    
    619
    
    
    
    928Income before income taxes
    
    
    11,520
    
    
    
    10,495
    
    
    
    16,395
    
    
    
    6,056
    
    
    
    8,219Provision for income taxes
    
    
    5,423
    
    
    
    4,805
    
    
    
    5,476
    
    
    
    5,082
    
    
    
    5,534Net income
    
    $
    6,097
    
    
    $
    5,690
    
    
    $
    10,919
    
    
    $
    974
    
    
    $
    2,685Net income per common share  basic
    
    $
    0.34
    
    
    $
    0.27
    
    
    $
    0.51
    
    
    $
    0.04
    
    
    $
    0.12Net income per common share  diluted
    
    $
    0.28
    
    
    $
    0.25
    
    
    $
    0.48
    
    
    $
    0.04
    
    
    $
    0.12Weighted average common shares
outstanding  basic
    
    
    17,997
    
    
    
    20,901
    
    
    
    21,558
    
    
    
    22,141
    
    
    
    22,339Weighted average common shares
outstanding  diluted
    
    
    21,637
    
    
    
    22,627
    
    
    
    22,929
    
    
    
    23,068
    
    
    
    22,957
 
 (a)
    
    Other income (expenses)for the year ended December 31, 2004 includes the reversal of
previously accrued tax assessments totaling $1,467,000. These assessments had been accrued to
be paid to the Spanish government as a vehicle to help reduce the impact of the rising health
care costs in Spain. Due to changes in the pharmaceutical industry in Spain and a change in
the Spanish political environment, these liabilities no longer exist. Accordingly, these
accruals were reversed during the second quarter of 2004.(b)
    
    Total revenuesfor the year ended December 31, 2005 include a change in estimate of royalty
revenues earned of approximately $1,092,000 recorded in the fourth quarter of 2005. This
change in estimate of royalty revenues earned is based upon publicly available data
determined to be more accurate than the source of data previously relied upon by management
in estimating the sell-through of prescriptions dispensed.(c)
    
    Total revenuesfor the year ended December 31, 2006 include an increase in royalty revenues
of approximately $479,000 recorded in the second quarter of 2006. This change in estimate
was due to the Companys ability to reasonably estimate future product returns on sales of
Testim based on actual historical data. 41




---



##### Table of Contents



(d)
    
    Operating expensesfor the year ended December 31, 2006 include litigation settlement
charges of approximately $7,546,000 recorded in the third quarter of 2006 associated with the
probable settlement of outstanding litigation claims. The Company recorded a tax benefit of
$2,746,000 in provision for income taxesupon finalization of the settlement in the fourth
quarter of 2006. The Company also incurred related legal defense costs of approximately
$3,368,000 during the year ended December 31, 2006.(e)
    
    Operating expensesfor the year ended December 31, 2007 included impairment charges of
$1,443,000 related to the write-down of its U.S. generic simvastatin drug license and certain
other U.S. generic drug projects. Consolidated Balance Sheet Data
 December 31,(in thousands)
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    

2007(a)Working capital
    
    $
    46,181
    
    
    $
    47,114
    
    
    $
    46,397
    
    
    $
    40,303
    
    
    $
    61,597Current assets
    
    $
    66,899
    
    
    $
    74,710
    
    
    $
    75,077
    
    
    $
    67,690
    
    
    $
    94,680Non-current assets
    
    
    33,564
    
    
    
    47,220
    
    
    
    49,143
    
    
    
    66,666
    
    
    
    78,416Total assets
    
    $
    100,463
    
    
    $
    121,930
    
    
    $
    124,220
    
    
    $
    134,356
    
    
    $
    173,096Current liabilities
    
    $
    20,718
    
    
    $
    27,596
    
    
    $
    28,680
    
    
    $
    27,387
    
    
    $
    33,083Long-term debt
    
    
    369
    
    
    
    349
    
    
    
    
    
    
    
    
    
    
    
    15,595Other non-current liabilities
    
    
    3,211
    
    
    
    4,328
    
    
    
    3,951
    
    
    
    6,638
    
    
    
    8,446Total liabilities
    
    $
    24,298
    
    
    $
    32,273
    
    
    $
    32,631
    
    
    $
    34,025
    
    
    $
    57,124Stockholders equity
    
    $
    76,165
    
    
    $
    89,657
    
    
    $
    91,589
    
    
    $
    100,331
    
    
    $
    115,972
 
 (a)
    
    In the fourth quarter of the year ended December 31, 2007, the Company recorded impairment
charges of $1,443,000 related to the write-down of its U.S. generic simvastatin drug license
and certain other U.S. generic drug projects (included in
non-current assets). 42




---



##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
   Planned Spin-off
   separation costs
 43




---



##### Table of Contents



Change in Estimate
 Licensing and collaboration revenues
 Litigation Settlement
 litigation
settlement
 Overview
  
    
    Specialty Generics: development, licensing and sales of generic and branded generic
pharmaceutical products and active pharmaceutical ingredients (API) and the
manufacturing of pharmaceuticals for others; and
    
    Drug Delivery: research, development and licensing/commercialization of advanced
drug delivery technologies and pharmaceutical products.
 Specialty Generic Pharmaceuticals
 cost of net product sales
 44




---



##### Table of Contents



research and development expenses
    Drug Delivery Technologies and Products
  45




---



##### Table of Contents



Research and Development Focus
  Effect of Foreign Currency Fluctuations
  Consolidated Results of Operations
 Fiscal Year Ended December 31, 2007 Compared To Fiscal Year Ended December 31, 2006
 Revenues
 Change(in thousands)
    
    2007
    
    %
    
    2006
    
    %
    
    $
    
    %Specialty GenericsNet product sales
    
    $
    112,999
    
    
    
    91
    %
    
    $
    100,590
    
    
    
    92
    %
    
    $
    12,409
    
    
    
    12
    %Licensing and
collaboration
revenues
    
    
    561
    
    
    
    *
    
    
    
    515
    
    
    
    *
    
    
    
    46
    
    
    
    9
    %113,560
    
    
    
    91
    %
    
    
    101,105
    
    
    
    92
    %
    
    
    12,455
    
    
    
    12
    %Drug DeliveryLicensing and
collaboration
revenues
    
    
    11,127
    
    
    
    9
    %
    
    
    8,366
    
    
    
    8
    %
    
    
    2,761
    
    
    
    33
    %Total revenues
    
    $
    124,687
    
    
    
    100
    %
    
    $
    109,471
    
    
    
    100
    %
    
    $
    15,216
    
    
    
    14
    %
 
 *
    
    Less than 1%  46




---



##### Table of Contents



Revenues Within Spain
    
    Revenues(in thousands)
    
    Branded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    1,912
    
    
    $
    15,818
    
    
    $
    
    
    
    $
    
    
    
    $
    17,730
    
    
    
    14
    %Enalapril
    
    
    5,176
    
    
    
    1,522
    
    
    
    
    
    
    
    
    
    
    
    6,698
    
    
    
    5
    %Simvastatin
    
    
    1,022
    
    
    
    4,866
    
    
    
    
    
    
    
    
    
    
    
    5,888
    
    
    
    5
    %Paroxetine
    
    
    1,521
    
    
    
    3,424
    
    
    
    
    
    
    
    
    
    
    
    4,945
    
    
    
    4
    %Lansoprazole
    
    
    3,610
    
    
    
    1,265
    
    
    
    
    
    
    
    
    
    
    
    4,875
    
    
    
    4
    %All other products
    
    
    12,788
    
    
    
    13,330
    
    
    
    466
    
    
    
    3,409
    
    
    
    29,993
    
    
    
    24
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    13,925
    
    
    
    28,945
    
    
    
    42,870
    
    
    
    35
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    561
    
    
    
    11,127
    
    
    
    11,688
    
    
    
    9
    %Total Revenues
    
    $
    26,029
    
    
    $
    40,225
    
    
    $
    14,952
    
    
    $
    43,481
    
    
    $
    124,687
    
    
    
    100
    %% of 2007 Revenues
    
    
    21
    %
    
    
    32
    %
    
    
    12
    %
    
    
    35
    %
    
    
    100
    %
  Revenues Within Spain
    
    Revenues(in thousands)
    
    Branded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    2,679
    
    
    $
    16,451
    
    
    $
    
    
    
    $
    
    
    
    $
    19,130
    
    
    
    18
    %Enalapril
    
    
    4,826
    
    
    
    1,824
    
    
    
    
    
    
    
    
    
    
    
    6,650
    
    
    
    6
    %Simvastatin
    
    
    1,851
    
    
    
    5,620
    
    
    
    
    
    
    
    
    
    
    
    7,471
    
    
    
    7
    %Paroxetine
    
    
    1,449
    
    
    
    3,045
    
    
    
    
    
    
    
    
    
    
    
    4,494
    
    
    
    4
    %Lansoprazole
    
    
    2,689
    
    
    
    852
    
    
    
    
    
    
    
    
    
    
    
    3,541
    
    
    
    3
    %All other products
    
    
    10,628
    
    
    
    11,263
    
    
    
    795
    
    
    
    1,763
    
    
    
    24,449
    
    
    
    22
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    12,741
    
    
    
    22,114
    
    
    
    34,855
    
    
    
    32
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    515
    
    
    
    8,366
    
    
    
    8,881
    
    
    
    8
    %Total Revenues
    
    $
    24,122
    
    
    $
    39,055
    
    
    $
    14,051
    
    
    $
    32,243
    
    
    $
    109,471
    
    
    
    100
    %% of 2006 Revenues
    
    
    22
    %
    
    
    36
    %
    
    
    13
    %
    
    
    29
    %
    
    
    100
    %
 Spanish Operations.
 Branded Generic Pharmaceutical Products
 Change(in thousands)
    
    2007
    
    %
    
    2006
    
    %
    
    $
    
    %Branded Generic Product Sales:Enalapril
    
    $
    5,176
    
    
    
    20
    %
    
    $
    4,826
    
    
    
    20
    %
    
    $
    350
    
    
    
    7
    %Codeisan
    
    
    3,921
    
    
    
    15
    %
    
    
    3,001
    
    
    
    12
    %
    
    
    920
    
    
    
    31
    %Lansoprazole
    
    
    3,610
    
    
    
    14
    %
    
    
    2,689
    
    
    
    11
    %
    
    
    921
    
    
    
    34
    %Ibuprofen
    
    
    2,386
    
    
    
    9
    %
    
    
    1,492
    
    
    
    6
    %
    
    
    894
    
    
    
    60
    %Omeprazole
    
    
    1,912
    
    
    
    7
    %
    
    
    2,679
    
    
    
    11
    %
    
    
    (767
    )
    
    
    (29
    )%All other branded products
    
    
    9,024
    
    
    
    35
    %
    
    
    9,435
    
    
    
    40
    %
    
    
    (411
    )
    
    
    (4
    )%Total branded generic sales
    
    $
    26,029
    
    
    
    100
    %
    
    $
    24,122
    
    
    
    100
    %
    
    $
    1,907
    
    
    
    8
    %
 47




---



##### Table of Contents



Generic Pharmaceutical Products
 Change(in thousands)
    
    2007
    
    %
    
    2006
    
    %
    
    $
    
    %Generic Product Sales:Omeprazole
    
    $
    15,818
    
    
    
    39
    %
    
    $
    16,451
    
    
    
    42
    %
    
    $
    (633
    )
    
    
    (4
    )%Simvastatin
    
    
    4,866
    
    
    
    12
    %
    
    
    5,620
    
    
    
    14
    %
    
    
    (754
    )
    
    
    (13
    )%Paroxetine
    
    
    3,424
    
    
    
    9
    %
    
    
    3,045
    
    
    
    8
    %
    
    
    379
    
    
    
    12
    %Trimetazidine
    
    
    2,804
    
    
    
    7
    %
    
    
    2,253
    
    
    
    6
    %
    
    
    551
    
    
    
    24
    %Pentoxifylline
    
    
    2,799
    
    
    
    7
    %
    
    
    2,571
    
    
    
    7
    %
    
    
    228
    
    
    
    9
    %All other generic products
    
    
    10,514
    
    
    
    26
    %
    
    
    9,115
    
    
    
    23
    %
    
    
    1,399
    
    
    
    15
    %Total generic sales
    
    $
    40,225
    
    
    
    100
    %
    
    $
    39,055
    
    
    
    100
    %
    
    $
    1,170
    
    
    
    3
    %
 All other generic products
 Sales to Licensees and Others
 Change(in thousands)
    
    2007
    
    2006
    
    $
    
    %Specialty generics
    
    $
    42,870
    
    
    $
    34,855
    
    
    $
    8,015
    
    
    
    23
    %
  Licensing and Collaboration Revenues
 Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    561
    
    
    $
    515
    
    
    $
    46
    
    
    
    9
    %Drug delivery
    
    
    11,127
    
    
    
    8,366
    
    
    
    2,761
    
    
    
    33
    %Total
    
    $
    11,688
    
    
    $
    8,881
    
    
    $
    2,807
    
    
    
    32
    %
 Licensing and collaboration revenues
 48




---



##### Table of Contents



licensing and collaboration revenues
 Gross Profit
 Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    49,550
    
    
    $
    51,255
    
    
    $
    (1,705
    )
    
    
    (3
    )%Drug delivery
    
    
    11,127
    
    
    
    8,366
    
    
    
    2,761
    
    
    
    33
    %Total
    
    $
    60,677
    
    
    $
    59,621
    
    
    $
    1,056
    
    
    
    2
    %
  Selling and Marketing Expenses
 Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    18,523
    
    
    $
    16,153
    
    
    $
    2,370
    
    
    
    15
    %Drug delivery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    18,523
    
    
    $
    16,153
    
    
    $
    2,370
    
    
    
    15
    %
  General and Administrative Expenses
 Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    9,558
    
    
    $
    7,391
    
    
    $
    2,167
    
    
    
    29
    %Drug delivery
    
    
    7,515
    
    
    
    7,410
    
    
    
    105
    
    
    
    1
    %Total
    
    $
    17,073
    
    
    $
    14,801
    
    
    $
    2,272
    
    
    
    15
    %
  49




---



##### Table of Contents



Research and Development Expenses
 Change(in thousands)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty generics
    
    $
    3,026
    
    
    $
    1,777
    
    
    $
    1,249
    
    
    
    70
    %Drug delivery
    
    
    10,574
    
    
    
    8,682
    
    
    
    1,892
    
    
    
    22
    %Total
    
    $
    13,600
    
    
    $
    10,459
    
    
    $
    3,141
    
    
    
    30
    %
 TM
 Litigation Settlement Expenses
 Change(in thousands)
    
    2007
    
    2006
    
    $
    
    %Specialty generics
    
    $
    
    
    
    $
    10,914
    
    
    $
    (10,914
    )
    
    
    *
 
 *
    
    Not meaningful  Separation Costs
 Change(in thousands)
    
    2007
    
    2006
    
    $
    
    %Drug Delivery
    
    $
    2,020
    
    
    $
    
    
    
    $
    2,020
    
    
    
    *
 
 *
    
    Not meaningful  50




---



##### Table of Contents



Provision for Income Taxes
 2007(in thousands)
    
    Spain
    
    
    Ireland
    
    
    U.S.
    
    
    ConsolidatedIncome (loss) before income taxesSpecialty generics
    
    $
    19,710
    
    
    $
    (250
    )
    
    $
    (2,066
    )
    
    $
    17,394Drug delivery
    
    
    
    
    
    
    12,509
    
    
    
    (21,684
    )
    
    
    (9,175
    )Total income (loss) before income
taxes
    
    
    19,710
    
    
    
    12,259
    
    
    
    (23,750
    )
    
    
    8,219Provision (benefit) for income taxes
    
    
    5,534
    
    
    
    1,563
    
    
    
    (4,765
    )
    
    
    2,332Valuation allowance
    
    
    
    
    
    
    (1,563
    )
    
    
    4,765
    
    
    
    3,202Net provision for income taxes
    
    
    5,534
    
    
    
    
    
    
    
    
    
    
    
    5,534Net income (loss)
    
    $
    14,176
    
    
    $
    12,259
    
    
    $
    (23,750
    )
    
    $
    2,685Effective tax rate
    
    
    28
    %
    
    
    0
    %
    
    
    0
    %
    
    
    67
    %
    51




---



##### Table of Contents



Net Income
 Change(in thousands, except per share data)
    
    2007
    
    
    2006
    
    
    $
    
    
    %Specialty Generics
    
    $
    11,860
    
    
    $
    8,696
    
    
    $
    3,164
    
    
    
    36
    %Drug Delivery
    
    
    (9,175
    )
    
    
    (7,722
    )
    
    
    (1,453
    )
    
    
    (19
    )%Total net income
    
    $
    2,685
    
    
    $
    974
    
    
    $
    1,711
    
    
    
    176
    %Net income per common share:Basic
    
    $
    0.12
    
    
    $
    0.04
    
    
    $
    0.08
    
    
    
    200
    %Diluted
    
    $
    0.12
    
    
    $
    0.04
    
    
    $
    0.08
    
    
    
    200
    %Weighted average common shares outstanding:Basic
    
    
    22,339
    
    
    
    22,141
    
    
    
    198
    
    
    
    1
    %Diluted
    
    
    22,957
    
    
    
    23,068
    
    
    
    (111
    )
    
    
    *
 
 *
    
    Less than 1%  52




---



##### Table of Contents



Fiscal Year Ended December 31, 2006 Compared To Fiscal Year Ended December 31, 2005
 Revenues
 Change(in thousands)
    
    2006
    
    %
    
    2005
    
    %
    
    $
    
    %Specialty GenericsNet product sales
    
    $
    100,590
    
    
    
    92
    %
    
    $
    91,308
    
    
    
    93
    %
    
    $
    9,282
    
    
    
    10
    %Licensing and
collaboration
revenues
    
    
    515
    
    
    
    *
    
    
    
    273
    
    
    
    *
    
    
    
    242
    
    
    
    89
    %101,105
    
    
    
    92
    %
    
    
    91,581
    
    
    
    93
    %
    
    
    9,524
    
    
    
    10
    %Drug DeliveryLicensing and
collaboration
revenues
    
    
    8,366
    
    
    
    8
    %
    
    
    6,149
    
    
    
    7
    %
    
    
    2,217
    
    
    
    36
    %Total revenues
    
    $
    109,471
    
    
    
    100
    %
    
    $
    97,730
    
    
    
    100
    %
    
    $
    11,741
    
    
    
    12
    %
 
 *
    
    Less than 1%    Revenues Within Spain
    
    Revenues(in thousands)
    
    Branded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    2,679
    
    
    $
    16,451
    
    
    $
    
    
    
    $
    
    
    
    $
    19,130
    
    
    
    18
    %Simvastatin
    
    
    1,851
    
    
    
    5,620
    
    
    
    
    
    
    
    
    
    
    
    7,471
    
    
    
    7
    %Enalapril
    
    
    4,826
    
    
    
    1,824
    
    
    
    
    
    
    
    
    
    
    
    6,650
    
    
    
    6
    %Paroxetine
    
    
    1,449
    
    
    
    3,045
    
    
    
    
    
    
    
    
    
    
    
    4,494
    
    
    
    4
    %Lansoprazole
    
    
    2,689
    
    
    
    852
    
    
    
    
    
    
    
    
    
    
    
    3,541
    
    
    
    3
    %All other products
    
    
    10,628
    
    
    
    11,263
    
    
    
    795
    
    
    
    1,763
    
    
    
    24,449
    
    
    
    22
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    12,741
    
    
    
    22,114
    
    
    
    34,855
    
    
    
    32
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    515
    
    
    
    8,366
    
    
    
    8,881
    
    
    
    8
    %Total Revenues
    
    $
    24,122
    
    
    $
    39,055
    
    
    $
    14,051
    
    
    $
    32,243
    
    
    $
    109,471
    
    
    
    100
    %% of 2006 Revenues
    
    
    22
    %
    
    
    36
    %
    
    
    13
    %
    
    
    29
    %
    
    
    100
    %
  Revenues Within Spain
    
    Revenues(in thousands)
    
    Branded
    
    
    
    
    
    
    
    
    
    Outside of
    
    
    
    
    
    % of TotalProduct Line
    
    Generics
    
    Generics
    
    Other
    
    Spain
    
    Total
    
    RevenuesOmeprazole
    
    $
    2,779
    
    
    $
    15,394
    
    
    $
    
    
    
    $
    
    
    
    $
    18,173
    
    
    
    18
    %Simvastatin
    
    
    1,666
    
    
    
    5,080
    
    
    
    
    
    
    
    
    
    
    
    6,746
    
    
    
    7
    %Enalapril
    
    
    4,153
    
    
    
    1,706
    
    
    
    
    
    
    
    
    
    
    
    5,859
    
    
    
    6
    %Paroxetine
    
    
    1,337
    
    
    
    3,118
    
    
    
    
    
    
    
    
    
    
    
    4,455
    
    
    
    5
    %Lansoprazole
    
    
    1,856
    
    
    
    530
    
    
    
    
    
    
    
    
    
    
    
    2,386
    
    
    
    2
    %All other products
    
    
    10,810
    
    
    
    9,282
    
    
    
    271
    
    
    
    1,512
    
    
    
    21,875
    
    
    
    23
    %Sales to licensees and others
    
    
    
    
    
    
    
    
    
    
    11,589
    
    
    
    20,225
    
    
    
    31,814
    
    
    
    32
    %Licensing and collaborations
    
    
    
    
    
    
    
    
    
    
    274
    
    
    
    6,148
    
    
    
    6,422
    
    
    
    7
    %Total Revenues
    
    $
    22,601
    
    
    $
    35,110
    
    
    $
    12,134
    
    
    $
    27,885
    
    
    $
    97,730
    
    
    
    100
    %% of 2005 Revenues
    
    
    23
    %
    
    
    36
    %
    
    
    12
    %
    
    
    29
    %
    
    
    100
    %
 53




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##### Table of Contents



Spanish Operations.
 Branded Generic Pharmaceutical Products
 Change(in thousands)
    
    2006
    
    %
    
    2005
    
    %
    
    $
    
    %Branded Generic Product Sales:Enalapril
    
    $
    4,826
    
    
    
    20
    %
    
    $
    4,153
    
    
    
    18
    %
    
    $
    673
    
    
    
    16
    %Codeisan
    
    
    3,001
    
    
    
    12
    %
    
    
    3,441
    
    
    
    16
    %
    
    
    (440
    )
    
    
    -13
    %Lansoprazole
    
    
    2,689
    
    
    
    11
    %
    
    
    1,856
    
    
    
    8
    %
    
    
    833
    
    
    
    45
    %Omeprazole
    
    
    2,679
    
    
    
    11
    %
    
    
    2,779
    
    
    
    12
    %
    
    
    (100
    )
    
    
    -4
    %Simvastatin
    
    
    1,851
    
    
    
    8
    %
    
    
    1,666
    
    
    
    7
    %
    
    
    185
    
    
    
    11
    %All other branded products
    
    
    9,076
    
    
    
    38
    %
    
    
    8,706
    
    
    
    39
    %
    
    
    370
    
    
    
    4
    %Total branded generic sales
    
    $
    24,122
    
    
    
    100
    %
    
    $
    22,601
    
    
    
    100
    %
    
    $
    1,521
    
    
    
    7
    %
 
 *
    
    Not meaningful  Generic Pharmaceutical Products
 Change(in thousands)
    
    2006
    
    %
    
    2005
    
    %
    
    $
    
    %Generic Product Sales:Omeprazole
    
    $
    16,451
    
    
    
    42
    %
    
    $
    15,394
    
    
    
    44
    %
    
    $
    1,057
    
    
    
    7
    %Simvastatin
    
    
    5,620
    
    
    
    14
    %
    
    
    5,080
    
    
    
    14
    %
    
    
    540
    
    
    
    11
    %Paroxetine
    
    
    3,045
    
    
    
    8
    %
    
    
    3,118
    
    
    
    9
    %
    
    
    (73
    )
    
    
    -2
    %Pentoxifylline
    
    
    2,571
    
    
    
    7
    %
    
    
    2,540
    
    
    
    7
    %
    
    
    31
    
    
    
    1
    %Trimetazidine
    
    
    2,253
    
    
    
    6
    %
    
    
    2,214
    
    
    
    6
    %
    
    
    39
    
    
    
    2
    %All other generic products
    
    
    9,115
    
    
    
    23
    %
    
    
    6,764
    
    
    
    20
    %
    
    
    2,351
    
    
    
    35
    %Total generic sales
    
    $
    39,055
    
    
    
    100
    %
    
    $
    35,110
    
    
    
    100
    %
    
    $
    3,945
    
    
    
    11
    %
 All other generic
products
 54




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##### Table of Contents



Sales to Licensees and Others
 Change(in thousands)
    
    2006
    
    2005
    
    $
    
    %Specialty generics
    
    $
    34,855
    
    
    $
    31,814
    
    
    $
    3,041
    
    
    
    10
    %
  Licensing and Collaboration Revenues
 Change(in thousands)
    
    2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    515
    
    
    $
    273
    
    
    $
    242
    
    
    
    89
    %Drug delivery
    
    
    8,366
    
    
    
    6,149
    
    
    
    2,217
    
    
    
    36
    %Total
    
    $
    8,881
    
    
    $
    6,422
    
    
    $
    2,459
    
    
    
    38
    %
 Licensing and collaboration revenues licensing and collaboration revenues
 Gross Profit
 Change(in thousands)
    
    2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    51,255
    
    
    $
    45,420
    
    
    $
    5,835
    
    
    
    13
    %Drug delivery
    
    
    8,366
    
    
    
    6,149
    
    
    
    2,217
    
    
    
    36
    %Total
    
    $
    59,621
    
    
    $
    51,569
    
    
    $
    8,052
    
    
    
    16
    %
  Selling and Marketing Expenses
 Change(in thousands)
    
    2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    16,153
    
    
    $
    16,347
    
    
    $
    (194
    )
    
    
    -1
    %Drug delivery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    16,153
    
    
    $
    16,347
    
    
    $
    (194
    )
    
    
    -1
    %
  55




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##### Table of Contents



General and Administrative Expenses
 Change(in thousands)
    
    2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    7,391
    
    
    $
    8,930
    
    
    $
    (1,539
    )
    
    
    -17
    %Drug delivery
    
    
    7,410
    
    
    
    2,475
    
    
    
    4,935
    
    
    
    199
    %Total
    
    $
    14,801
    
    
    $
    11,405
    
    
    $
    3,396
    
    
    
    30
    %
  Research and Development Expenses
 Change(in thousands)
    
    2006
    
    
    2005
    
    
    $
    
    
    %Specialty generics
    
    $
    1,777
    
    
    $
    1,378
    
    
    $
    399
    
    
    
    29
    %Drug delivery
    
    
    8,682
    
    
    
    4,422
    
    
    
    4,260
    
    
    
    96
    %Total
    
    $
    10,459
    
    
    $
    5,800
    
    
    $
    4,659
    
    
    
    80
    %
 TM
 Litigation Settlement Expenses
 Change(in thousands)
    
    2006
    
    2005
    
    $
    
    %Specialty generics
    
    $
    10,914
    
    
    $
    593
    
    
    $
    10,321
    
    
    
    *
 
 *
    
    Not meaningful general and administrative expenses litigation settlement expenses
 56




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##### Table of Contents



Provision for Income Taxes
 2006(in thousands)
    
    Spain
    
    
    Ireland
    
    
    U.S.
    
    
    ConsolidatedIncome (loss) before income taxesSpecialty generics
    
    $
    16,239
    
    
    $
    29
    
    
    $
    (2,482
    )
    
    $
    13,786Drug delivery
    
    
    
    
    
    
    (10,447
    )
    
    
    2,717
    
    
    
    (7,730
    )Total income (loss) before income
taxes
    
    
    16,239
    
    
    
    (10,418
    )
    
    
    235
    
    
    
    6,056Provision (benefit) for income taxes
    
    
    5,082
    
    
    
    (1,315
    )
    
    
    1,982
    
    
    
    5,749Valuation allowance
    
    
    
    
    
    
    1,315
    
    
    
    (1,982
    )
    
    
    (667
    )Net provision for income taxes
    
    
    5,082
    
    
    
    
    
    
    
    
    
    
    
    5,082Net income (loss)
    
    $
    11,157
    
    
    $
    (10,418
    )
    
    $
    235
    
    
    $
    974Effective tax rate
    
    
    31
    %
    
    
    0
    %
    
    
    0
    %
    
    
    84
    %
    Net Income
 Change(in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    $
    
    
    %Specialty Generics
    
    $
    8,696
    
    
    $
    11,532
    
    
    $
    (2,836
    )
    
    
    -25
    %Drug Delivery
    
    
    (7,722
    )
    
    
    (613
    )
    
    
    (7,109
    )
    
    
    -1160
    %Total net income
    
    $
    974
    
    
    $
    10,919
    
    
    $
    (9,945
    )
    
    
    -91
    %Net income per common share:Basic
    
    $
    0.04
    
    
    $
    0.51
    
    
    $
    (0.47
    )
    
    
    -92
    %Diluted
    
    $
    0.04
    
    
    $
    0.48
    
    
    $
    (0.44
    )
    
    
    -92
    %Weighted average common shares outstanding:Basic
    
    
    22,141
    
    
    
    21,558
    
    
    
    583
    
    
    
    3
    %Diluted
    
    
    23,068
    
    
    
    22,929
    
    
    
    139
    
    
    
    1
    %
 57




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##### Table of Contents



Selected Quarterly Financial Data
  Fiscal 2006
    
    
    Fiscal 2007Three Months Ended (Unaudited)3/31/06
    
    
    6/30/06
    
    
    9/30/06(a)(b)
    
    
    12/31/06(b)
    
    
    3/31/07
    
    
    6/30/07
    
    
    9/30/07
    
    
    12/31/07(c)(d)(in thousands, except per share data)Total revenues
    
    $
    28,278
    
    
    $
    28,983
    
    
    $
    25,156
    
    
    $
    27,054
    
    
    $
    31,391
    
    
    $
    31,179
    
    
    $
    27,348
    
    
    $
    34,769Cost of net product sales
    
    
    12,933
    
    
    
    12,471
    
    
    
    11,778
    
    
    
    12,668
    
    
    
    15,897
    
    
    
    15,790
    
    
    
    14,451
    
    
    
    17,872Gross profit
    
    
    15,345
    
    
    
    16,512
    
    
    
    13,378
    
    
    
    14,386
    
    
    
    15,494
    
    
    
    15,389
    
    
    
    12,897
    
    
    
    16,897Operating expenses
    
    
    11,991
    
    
    
    11,580
    
    
    
    19,085
    
    
    
    11,566
    
    
    
    11,274
    
    
    
    13,440
    
    
    
    12,530
    
    
    
    16,031Gain
(loss) on sale of drug
license
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )Income (loss) from
operations
    
    
    3,354
    
    
    
    4,932
    
    
    
    (5,707
    )
    
    
    2,858
    
    
    
    4,220
    
    
    
    1,949
    
    
    
    367
    
    
    
    755Other income (expenses)
    
    
    193
    
    
    
    187
    
    
    
    208
    
    
    
    31
    
    
    
    221
    
    
    
    278
    
    
    
    (57
    )
    
    
    486Provision (benefit) for
income taxes
    
    
    2,393
    
    
    
    2,484
    
    
    
    1,730
    
    
    
    (1,525
    )
    
    
    2,081
    
    
    
    1,517
    
    
    
    911
    
    
    
    1,025Net income(loss)
    
    $
    1,154
    
    
    $
    2,635
    
    
    $
    (7,229
    )
    
    $
    4,414
    
    
    $
    2,360
    
    
    $
    710
    
    
    $
    (601
    )
    
    $
    216Net income(loss) per
common share:Basic
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    (0.33
    )
    
    $
    0.20
    
    
    $
    0.11
    
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.01Diluted
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    (0.33
    )
    
    $
    0.19
    
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.01Weighted average common
shares outstanding:Basic
    
    
    21,954
    
    
    
    22,170
    
    
    
    22,194
    
    
    
    22,242
    
    
    
    22,293
    
    
    
    22,318
    
    
    
    22,354
    
    
    
    22,391Diluted
    
    
    23,807
    
    
    
    22,876
    
    
    
    22,194
    
    
    
    22,735
    
    
    
    22,534
    
    
    
    22,892
    
    
    
    22,354
    
    
    
    23,322
 
 (a)
    
    Total revenuesfor the year ended December 31, 2006 include an increase in royalty
revenues of approximately $479,000 recorded in the second quarter of 2006. This change in
estimate was due to the Companys ability to reasonably estimate future product returns on
sales of Testim based on actual historical data.(b)
    
    Operating expensesfor the year ended December 31, 2006 include litigation settlement
charges of approximately $7,546,000 recorded in the third quarter of 2006 associated with
the probable 58




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settlement of outstanding litigation claims. The Company recorded a tax benefit of
$2,746,000 in provision for incomes taxesupon finalization of the settlement in the fourth
quarter of 2006. Operating expensesalso include related legal defense costs of $604,000,
$733,000, $1,386,000 and $645,000 in first, second, third and fourth quarters of 2006,
respectively.(c)
    
    Operating expensesfor the fourth quarter ended December 31, 2007 include impairment
charges of $1,225,000 related to the write-down of the Companys U.S. generic simvastatin
drug license and certain other U.S. generic drug projects.(d)
    
    Cost of net product salesand net incomefor the fourth quarter ended
December 31, 2007 includes $378,000 and $255,000 net of tax,
respectively, related to intercompany profits included in inventory
which were not properly eliminated in prior quarters. The
intercompany profit eliminations were not considered to be material to the prior quarters. Liquidity and Capital Resources
       59




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60




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Contractual Obligations
  Payments Due By PeriodLess than 1
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than 5(in thousands)
    
    Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsLong-term debt
    
    $
    16,203
    
    
    $
    608
    
    
    $
    4,860
    
    
    $
    4,860
    
    
    $
    5,875Short-term borrowings
    
    
    116
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    Capital leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    3,070
    
    
    
    1,754
    
    
    
    1,237
    
    
    
    79
    
    
    
    Purchase obligations (1)
    
    
    8,087
    
    
    
    7,501
    
    
    
    586
    
    
    
    
    
    
    
    Other current liabilities (2)
    
    
    1,137
    
    
    
    1,137
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities (2)
    
    
    2,016
    
    
    
    
    
    
    
    2,016
    
    
    
    
    
    
    
    Total
contractual cash obligations (3)(4)
    
    $
    30,629
    
    
    $
    11,116
    
    
    $
    8,699
    
    
    $
    4,939
    
    
    $
    5,875
 
 (1)
    
    For the purposes of this table, contractual obligations for purchase of goods or
services are defined as agreements that are enforceable and legally binding and that
specify all significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate timing of the transaction.
Our purchase obligations primarily consist of $2.8 million for capital expenditures, $2.7
million for preclinical and clinical projects and $1.8 million related to compensation
agreements with key management. Contractual obligations related to capital expenditures
represent commitments made by the Company for the purchase of machinery, construction and
engineering services. Purchase obligations related to preclinical and clinical projects
have been estimated by management using the most recent project plans. Purchase
obligations related to compensation to key management personnel under employment agreements
are expected to be renewed annually unless terminated by any of the parties or amended by
the Compensation Committee of the Board of Directors.(2)
    
    Included in other liabilities at December 31, 2007 are the present value of three
annual payments of $1,000,000 to be paid in connection with the settlement of litigation in
2006 and the value of a hedging instrument obtained to reduce the currency risk on the
settlement obligation, of which $1,991,000 is classified as long-term. There were no other
contractual obligations included in other long-term liabilities in our Consolidated Balance
Sheet as of December 31, 2007.(3)
    
    Not included in the chart above is an aggregate of
$1,081,000, of which approximately $360,000 is current, of deferred taxes due to
be paid to the Spanish Ministry of Taxes over the next three years which resulted from the
sale of certain drug licenses in prior years. These deferred tax liabilities
are netted against the Companys deferred tax assets on the 2007 Consolidated
Balance Sheet.(4)
    
    Not included in the table above are unrecognized tax benefits totaling
$763,000, of which $309,000 is classified as current in the Consolidated Balance Sheet as
of December 31, 2007.  None of our uncertain tax positions are currently subject to ongoing
examinations by taxing authorities.  Additionally, we expect our unrecognized tax benefits
to expire due to statute of limitations without examination by such taxing authorities.   61




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easonality, Effect of Inflation and Liquidity.
 Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  
    
    Revenue recognition and accounts receivable.
 o
    
    Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, the price is fixed and final, delivery has occurred and there
is a reasonable assurance of collection of the sales proceeds. We generally obtain
purchase authorizations from our customers for a specified amount of product at a
specified price and consider delivery to have occurred when the customer takes
possession of the products. We provide our customers with a limited right of
return. Revenue is recognized upon delivery of products and a reserve for sales
returns is recorded when considered appropriate. We have demonstrated the ability
to make reasonable and reliable estimates of product returns in accordance with
SFAS No. 48, Revenue Recognition When Right of Return Exists, and of allowances for
doubtful accounts based on significant historical experience.
 62




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o
    
    We earn royalty revenues on Auxiliums sales of Testim, which
incorporates our CPE-215 permeation enhancement technology. Since 2003, Auxilium
has sold Testim to pharmaceutical wholesalers and chain drug stores, which have the
right to return purchased product prior to the units being dispensed through
patient prescriptions. Historically, customer returns were not able to be
reasonably estimated. Therefore, in accordance with SFAS No. 48, we deferred the
recognition of royalty revenues on product shipments of Testim until the units were
dispensed through patient prescriptions. During the quarter ended June 30, 2006, we
recorded an increase in royalty revenues of approximately $479,000 due to a change
in estimate, which, based upon historical experience, allowed us to reasonably
estimate future product returns on sales of Testim.o
    
    We enter into licensing and supply agreements with certain customers
that provide for the supply of specified products at specified prices. Our two
deliverables in these agreements (the license and the product sales) do not meet
the criteria for separation under Emerging Issues Task Force (EITF) Issue No.
00-21, Accounting for Revenue Arrangements with Multiple Deliverables, and are
therefore accounted for as one unit of account in accordance with EITF 00-21.
Specifically, the license agreements contain contractual restrictions whereby the
licensees are obligated to purchase the licensed products exclusively from us for
the entire term of the related supply agreement. Additionally, our licensees are
precluded from being able to sell, sub-lease or transfer their rights or from being
able to manufacture the product in-house. Our product sales under the agreements
are recognized in the same manner as our normal product sales. The license fees,
which are due and payable upfront, are refundable to the customer until the
customer has received marketing authorization to sell the licensed product.
Accordingly, we defer the revenue recognition of the license fees until the
customer obtains marketing authorization. We then recognize the license fees as
revenue on a straight line basis over the term of the related supply agreement.o
    
    Accounts receivable are recorded at their net realizable value,
generally as products are shipped or services are performed. Receivable balances
are reported net of an estimated allowance for uncollectible accounts. Estimated
uncollectible receivables are based on the amount and status of past due accounts,
contractual terms with customers, the credit worthiness of customers and the
history of our uncollectible accounts.
 
    
    Inventories.Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method. We analyze our inventory on a quarterly basis and
write-down inventory that has a cost basis in excess of its expected net realizable value. The
determination of whether or not inventory costs will be realized requires management estimates.
Actual results may differ from those estimates and require inventory to be written-down, resulting
in a new cost basis until sold. Reserves for slow moving or obsolete inventories are provided
based on historical experience and forecasted demand. We recorded adjustments totaling $1,090,000
to write-down inventories to their net realizable value and reserve
for slow moving inventories with respect to our U.S. simvastatin
products in the year ended December 31, 2007.
    
    Drug licenses and related costs.Drug licenses and related costs incurred in connection
with acquiring licenses, patents and other proprietary rights related to our commercially
developed products are capitalized. Capitalized drug licenses and related costs are being
amortized on a straight-line basis for periods not exceeding 15 years from the dates of
acquisition. Carrying values of such assets are reviewed at least annually by comparing the
carrying amounts to their estimated undiscounted cash flows and adjustments are made for
any diminution in value. We recorded impairment changes totaling
$1,433,000 to research and development expenses in the year ended
December 31, 2007 as a result of such reviews.
    
    Share-based compensation.Commencing January 1, 2006, we began accounting for
share-based compensation in accordance with the fair value recognition provisions of
SFAS No. 123 (Revised). Under the fair value recognition provisions of SFAS No. 123
(Revised), share-based compensation cost is measured at the grant date based on the fair
value of the award and is
recognized as expense over the requisite service period. Determining the fair value of
equity
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awards at the grant date requires judgment. We estimate the grant date fair value of
stock options using the Black-Scholes option valuation model. This option valuation model
requires the input of subjective assumptions including: (1) Expected life  the expected
life (estimated period of time outstanding) of options granted is estimated based on
historical exercise behaviors; (2) Volatility  the volatility of the Companys stock is
calculated on the grant date of each equity award using daily price observations over a
period of time commensurate with the expected life of the award; (3) Risk-free rate  the
risk-free interest rate is based on the yield curve of U.S. Treasury securities in effect at
the date of the grant, having a duration commensurate with the estimated life of the award;
and (4) Dividends  as we have not declared dividends, and we do not expect to declare
dividends in the future, we include an annual dividend rate of 0% when calculating the grant
date fair value of equity awards. Because share-based compensation expense is based on
awards ultimately expected to vest, it is reduced for estimated forfeitures. SFAS No. 123
(Revised) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.
Forfeitures are estimated based on historical experience. While we recognize share-based
compensation under the accelerated expense attribution method pursuant to FASB
Interpretation No. 28 for all options previously accounted for under APB Opinion No. 25, we
have elected to recognize share-based compensation attributable to equity awards granted
subsequent to December 31, 2005 under the straight-line method which is an alternative
allowed for under SFAS No. 123 (Revised). Had we elected to recognize compensation expense
for new equity awards under the accelerated expense attribution method, recognition of the
related compensation expense would be front-loaded in the requisite service period as
opposed to being recognized evenly over the period.
 SFAS No. 123 (Revised) requires a company to calculate the pool of excess tax benefits, or
APIC Pool, available to absorb tax deficiencies recognized subsequent to adopting the
accounting standard, as if the company had adopted SFAS No. 123, as originally issued, at
its effective date in 1995. There are two allowable methods to calculate the hypothetical
APIC Pool: (1) the long form method as set forth in SFAS No. 123 (Revised) or (2) the
short form method as set forth in FASB Staff Position No. 123(R)-3. We have elected to use
the long form method under which we track each award grant on an employee-by-employee basis
and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for such
award. We then compared the fair value expense to the tax deduction received for each grant
and aggregated the benefits and deficiencies to establish its hypothetical APIC Pool.Due to the adoption of SFAS No. 123 (Revised), some exercises result in tax deductions in
excess of previously recorded benefits based on the option value at the time of grant, or
windfalls. We recognize windfall tax benefits associated with the exercise of stock options
directly to stockholders equity only when realized. Accordingly, deferred tax assets are
not recognized for net operating loss carryforwards resulting from windfall tax benefits
occurring from January 1, 2006 onward. A windfall tax benefit occurs when the actual tax
benefit realized by the company upon an employees disposition of a share-based award
exceeds the deferred tax asset, if any, associated with the award that the company had
recorded.
    
    Clinical trial expenses.Clinical trial expenses, which are reflected in research and development expenses, result from obligations under contract with vendors, consultants, and clinical sites in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in cash flows which are not consistent with the periods in which materials or services are provided. These costs are capitalized upon payment and expensed according to the progress of each trial as measured by patient progression and the timing of various aspects of the trial. The progress of the trials, including the level of services performed, is determined for financial reporting purposes based upon judgments made after discussions with internal personnel as well as outside service providers.
    
    Provision for income taxes.We have provided for current and deferred U.S. federal,
state and foreign income taxes for the current and all prior periods presented. Current
and deferred income taxes have been provided with respect to jurisdictions where certain of
our subsidiaries produce taxable income. We have provided a valuation allowance with
respect to the remainder of our deferred income taxes, consisting primarily of net
operating loss carryforwards in the U.S. and Ireland, because of uncertainty regarding
their realization.
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Should we determine that it is more likely than not that we will realize certain of our net
deferred tax assets for which we have previously provided a valuation allowance, an
adjustment would be required to reduce the existing valuation allowance. In addition, we
operate within multiple taxing jurisdictions and are subject to audit in those
jurisdictions. These audits can involve complex issues, which may require an extended
period of time for resolution. Although we believe that adequate consideration has been
made for such issues, there is the possibility that the ultimate resolution of such issues
could have an adverse effect on our financial position, results of operations or cash
flows.Effective January 1, 2007, we
account for uncertain tax positions in accordance with Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB

Statement No. 109, Accounting for Income Taxes (FIN No. 48). As a result of the implementation
of FIN No. 48, we recorded a $405,000 increase in our non-current liabilities for uncertain tax
positions which was accounted for as an increase to the January 1, 2007 accumulated deficit.
The application of income tax law is inherently complex. Income tax laws and regulations are
voluminous and often ambiguous. As such, we are required to make many subjective assumptions
and judgments regarding our income tax exposures. Interpretations and guidance surrounding
income tax laws and regulations change frequently. Changes in our subjective assumptions and
judgments could have a material effect on our financial position, results of operations or
cash flows. In addition, as we operate within multiple taxing jurisdictions, we are subject
to audit in those jurisdictions.  The ultimate resolution of tax audits may require an extended
period of time.  Although we believe an adequate provision has been made for uncertain tax
positions, there is the possibility that the ultimate resolution of such positions could have
an adverse effect on our financial position, results of operations or
cash flows.
    
    Foreign currency translation. The financial position, results of operations and cash
flows of our foreign subsidiaries are measured using local currency as the functional
currency. Assets and liabilities of each foreign subsidiary are translated at the rate of
exchange in effect at the end of the period. Revenues and expenses are translated at the
average exchange rate for the period. Foreign currency translation gains and losses are
credited to or charged against other comprehensive income in the Consolidated Balance
Sheets. Foreign currency gains and losses arising from cash transactions are credited to or
charged against current earnings.
 New Accounting Standards
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements
 The
Fair Value Option for Financial Assets and Financial Liabilities  including an amendment of FASB
Statement No. 115
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Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of Accounting Research Bulletin No. 51
 Accounting for Collaborative Agreements Reporting Revenue Gross as a Principal versus Net as an Agent
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency.
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U.S. Dollars per Euro
    
    2007
    
    2006
    
    2005Weighted average exchange rate
    
    
    1.37
    
    
    
    1.26
    
    
    
    1.24Exchange rate
    
    
    1.47
    
    
    
    1.31
    
    
    
    1.19
  Favorable (Unfavorable)Assuming a
    
    Assuming a10% Increase
    
    10% DecreaseFinancial instrument:
    
    in FX Rates
    
    in FX Rates
    
    Impact onForward contracts (Euro)
    
    $
    (254,351
    )
    
    $
    309,136
    
    
    Fair valueForeign currency denominated debt
    
    $
    (1,617,000
    )
    
    $
    1,617,000
    
    
    Fair value
  accumulated
other comprehensive income
  Interest
Rates.
 
 Item 8. Financial Statements and Supplementary Data
  67




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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures.
     (b) Managements Annual Report on Internal Control over Financial Reporting
    Material
Weakness in consolidation process for one of the Companys
subsidiaries
    68




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal
ControlIntegrated Framework
       69




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Internal ControlIntegrated Framework
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109
  
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(c) Changes in Internal control over Financial Reporting.  Management remediation plan
  Item 9B. Other Information
 .
 71




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Part III
 
 Item 10. Directors and Executive Officers of the Registrant and Corporate Governance
 Name
    
    Age
    
    PositionJames R. Murphy
    
    
    58
    
    
    Chairman, Chief Executive Officer and DirectorMichael McGovern
    
    
    64
    
    
    Vice Chairman and DirectorJohn A. Sedor
    
    
    63
    
    
    PresidentRichard P. Lindsay
    
    
    46
    
    
    Vice President, Chief Financial Officer, Treasurer and SecretaryAdolfo Herrera
    
    
    48
    
    
    Managing Director of European SubsidiariesMiguel Fernandez
    
    
    77
    
    
    DirectorF. Ross Johnson
    
    
    76
    
    
    DirectorEdward J. Robinson
    
    
    67
    
    
    DirectorJohn W. Spiegel
    
    
    67
    
    
    Lead Director
 James R. Murphy -
 Michael McGovern
 John A. Sedor
 72




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Richard P. Lindsay
 Adolfo Herrera
 Miguel Fernandez
 F. Ross Johnson
 Edward J. Robinson
 73




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John W. Spiegel
 Audit Committee
  Section 16(a) Beneficial Ownership Reporting Compliance
  Other Information
   www.bentleypharm.com. www.sec.gov.
  74




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##### Table of Contents



Code of Business Conduct and Ethics
 www.bentleypharm.com
 
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  
 Item 13. Certain Relationships and Related Transactions and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  75




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Part IV
 
 Item 15. Exhibits, Financial Statement Schedules
 Page Herein(a)
    
    The following documents are filed as a part of this report:(1) Financial Statements:Consolidated Financial Statements of Bentley Pharmaceuticals, Inc.
and Subsidiaries
    
    F-1 to F-40(2) Financial Statement Schedules:None(3) Exhibits  See index beginning on page 77
 (b)
    
    The exhibits filed as a part of this annual report on Form 10-K are listed on the Exhibit
Index immediately preceding the signature page. The Exhibit Index is incorporated herein by reference.
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EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Articles of Incorporation of the Registrant, as amended and restated. (Reference is
made to Appendix B to the Registrants Definitive Proxy Statement for the Annual
Meeting of Stockholders filed on May 18, 1999, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)3.2
    
    Amendment of Restated Articles of Incorporation of the Registrant. (Reference is made
to Exhibit 3.1 to the Registrants Form 10-Q for the quarter ended June 30, 2004,
Commission File No. 1-10581, which exhibit is incorporated herein by reference.)3.3
    
    Bylaws of the Registrant, as amended and restated. (Reference is made to Exhibit 3.1
to the Registrants Form 10-Q for the quarter ended March 31, 2004, Commission File
No. 1-10581, which exhibit is incorporated herein by reference.)4.1
    
    Renewed Rights Agreement dated as of December 21, 2004 between Bentley
Pharmaceuticals, Inc. and American Stock Transfer & Trust Company, as Rights Agent,
including the form of Rights certificate as Exhibit B thereto and the Summary of
Rights to Purchase Series A Junior Participating Preferred Stock as Exhibit C thereto.
(Reference is made to Exhibit 4.1 to the Registrants Form 8-K, filed on December 21,
2004, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.1*
    
    Registrants Amended and Restated 1991 Stock Option Plan. (Reference is made to
Appendix D to the Registrants Definitive Proxy Statement for the Annual Meeting of
Stockholders filed on May 18, 1999, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)10.2*
    
    Form of Non-qualified Stock Option Agreement under the Registrants 1991 Stock
Option Plan. (Reference is made to Exhibit 4.25 to the Registrants Form 10-K for the
year ended June 30, 1992, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)10.3*
    
    Registrants 2001 Employee Stock Option Plan. (Reference is made to Appendix B to
the Registrants Definitive Proxy Statement for the Annual Meeting of Stockholders
filed on April 9, 2001, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)10.4*
    
    Registrants 2001 Directors Stock Option Plan. (Reference is made to Appendix C to
the Registrants Definitive Proxy Statement for the Annual Meeting of Stockholders
filed on April 9, 2001, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)
 77




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ExhibitNumber
    
    Description10.5*
    
    Form of Stock Option contract under the Registrants 2001 Employee Stock Option
Plan. (Reference is made to Exhibit 4.8 to the Registrants Form 10-K for the year
ended December 31, 2001, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)10.6*
    
    Form of Stock Option contract under the Registrants 2001 Directors Stock Option
Plan. (Reference is made to Exhibit 4.9 to the Registrants Form 10-K for the year
ended December 31, 2001, Commission File No. 1-10581, which exhibit is incorporated
herein by reference.)10.7*
    
    Amendment No. 1 to the Registrants 2001 Employee Stock Option Plan. (Reference is
made to Exhibit 4.10 to the Registrants Form 10-K for the year ended December 31,
2003, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.8*
    
    Amendment No. 2 to the Registrants 2001 Employee Stock Option Plan. (Reference is
made to Exhibit 4.11 to the Registrants Form 10-K for the year ended December 31,
2003, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.9*
    
    Amendment No. 1 to the Registrants 2001 Directors Stock Option Plan. (Reference is
made to Exhibit 4.12 to the Registrants Form 10-K for the year ended December 31,
2003, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.10*
    
    Amendment No. 2 to the Registrants 2001 Directors Stock Option Plan. (Reference is
made to Exhibit 4.13 to the Registrants Form 10-K for the year ended December 31,
2003, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.11*
    
    Form of Incentive Stock Option Certificate under the Registrants Amended and
Restated 2005 Equity and Incentive Plan. (Reference is made to Exhibit 10.2 to the
Registrants Form 10-Q for the quarter ended June 30, 2005, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)10.12*
    
    Form of Non-Statutory Stock Option Certificate under the Registrants Amended and
Restated 2005 Equity and Incentive Plan. (Reference is made to Exhibit 10.3 to the
Registrants Form 10-Q for the quarter ended June 30, 2005, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)10.13*
    
    Bentley Pharmaceuticals, Inc. Amended and Restated 2005 Equity and Incentive Plan.
(Reference is made to Exhibit 10.1 of the Registrants Current Report on Form 8-K
dated May 23, 2006, Commission File No. 1-10581, which exhibit is incorporated herein
by reference.)10.14*
    
    Form of Restricted Stock Unit Certificate (Non-employee Directors) under the
Registrants Amended and Restated 2005 Equity and Incentive Plan. (Reference is made
to Exhibit 10.2 of the Registrants Form 10-Q for the quarter ended June 30, 2006,
Commission File No. 1-10581, which exhibit is incorporated herein by reference.)
 78




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ExhibitNumber
    
    Description10.15*
    
    Form of Restricted Stock Unit Certificate (Employees) under the Registrants Amended
and Restated 2005 Equity and Incentive Plan. (Reference is made to Exhibit 10.3 of
the Registrants Form 10-Q for the quarter ended June 30, 2006, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)10.16*
    
    Ordinary Labor Contract dated as of February 12, 1998 between the Registrants
wholly-owned subsidiary, Laboratorios Belmac, S.A. and Adolfo Herrera. (Reference is
made to Exhibit 10.26 to the Registrants Form 10-K for the year ended December 31,
2005, Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.17*
    
    Letter Agreement dated December 13, 2007 by and between Laboratorios Belmac, S.A.
and Adolfo Herrera Málaga.10.18*
    
    Amended and Restated Employment Agreement dated as of August 20, 2007 between the
Registrant and James R. Murphy. (Reference is made to Exhibit 10.1 to the
Registrants Form 10-Q for the quarter ended September 30, 2007, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)10.19*
    
    Employment Agreement dated as of August 27, 2005 between the Registrant and John A.
Sedor. (Reference is made to Exhibit 10.1 to the Registrants Form 10-Q for the
quarter ended September 30, 2005, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)10.20*
    
    Employment Agreement dated as of September 11, 2006 by and between the Registrant
and Richard P. Lindsay. (Reference is made to Exhibit 10.1 of the Registrants Current
Report on Form 8-K dated September 11, 2006, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)10.21*
    
    Letter Agreement dated March 17, 2008 amending the Employment Agreement between the
Registrant and Richard P. Lindsay.10.22*
    
    Information on remuneration of non-employee members of the Board of Directors.
(Reference is made to Item 1.01 of the Registrants Current Report on Form 8-K dated
May 23, 2006, Commission File No. 1-10581, which item is incorporated herein by
reference.)10.23
    
    Asset Purchase Agreement between the Registrant and Yungtai Hsu dated February 1,
1999, effective as of December 31, 1998. (Reference is made to Exhibit 7.1 to the
Registrants Form 8-K filed on February 26, 1999, Commission File No. 1-10581, which
exhibit is incorporated herein by reference.)10.24
    
    Letter Amendment dated February 8, 2008 between the Registrant and Yungtai Hsu
effective December 31, 2007. (Reference is made to Exhibit 10.1 to the Registrants
Form 8-K filed on February 13, 2008, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)
 79




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ExhibitNumber
    
    Description10.25
    
    License Agreement between the Registrant and Auxilium A2, Inc. dated May
31, 2000, including Amendment No. 1 thereto dated October 2000 and Amendment No. 2
dated May 31, 2001. (Reference is made to Exhibit 10.10 to Amendment No. 2 to the
Registrants Form 10-K for the year ended December 31, 2001, Commission File No.
1-10581, which exhibit is incorporated herein by reference.)10.26
    
    Amendment No. 3 dated September 6, 2002 to License Agreement between the Registrant
and Auxilium Pharmaceuticals, Inc. dated May 31, 2000. (Reference is made to Exhibit
10.10 to the Registrants Form 10-K for the year ended December 31, 2002, Commission
File No. 1-10581, which exhibit is incorporated herein by reference.)10.27
    
    Amendment No. 4 dated March 25, 2004 to License Agreement between the Registrant and
Auxilium Pharmaceuticals, Inc. dated May 31, 2000. (Reference is made to Exhibit 10.26
to the Registrants Form 10-K for the year ended December 31, 2005, Commission File
No. 1-10581, which exhibit is incorporated herein by reference.)10.28
    
    License Agreement between the Registrant and Auxilium Pharmaceuticals, Inc. dated
May 31, 2001 relating to products using Dihydrotestosterone. (Reference is made to
Exhibit 10.12 to the Registrants Form 10-K for the year ended December 31, 2002,
Commission File No. 1-10581, which exhibit is incorporated herein by reference.)10.29
    
    Amendment No. 1 dated September 6, 2002 to License Agreement between the Registrant
and Auxilium Pharmaceuticals, Inc. dated May 31, 2001 related to products using
Dihydrotestosterone. (Reference is made to Exhibit 10.13 to the Registrants Form 10-K
for the year ended December 31, 2002, Commission File No. 1-10581, which exhibit is
incorporated herein by reference.)10.30
    
    Settlement Term Sheet Agreement, dated September 29, 2006, between Ethypharm S.A.
France, Ethypharm S.A. Spain, the Registrant and Laboratorios Belmac
S. A. (Reference is made to Exhibit 10.29 to the Registrants
Form 10-K for the year ended December 31, 2006, Commission File
No. 1-10581, which exhibit is incorporated herein by reference.)21.1
    
    Subsidiaries of the Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 80




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ExhibitNumber
    
    Description32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates a management contract or compensatory plan or arrangement.
    
    Filed herewith. 81




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SIGNATURES
  BENTLEY PHARMACEUTICALS, INC.By:
    
    /s/ James R. Murphy

James R. MurphyChairman and ChiefExecutive OfficerDate: March 17, 2008
  Signature
    
    Title
    
    Date/s/ James R. Murphy

James R. Murphy
    
    Chairman, Chief Executive
Officer
and Director (principal
executive officer)
    
    March 17, 2008/s/ Michael McGovern

Michael McGovern
    
    Vice Chairman and Director
    
    March 17, 2008/s/ Richard P. Lindsay

Richard P. Lindsay
    
    Vice-President, Chief
Financial Officer,
Treasurer and Secretary
(principal financial officer)
    
    March 17, 2008/s/ Robert P. Hebert

Robert P. Hebert
    
    Controller, Assistant Treasurer and
Assistant Secretary (principal
accounting officer)
    
    March 17, 2008/s/ Miguel Fernandez

Miguel Fernandez
    
    Director
    
    March 17, 2008/s/ F. Ross Johnson

F. Ross Johnson
    
    Director
    
    March 17, 2008/s/ Edward J. Robinson

Edward J. Robinson
    
    Director
    
    March 17, 2008/s/ John W. Spiegel

John W. Spiegel
    
    Lead Director
    
    March 17, 2008




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Index to Consolidated Financial Statements of
Bentley Pharmaceuticals, Inc. and Subsidiaries
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    F-3Consolidated Income Statements for the years ended December 31, 2007, 2006 and 2005
    
    F-4Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2007, 2006 and 2005
    
    F-5Consolidated Statements of Cash Flows for the years
ended December 31, 2007, 2006 and 2005
    
    F-6Notes to Consolidated Financial Statements
    
    F-8
 F -1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Accounting for Uncertainty
in Income Taxes  an interpretation of FASB Statement No. 109 Share-Based Payment
 Internal ControlIntegrated Framework
  
 F -2




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##### Table of Contents



Bentley
Pharmaceuticals, Inc. and Subsidiaries
 Consolidated Balance Sheets
 (in thousands, except per share data)
    
    December 31,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    33,706
    
    
    $
    12,424Marketable securities
    
    
    1,010
    
    
    
    3,177Receivables, net
    
    
    39,324
    
    
    
    32,963Inventories
    
    
    17,658
    
    
    
    16,279Deferred taxes
    
    
    1,067
    
    
    
    1,049Prepaid expenses and other
    
    
    1,915
    
    
    
    1,798Total current assets
    
    
    94,680
    
    
    
    67,690Non-current assets:Fixed assets, net
    
    
    59,191
    
    
    
    48,556Drug licenses and related costs, net
    
    
    16,624
    
    
    
    16,026Restricted cash
    
    
    1,000
    
    
    
    1,000Deferred taxes
    
    
    676
    
    
    
    240Other
    
    
    925
    
    
    
    844Total non-current assets
    
    
    78,416
    
    
    
    66,666Total assets
    
    $
    173,096
    
    
    $
    134,356Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    19,413
    
    
    $
    14,566Accrued expenses
    
    
    10,623
    
    
    
    9,704Short-term borrowings
    
    
    116
    
    
    
    247Current portion of long-term debt
    
    
    608
    
    
    
    307Deferred income
    
    
    1,186
    
    
    
    1,045Other current liabilities
    
    
    1,137
    
    
    
    1,518Total current liabilities
    
    
    33,083
    
    
    
    27,387Non-current liabilities:Long-term debt
    
    
    15,595
    
    
    
    Deferred income
    
    
    5,976
    
    
    
    3,899Other
    
    
    2,470
    
    
    
    2,739Total non-current liabilities
    
    
    24,041
    
    
    
    6,638Commitments and contingencies (Note 15)Stockholders equity:Preferred stock, $1.00 par value, authorized 2,000 shares,
issued and outstanding, none
    
    
    
    
    
    
    Common stock, $0.02 par value, authorized 100,000 shares,
issued and outstanding, 22,376 and 22,262 shares
    
    
    447
    
    
    
    445Additional paid-in capital
    
    
    143,269
    
    
    
    140,030Accumulated deficit
    
    
    (46,736
    )
    
    
    (49,016
    )Accumulated other comprehensive income
    
    
    18,992
    
    
    
    8,872Total stockholders equity
    
    
    115,972
    
    
    
    100,331Total liabilities and stockholders equity
    
    $
    173,096
    
    
    $
    134,356
 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-3




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 Consolidated Income Statements
 (in thousands, except per share data)
    
    For the Year Ended December 31,2007
    
    
    2006
    
    
    2005Revenues:Net product sales
    
    $
    112,999
    
    
    $
    100,590
    
    
    $
    91,308Licensing and collaboration revenues
    
    
    11,688
    
    
    
    8,881
    
    
    
    6,422Total revenues
    
    
    124,687
    
    
    
    109,471
    
    
    
    97,730Cost of net product sales
    
    
    64,010
    
    
    
    49,850
    
    
    
    46,161Gross profit
    
    
    60,677
    
    
    
    59,621
    
    
    
    51,569Operating expenses:Selling and marketing
    
    
    18,523
    
    
    
    16,153
    
    
    
    16,347General and administrative
    
    
    17,073
    
    
    
    14,801
    
    
    
    11,405Research and development
    
    
    13,600
    
    
    
    10,459
    
    
    
    5,800Litigation settlement
    
    
    
    
    
    
    10,914
    
    
    
    593Separation costs
    
    
    2,020
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    2,059
    
    
    
    1,895
    
    
    
    1,758Total operating expenses
    
    
    53,275
    
    
    
    54,222
    
    
    
    35,903(Loss) gain on sale of drug license
    
    
    (111
    )
    
    
    38
    
    
    
    Income from operations
    
    
    7,291
    
    
    
    5,437
    
    
    
    15,666Other income (expenses):Interest income
    
    
    1,092
    
    
    
    820
    
    
    
    928Interest expense
    
    
    (598
    )
    
    
    (158
    )
    
    
    (211
    )Other, net
    
    
    434
    
    
    
    (43
    )
    
    
    12Income before income taxes
    
    
    8,219
    
    
    
    6,056
    
    
    
    16,395Provision for income taxes
    
    
    5,534
    
    
    
    5,082
    
    
    
    5,476Net income
    
    $
    2,685
    
    
    $
    974
    
    
    $
    10,919Net income per common share:Basic
    
    $
    0.12
    
    
    $
    0.04
    
    
    $
    0.51Diluted
    
    $
    0.12
    
    
    $
    0.04
    
    
    $
    0.48Weighted average common shares outstanding:Basic
    
    
    22,339
    
    
    
    22,141
    
    
    
    21,558Diluted
    
    
    22,957
    
    
    
    23,068
    
    
    
    22,929
 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-4




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 Consolidated Statements of Changes in Stockholders Equity
 (in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated$0.02 Par Value
    
    
    Additional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance at
January 1, 2005
    
    
    21,312
    
    
    $
    426
    
    
    $
    140,418
    
    
    $
    (60,909
    )
    
    $
    9,722
    
    
    $
    89,657Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,919
    
    
    
    
    
    
    
    10,919Other comprehensive loss:Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,962
    )
    
    
    (7,962
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,957Exercise of stock options
    
    
    1,021
    
    
    
    20
    
    
    
    4,055
    
    
    
    
    
    
    
    
    
    
    
    4,075Purchase of treasury shares
    
    
    (430
    )
    
    
    (8
    )
    
    
    (5,313
    )
    
    
    
    
    
    
    
    
    
    
    (5,321
    )Stock-based compensation
    
    
    20
    
    
    
    
    
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    221Balance at December 31, 2005
    
    
    21,923
    
    
    
    438
    
    
    
    139,381
    
    
    
    (49,990
    )
    
    
    1,760
    
    
    
    91,589Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    974
    
    
    
    
    
    
    
    974Other comprehensive income:Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,112
    
    
    
    7,112Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,086Exercise of stock options
    
    
    741
    
    
    
    15
    
    
    
    3,937
    
    
    
    
    
    
    
    
    
    
    
    3,952Purchase of treasury shares
    
    
    (418
    )
    
    
    (8
    )
    
    
    (5,442
    )
    
    
    
    
    
    
    
    
    
    
    (5,450
    )Stock-based compensation
    
    
    16
    
    
    
    
    
    
    
    2,154
    
    
    
    
    
    
    
    
    
    
    
    2,154Balance at December 31, 2006
    
    
    22,262
    
    
    
    445
    
    
    
    140,030
    
    
    
    (49,016
    )
    
    
    8,872
    
    
    
    100,331Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,685
    
    
    
    
    
    
    
    2,685Other comprehensive income:Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,120
    
    
    
    10,120Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,805Cumulative effect of change in
accounting from the
implementation of FIN48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405
    )
    
    
    
    
    
    
    (405
    )Exercise of
stock options and vesting of restricted stock units
    
    
    97
    
    
    
    2
    
    
    
    617
    
    
    
    
    
    
    
    
    
    
    
    619Purchase of treasury shares
    
    
    (4
    )
    
    
    
    
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    (52
    )Stock-based compensation
    
    
    21
    
    
    
    
    
    
    
    2,674
    
    
    
    
    
    
    
    
    
    
    
    2,674Balance at December 31, 2007
    
    
    22,376
    
    
    $
    447
    
    
    $
    143,269
    
    
    $
    (46,736
    )
    
    $
    18,992
    
    
    $
    115,972
 The
accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-5




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
 (in thousands)
    
    For the Year Ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    2,685
    
    
    $
    974
    
    
    $
    10,919Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    6,712
    
    
    
    5,570
    
    
    
    5,096Non-cash charge for inventory write-down and
reserves
    
    
    425
    
    
    
    
    
    
    
    Non-cash charge for write-down of intangible assets
    
    
    1,433
    
    
    
    
    
    
    
    Foreign currency gains
    
    
    (200
    )
    
    
    (133
    )
    
    
    Loss (gain) on sale of drug license
    
    
    111
    
    
    
    (38
    )
    
    
    Stock-based compensation expense
    
    
    2,674
    
    
    
    2,154
    
    
    
    280Change in fair value of derivative instrument
    
    
    105
    
    
    
    186
    
    
    
    Loss on disposal of assets
    
    
    317
    
    
    
    208
    
    
    
    481Other non-cash items
    
    
    12
    
    
    
    12
    
    
    
    38(Increase) decrease in assets and
increase (decrease) in liabilities:Receivables, net
    
    
    (2,445
    )
    
    
    (3,129
    )
    
    
    (2,529
    )Inventories
    
    
    106
    
    
    
    (2,691
    )
    
    
    (3,701
    )Deferred income taxes
    
    
    (265
    )
    
    
    (1,731
    )
    
    
    (1,160
    )Prepaid expenses and other current assets
    
    
    (4
    )
    
    
    343
    
    
    
    (809
    )Other assets
    
    
    (26
    )
    
    
    (31
    )
    
    
    (681
    )Accounts payable and accrued expenses
    
    
    3,017
    
    
    
    (2,663
    )
    
    
    4,900Deferred income
    
    
    1,441
    
    
    
    1,401
    
    
    
    (173
    )Other liabilities
    
    
    (1,349
    )
    
    
    4,070
    
    
    
    (65
    )Net cash provided by operating activities
    
    
    14,749
    
    
    
    4,502
    
    
    
    12,596Cash flows from investing activities:Additions to fixed assets
    
    
    (9,989
    )
    
    
    (15,313
    )
    
    
    (11,018
    )Additions to drug licenses and related costs
    
    
    (2,662
    )
    
    
    (2,772
    )
    
    
    (2,045
    )Proceeds from the sale of fixed assets
    
    
    30
    
    
    
    
    
    
    
    Proceeds from sale of drug license
    
    
    43
    
    
    
    
    
    
    
    Proceeds from maturity of investments
    
    
    3,177
    
    
    
    
    
    
    
    461Purchase of investments
    
    
    (901
    )
    
    
    (2,409
    )
    
    
    (461
    )Net cash used in investing activities
    
    
    (10,302
    )
    
    
    (20,494
    )
    
    
    (13,063
    )
  The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-6




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Concluded)
 (in thousands)
    
    For the Year Ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from financing activities:Proceeds from the exercise of stock options
    
    $
    619
    
    
    $
    450
    
    
    $
    2,028Remittance of employee tax liabilities in exchange for
common stock tendered to the Company
    
    
    (52
    )
    
    
    (1,948
    )
    
    
    (2,292
    )Purchases of treasury stock
    
    
    
    
    
    
    
    
    
    
    (1,041
    )Proceeds from borrowings
    
    
    14,901
    
    
    
    1,643
    
    
    
    1,938Repayment of borrowings
    
    
    (554
    )
    
    
    (4,281
    )
    
    
    (1,659
    )Net cash provided by (used in) financing
activities
    
    
    14,914
    
    
    
    (4,136
    )
    
    
    (1,026
    )Effect of exchange rate changes on cash
    
    
    1,921
    
    
    
    168
    
    
    
    (353
    )Net increase (decrease) in cash and cash equivalents
    
    
    21,282
    
    
    
    (19,960
    )
    
    
    (1,846
    )Cash and cash equivalents at beginning of year
    
    
    12,424
    
    
    
    32,384
    
    
    
    34,230Cash and cash equivalents at end of year
    
    $
    33,706
    
    
    $
    12,424
    
    
    $
    32,384Supplemental Disclosures of Cash Flow InformationThe Company paid cash during the year for:Interest
    
    $
    226
    
    
    $
    118
    
    
    $
    204Foreign income taxes
    
    $
    4,650
    
    
    $
    4,555
    
    
    $
    4,231Supplemental Disclosures of Non-Cash Financing and
Investing ActivitiesThe Company has issued Common Stock as stock-based
compensation in lieu of cash during the year as
follows:Shares
    
    
    21
    
    
    
    16
    
    
    
    20Amount
    
    $
    223
    
    
    $
    208
    
    
    $
    221Amounts included in accounts payable at end of year for
fixed asset and drug license purchases
    
    $
    1,404
    
    
    $
    1,869
    
    
    $
    2,675
 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
 F-7




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 NOTE 1  HISTORY AND OPERATIONS
  
    
    Specialty Generics: development, licensing and sales of generic and branded generic
pharmaceutical products and active pharmaceutical ingredients (API) and the manufacturing
of pharmaceuticals for others; and
    
    Drug Delivery: research, development and licensing/commercialization of advanced drug
delivery technologies and pharmaceutical products.
    F-8




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
   separation costs
 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of consolidation and foreign currency translation
  U.S. Dollars per Euro
    
    2007
    
    2006
    
    2005Weighted average exchange rate
    
    
    1.37
    
    
    
    1.26
    
    
    
    1.24Exchange rate
    
    
    1.47
    
    
    
    1.31
    
    
    
    1.19
 other comprehensive income. accumulated other
comprehensive income
 F-9




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Use of estimates
  Cash and cash equivalents and restricted cash
 marketable securities
  restricted cash
 Marketable securities
 other
comprehensive income
 Accounts receivable and allowances for doubtful accounts
  Inventories
 FIFO
 F-10




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Fixed assets
  YearsBuildings and improvements
    
    30Equipment
    
    3-7Furniture and fixtures
    
    5-7Other
    
    5
  Drug licenses and related costs
 Goodwill and Other Intangible Assets Accounting for the Impairment or Disposal of Long-Lived
Assets
 Other liabilities
 other current liabilities
 F-11




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 litigation settlement
 Derivative Instruments and Hedging Activity
 Accounting
for Derivative Instruments and Certain Hedging Activities Accounting
for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133 Amendment of Statement 133 on Derivative Instruments and Hedging Activities
 other income
(expenses)
 Fair value measurements
 Fair Value Measurements
  F-12




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
    (In Thousands)
    
    
    
    
    
    Fair Value Measurements at December 31, 2007 Using:Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantTotal at
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsAssets:
    
    December 31, 2007
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Marketable
Securities
    
    $
    1,010
    
    
    $
    1,010
    
    
    $
    
    
    
    $
    Liabilities:Cash flow hedges
    
    $
    374
    
    
    $
    
    
    
    $
    
    
    
    $
    374
 (In Thousands)
    
    Fair Value Measurements atDecember 31, 2007 UsingSignificant Unobservable Inputs(Level 3)Cash Flow HedgesBeginning Balance at January 1, 2007
    
    $
    186Total gains or losses (realized/unrealized):Included in earnings (or changes in net assets)
    
    
    404Included in other comprehensive income
    
    
    Purchases, issuances, and settlements
    
    
    (216
    )Transfers in and/or out of Level 3
    
    
    Ending balance at December 31, 2007
    
    $
    374The amount of total gains or losses for the period
included in earnings (or changes in net assets)
attributable to the change in unrealized gains or
losses relating to assets still held at December
31, 2007
    
    $
    
 Other income (expenses)
 Other income (expenses)Total gains or losses included in earnings (or changes in net
assets) for the year ended December 31, 2007
    
    $
    404Changes in unrealized gains or losses relating to assets
held at December 31, 2007
    
    $
    
 F-13




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  (In Thousands)
    
    
    
    
    
    Fair Value Measurements at December 31, 2007 Using:Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    SignificantTotal at
    
    
    for Identical
    
    
    Observable
    
    
    Unobservable
    
    
    TotalDecember
    
    
    Assets
    
    
    Inputs
    
    
    Inputs
    
    
    GainsAssets:
    
    31, 2007
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    (Losses)Drug licenses and
related costs, net
    
    $
    16,624
    
    
    $
    
    
    
    $
    
    
    
    $
    16,624
    
    
    $
    (1,433
    )
 Revenue recognition
 Revenue Recognition When Right of
Return Exists (SFAS No. 48),
  Accounting for
Revenue Arrangements with Multiple Deliverables
 F-14




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Research and development
 Accounting for Research and Development Costs
 Clinical trial expenses
  Provision for Income taxes
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
  Balance at January 1, 2007
    
    $
    626Increases related to current year tax positions
    
    
    78Expirations due to the lapse of statute of limitations
    
    
    (234
    )Other (primarily impact of fluctuations in foreign currency rates)
    
    
    44Balance at December 31, 2007
    
    $
    514
  F-15




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
     Accounting for Income
Taxes Accounting for Income Taxes  Special Areas
 Basic and diluted net income per common share
 Earnings per
Share
  Effect ofBasic
    
    Dilutive
    
    DilutedFor The Year Ended December 31, 2007
    
    EPS
    
    Securities
    
    EPS(In Thousands, Except Per Share Data)Net income
    
    $
    2,685
    
    
    $
    
    
    
    $
    2,685Weighted average common shares outstanding
    
    
    22,339
    
    
    
    618
    
    
    
    22,957Net income per common share
    
    $
    0.12
    
    
    $
    
    
    
    $
    0.12
 F-16




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Effect ofBasic
    
    Dilutive
    
    DilutedFor The Year Ended December 31, 2006
    
    EPS
    
    Securities
    
    EPS(In Thousands, Except Per Share Data)Net income
    
    $
    974
    
    
    $
    
    
    
    $
    974Weighted average common shares outstanding
    
    
    22,141
    
    
    
    927
    
    
    
    23,068Net income per common share
    
    $
    0.04
    
    
    $
    
    
    
    $
    0.04
 Effect ofBasic
    
    Dilutive
    
    DilutedFor The Year Ended December 31, 2005
    
    EPS
    
    Securities
    
    EPS(In Thousands, Except Per Share Data)Net income
    
    $
    10,919
    
    
    $
    
    
    
    $
    10,919Weighted average common shares outstanding
    
    
    21,558
    
    
    
    1,371
    
    
    
    22,929Net income per common share
    
    $
    0.51
    
    
    $
    (0.03
    )
    
    $
    0.48
  Comprehensive income
 Reporting Comprehensive Income
 Stock-based compensation plans
 Share-Based Payment. Accounting for
Stock-Based Compensation Accounting for Stock Issued to
Employees
 F-17




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Segments of an enterprise and related information
 Disclosures About Segments of an Enterprise and Related Information,
 Recently issued accounting pronouncements
 The
Fair Value Option for Financial Assets and Financial Liabilities  including an amendment of FASB
Statement No. 115
 Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities
 F-18




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of Accounting Research Bulletin No. 51
 Accounting for Collaborative Agreements Reporting Revenue Gross as a Principal versus Net as an Agent
 NOTE 3 RECEIVABLES
  December 31,2007
    
    
    2006Trade receivables (of which $0 and $247, respectively,
collateralize short-term borrowings with Spanish financial institutions)
    
    $
    32,279
    
    
    $
    27,880VAT, income and social security taxes receivable
    
    
    4,333
    
    
    
    3,151Royalties receivable
    
    
    3,237
    
    
    
    2,261Other
    
    
    161
    
    
    
    8240,010
    
    
    
    33,374Less-allowance for doubtful accounts
    
    
    (686
    )
    
    
    (411
    )$
    39,324
    
    
    $
    32,963
 F-19




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Year Ended December 31,2007
    
    
    2006
    
    
    2005(In Thousands)Balance at beginning of year
    
    $
    411
    
    
    $
    202
    
    
    $
    375Net provisions charged to expenses
    
    
    212
    
    
    
    191
    
    
    
    (122
    )Write-offs reducing allowance
    
    
    (29
    )
    
    
    (10
    )
    
    
    (9
    )Effect of foreign currency
    
    
    92
    
    
    
    28
    
    
    
    (42
    )Balance at end of year
    
    $
    686
    
    
    $
    411
    
    
    $
    202
 NOTE 4 INVENTORIES
  December 31,2007
    
    
    2006(In Thousands)Raw materials
    
    $
    11,802
    
    
    $
    8,669Finished goods
    
    
    6,798
    
    
    
    7,62118,600
    
    
    
    16,290Less-allowance for slow moving inventory
    
    
    (942
    )
    
    
    (11
    )$
    17,658
    
    
    $
    16,279
 cost of net product sales
 other current liabilities
  Year Ended December 31,2007
    
    
    2006
    
    
    2005(In Thousands)Balance at beginning of year
    
    $
    11
    
    
    $
    136
    
    
    $
    75Provisions charged to costs and expenses
    
    
    938
    
    
    
    11
    
    
    
    70Write-offs reducing allowance
    
    
    (11
    )
    
    
    (144
    )
    
    
    Effect of foreign currency
    
    
    4
    
    
    
    8
    
    
    
    (9
    )Balance at end of year
    
    $
    942
    
    
    $
    11
    
    
    $
    136
 F-20




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 NOTE 5 FIXED ASSETS
  December 31,2007
    
    
    2006(In Thousands)Land
    
    $
    3,128
    
    
    $
    2,875Buildings and improvements
    
    
    26,185
    
    
    
    17,538Equipment
    
    
    26,813
    
    
    
    20,591Furniture and fixtures
    
    
    2,537
    
    
    
    2,138Other
    
    
    350
    
    
    
    39459,013
    
    
    
    43,536Capital in-progress
    
    
    22,314
    
    
    
    20,21381,327
    
    
    
    63,749Less-accumulated depreciation
    
    
    (22,136
    )
    
    
    (15,193
    )$
    59,191
    
    
    $
    48,556
  depreciation and amortization expense cost of net
product sales
 NOTE 6 DRUG LICENSES AND RELATED COSTS
  December 31,2007
    
    
    2006(In Thousands)Drug licenses and related costs
    
    $
    25,667
    
    
    $
    23,069Less-accumulated amortization
    
    
    (9,043
    )
    
    
    (7,043
    )$
    16,624
    
    
    $
    16,026
 depreciation and amortization expense
 F-21




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Year Ending December 31,
    
    Future Amortization Expense(In Thousands)2008
    
    $1,6222009
    
    1,6702010
    
    1,6982011
    
    1,6722012
    
    1,6602013 and beyond
    
    8,302
 NOTE 7 RELATED PARTY AND SUPPLEMENTAL CASH FLOW DISCLOSURES
  common stock additional paid in
capital
 NOTE 8 ACCRUED EXPENSES
  December 31,2007
    
    
    2006(In Thousands)Foreign income taxes payable
    
    $
    1,634
    
    
    $
    2,463Allowance for sales returns
    
    
    691
    
    
    
    784Accrued payroll and related taxes
    
    
    5,209
    
    
    
    3,288Spanish pharmaceutical taxes payable
    
    
    1,443
    
    
    
    1,035Other accrued expenses
    
    
    1,646
    
    
    
    2,134$
    10,623
    
    
    $
    9,704
 F-22




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Year Ended December 31,2007
    
    
    2006
    
    
    2005(In Thousands)Balance at beginning of year
    
    $
    784
    
    
    $
    887
    
    
    $
    597Provisions charged to costs and expenses
    
    
    3,154
    
    
    
    1,939
    
    
    
    898Write-offs reducing allowance
    
    
    (3,323
    )
    
    
    (2,138
    )
    
    
    (652
    )Effect of foreign currency
    
    
    76
    
    
    
    96
    
    
    
    44Balance at end of year
    
    $
    691
    
    
    $
    784
    
    
    $
    887
 NOTE 9 DEBT
  December 31,2007
    
    
    2006(In Thousands)Trade receivables discounted with Spanish
financial institutions, with recourse,
effective interest rate is 3.7%
    
    $
    
    
    
    $
    247Revolving
lines of credit payable to Spanish financial institutions, weighted average
interest rate is
5.05%
    
    
    116
    
    
    
    $
    116
    
    
    $
    247
   December 31,2007
    
    
    2006(In Thousands)Loans payable
    
    $
    16,203
    
    
    $
    307Less-current portion of long-term debt
    
    
    (608
    )
    
    
    (307
    )Total long-term debt
    
    $
    15,595
    
    
    $
    
 F-23




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Year
    
    Principal Payment2008
    
    $
    6082009
    
    
    2,4302010
    
    
    2,4302011
    
    
    2,4302012
    
    
    2,4302013
    
    
    5,875Total
    
    $
    16,203
   NOTE 10 PREFERRED STOCK
  NOTE 11 EQUITY AND STOCK-BASED COMPENSATION
  Common Shares(In Thousands)For exercise of outstanding stock options and restricted stock units
    
    
    4,035For future stock option and restricted stock unit grants
    
    
    3234,358
 F-24




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Common stock and restricted stock unit transactions
     Share-based compensation plans
  F-25




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  For Year Ended December 31, 2007WeightedWeighted
    
    
    AverageNumber
    
    
    Average
    
    
    Remaining
    
    
    Aggregateof
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Term (Years)
    
    
    ValueOptions
outstanding, January 1, 2005
    
    
    4,087
    
    
    $
    7.44
    
    
    
    5.26Granted
    
    
    870
    
    
    
    9.11Exercised
    
    
    (1,021
    )
    
    
    3.93Forfeited and expired
    
    
    (20
    )
    
    
    8.87Options outstanding, December 31, 2005
    
    
    3,916
    
    
    
    8.72
    
    
    
    6.28Granted
    
    
    481
    
    
    
    11.80Exercised
    
    
    (739
    )
    
    
    5.34Forfeited and expired
    
    
    (21
    )
    
    
    10.01Options outstanding, December 31, 2006
    
    
    3,637
    
    
    
    9.80
    
    
    
    6.56Granted
    
    
    331
    
    
    
    11.97Exercised
    
    
    (73
    )
    
    
    8.48Forfeited and expired
    
    
    (57
    )
    
    
    12.72Options outstanding, December 31, 2007
    
    
    3,838
    
    
    $
    9.97
    
    
    
    6.00
    
    
    $
    19,658Vested or expected to vest, December 31, 2007
    
    
    3,612
    
    
    $
    9.97
    
    
    
    6.32
    
    
    $
    19,550Options exercisable, December 31, 2007
    
    
    3,014
    
    
    $
    9.64
    
    
    
    5.29
    
    
    $
    16,417
 F-26




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Options Outstanding
    
    
    Options Currently ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    Number
    
    
    Exercise
    
    
    Remaining Life
    
    
    Number
    
    
    ExercisePrices
    
    Outstanding
    
    
    Price
    
    
    (Years)
    
    
    Exercisable
    
    
    Price$2.00-$3.00
    
    
    54
    
    
    $
    2.72
    
    
    
    1.16
    
    
    
    54
    
    
    $
    2.725.70 - 5.88
    
    
    142
    
    
    
    5.84
    
    
    
    2.39
    
    
    
    142
    
    
    
    5.846.00 - 6.33
    
    
    262
    
    
    
    6.01
    
    
    
    3.36
    
    
    
    262
    
    
    
    6.017.10 - 7.39
    
    
    164
    
    
    
    7.30
    
    
    
    5.12
    
    
    
    136
    
    
    
    7.287.50
    
    
    320
    
    
    
    7.50
    
    
    
    7.25
    
    
    
    213
    
    
    
    7.508.00 - 8.93
    
    
    298
    
    
    
    8.29
    
    
    
    5.00
    
    
    
    298
    
    
    
    8.299.00 - 9.80
    
    
    408
    
    
    
    9.67
    
    
    
    4.05
    
    
    
    408
    
    
    
    9.6710.04
    
    
    273
    
    
    
    10.04
    
    
    
    5.39
    
    
    
    273
    
    
    
    10.0410.38 - 10.79
    
    
    200
    
    
    
    10.76
    
    
    
    6.74
    
    
    
    200
    
    
    
    10.7611.00 - 11.98
    
    
    1,148
    
    
    
    11.69
    
    
    
    7.83
    
    
    
    502
    
    
    
    11.4412.01 - 12.55
    
    
    203
    
    
    
    12.30
    
    
    
    7.14
    
    
    
    160
    
    
    
    12.3713.30
    
    
    323
    
    
    
    13.30
    
    
    
    6.01
    
    
    
    323
    
    
    
    13.3013.48 - 15.83
    
    
    43
    
    
    
    14.07
    
    
    
    5.90
    
    
    
    43
    
    
    
    14.07$2.00-$15.83
    
    
    3,838
    
    
    $
    9.97
    
    
    
    6.00
    
    
    
    3,014
    
    
    $
    9.64
  For Year Ended December 31,2007
    
    
    2006
    
    
    2005Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Grant
    
    
    Number
    
    
    Grant
    
    
    Number
    
    
    Grantof
    
    
    Date Fair
    
    
    of
    
    
    Date Fair
    
    
    of
    
    
    Date FairOptions
    
    
    Value
    
    
    Options
    
    
    Value
    
    
    Options
    
    
    ValueNonvested options
outstanding,
beginning of the
period
    
    
    802
    
    
    $
    4.76
    
    
    
    840
    
    
    $
    4.35
    
    
    
    748
    
    
    $
    5.58Granted
    
    
    331
    
    
    
    12.20
    
    
    
    481
    
    
    
    5.54
    
    
    
    870
    
    
    
    4.07Vested
    
    
    (303
    )
    
    
    (4.51
    )
    
    
    (499
    )
    
    
    (4.82
    )
    
    
    (763
    )
    
    
    (4.41
    )Forfeited
    
    
    (5
    )
    
    
    (7.38
    )
    
    
    (20
    )
    
    
    (4.62
    )
    
    
    (15
    )
    
    
    (4.24
    )Nonvested options
outstanding, end of
the period
    
    
    825
    
    
    $
    7.85
    
    
    
    802
    
    
    $
    4.76
    
    
    
    840
    
    
    $
    4.35
   F-27




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
    For the Years Ended December 31, 2007 and 2006Number
    
    
    
    
    
    
    Weightedof
    
    
    Weighted
    
    
    AverageRestricted
    
    
    Average
    
    
    Remaining
    
    
    AggregateStock
    
    
    Grant Date
    
    
    Contractual
    
    
    IntrinsicUnits
    
    
    Fair Value
    
    
    Term (Years)
    
    
    ValueRestricted
stock units outstanding, January 1, 2006
    
    
    
    
    
    $
    Granted
    
    
    146
    
    
    
    11.47Vested
    
    
    (22
    )
    
    
    11.78Forfeited
    
    
    (6
    )
    
    
    11.78Restricted stock units outstanding, December
31, 2006
    
    
    118
    
    
    $
    11.39
    
    
    
    1.69Granted
    
    
    151
    
    
    
    12.10Vested
    
    
    (65
    )
    
    
    12.71Forfeited
    
    
    (7
    )
    
    
    11.66Restricted stock units outstanding, December
31, 2007
    
    
    197
    
    
    $
    11.81
    
    
    
    1.58
    
    
    $
    2,976Vested and expected to vest, December 31, 2007
    
    
    189
    
    
    $
    11.82
    
    
    
    1.58
    
    
    $
    2,855
    F-28




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Stock-based compensation
  For the Year EndedDecember 31,2007
    
    
    2006Cost of net product sales
    
    $
    35
    
    
    $
    26Selling and marketing expenses
    
    
    18
    
    
    
    13General and administrative expenses
    
    
    1,440
    
    
    
    1,226Research and development expenses
    
    
    836
    
    
    
    664$
    2,329
    
    
    $
    1,929
 general and administrative expenses
    F-29




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 For the Year Ended December 31,2007
    
    
    2006
    
    
    2005General and administrative expenses
    
    $
    107
    
    
    $
    102
    
    
    $
    113Research and development expenses
    
    
    238
    
    
    
    122
    
    
    
    167$
    345
    
    
    $
    224
    
    
    $
    280
   Year
Ended December 31, 2005(In Thousands, Except Per Share Data)Net income, as reported
    
    
    $
    10,919Add: Stock-based
employee compensation
expense included in
reported net income
    
    
    
    280Deduct: Total
stock-based employee
compensation expense
determined under fair
value method for all
awards
    
    
    
    (3,452
    )Pro forma net income
    
    
    $
    7,747Net income per share:Basic  as reported
    
    
    $
    0.51Basic  pro forma
    
    
    $
    0.36Diluted  as reported
    
    
    $
    0.48Diluted  pro forma
    
    
    $
    0.34
  F-30




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 Year Ended December 31,2007
    
    2006
    
    2005Risk free interest rate
    
    
    4.79
    %
    
    
    4.95
    %
    
    
    3.90
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected life
    
    5 years
    
    5 years
    
    5 yearsVolatility
    
    
    44.57
    %
    
    
    46.24
    %
    
    
    45.28
    %Fair value of options granted
    
    
    12.20
    
    
    $
    5.54
    
    
    $
    4.04
   Stockholder Rights Plan
   F-31




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 NOTE 12 PROVISION FOR INCOME TAXES
 income before income taxes provision for income taxes
 Year Ended December 31,2007
    
    
    2006
    
    
    2005(In Thousands)Current:Foreign
    
    $
    5,962
    
    
    $
    6,254
    
    
    $
    6,515Deferred:State
    
    
    (38
    )
    
    
    (96
    )
    
    
    120Federal
    
    
    (4,671
    )
    
    
    2,134
    
    
    
    134Foreign
    
    
    (428
    )
    
    
    (1,171
    )
    
    
    (1,039
    )Tax effect of operating loss carryforwards:State
    
    
    (56
    )
    
    
    (56
    )
    
    
    (56
    )Foreign
    
    
    1,563
    
    
    
    (1,303
    )
    
    
    (260
    )Change in valuation allowance
    
    
    3,202
    
    
    
    (680
    )
    
    
    62Total provision for income taxes
    
    $
    5,534
    
    
    $
    5,082
    
    
    $
    5,476
  Year Ended December 31,2007
    
    
    2006
    
    
    2005(In Thousands)Statutory federal income taxes
    
    $
    2,794
    
    
    $
    2,059
    
    
    $
    6,230Foreign
income tax rate differential
    
    
    (2,933
    )
    
    
    2,405
    
    
    
    7Permanent differences from foreign subsidiary
    
    
    205
    
    
    
    346
    
    
    
    311Foreign dividend
    
    
    7,259
    
    
    
    
    
    
    
    State income taxes
    
    
    (93
    )
    
    
    (152
    )
    
    
    63Expiration/Reduction of loss carryforwards
    
    
    2,316
    
    
    
    2,119
    
    
    
    Impact of foreign tax rate changes
    
    
    128
    
    
    
    (33
    )
    
    
    Tax credits
    
    
    (7,252
    )
    
    
    (1,044
    )
    
    
    (1,124
    )Other
    
    
    (92
    )
    
    
    62
    
    
    
    (73
    )Change in valuation allowance
    
    
    3,202
    
    
    
    (680
    )
    
    
    62$
    5,534
    
    
    $
    5,082
    
    
    $
    5,476
  F-32




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  December 31,2007
    
    
    2006(In Thousands)Deferred tax assets:NOL carryforwards
    
    $
    16,361
    
    
    $
    20,010Disposition of subsidiary
    
    
    6,845
    
    
    
    6,909Foreign tax on deferred income
    
    
    2,556
    
    
    
    1,767Tax credit carryforwards
    
    
    7,305
    
    
    
    1,303Other, net
    
    
    1,975
    
    
    
    1,166Total deferred tax assets
    
    
    35,042
    
    
    
    31,155Foreign deferred tax liability
    
    
    (2,307
    )
    
    
    (2,074
    )Other deferred tax liabilities
    
    
    (215
    )
    
    
    (217
    )Valuation allowance
    
    
    (30,777
    )
    
    
    (27,575
    )Deferred tax asset (liability), net
    
    $
    1,743
    
    
    $
    1,289
    provision for income taxes
  F-33




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
    NOTE 13 SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)
  For the Three Months Ended3/31/07
    
    
    6/30/07
    
    
    9/30/07
    
    

12/31/07(a)(d)(In Thousands, Except Per Share Data)Total revenues
    
    $
    31,391
    
    
    $
    31,179
    
    
    $
    27,348
    
    
    $
    34,769Cost of net product sales
    
    
    15,897
    
    
    
    15,790
    
    
    
    14,451
    
    
    
    17,872Gross profit
    
    
    15,494
    
    
    
    15,389
    
    
    
    12,897
    
    
    
    16,897Operating expenses
    
    
    11,274
    
    
    
    13,440
    
    
    
    12,530
    
    
    
    16,031Loss on sale of license
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )Income from operations
    
    
    4,220
    
    
    
    1,949
    
    
    
    367
    
    
    
    755Other income (expenses)
    
    
    221
    
    
    
    278
    
    
    
    (57
    )
    
    
    486Provision for income taxes
    
    
    2,081
    
    
    
    1,517
    
    
    
    911
    
    
    
    1,025Net income (loss)
    
    $
    2,360
    
    
    $
    710
    
    
    $
    (601
    )
    
    $
    216Net income (loss) per common share:Basic
    
    $
    0.11
    
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.01Diluted
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.01Weighted average common shares
outstanding:Basic
    
    
    22,293
    
    
    
    22,318
    
    
    
    22,354
    
    
    
    22,391Diluted
    
    
    22,534
    
    
    
    22,892
    
    
    
    22,354
    
    
    
    23,322
 F-34




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
 For the Three Months Ended3/31/06(b)
    
    
    6/30/06(b)(c)
    
    
    9/30/06(b)
    
    
    12/31/06(b)(In Thousands, Except Per Share Data)Total revenues
    
    $
    28,278
    
    
    $
    28,983
    
    
    $
    25,156
    
    
    $
    27,054Cost of net product sales
    
    
    12,933
    
    
    
    12,471
    
    
    
    11,778
    
    
    
    12,668Gross profit
    
    
    15,345
    
    
    
    16,512
    
    
    
    13,378
    
    
    
    14,386Operating expenses
    
    
    11,991
    
    
    
    11,580
    
    
    
    19,085
    
    
    
    11,566Gain on sale of license
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Income (loss) from operations
    
    
    3,354
    
    
    
    4,932
    
    
    
    (5,707
    )
    
    
    2,858Other income
    
    
    193
    
    
    
    187
    
    
    
    208
    
    
    
    31Provision (benefit) for income taxes
    
    
    2,393
    
    
    
    2,484
    
    
    
    1,730
    
    
    
    (1,525
    )Net income (loss)
    
    $
    1,154
    
    
    $
    2,635
    
    
    $
    (7,229
    )
    
    $
    4,414Net income (loss) per common share:Basic
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    (0.33
    )
    
    $
    0.20Diluted
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    (0.33
    )
    
    $
    0.19Weighted average common shares
outstanding:Basic
    
    
    21,954
    
    
    
    22,170
    
    
    
    22,194
    
    
    
    22,242Diluted
    
    
    23,807
    
    
    
    22,876
    
    
    
    22,194
    
    
    
    22,735
 
 (a)
    
    Operating expensesfor the fourth quarter ended December 31, 2007 included impairment
charges of $1,225,000 related to the write-down of its U.S. generic simvastatin drug
license and certain other U.S. generic drug projects.(b)
    
    Operating expensesfor the quarter ended September 30, 2006 includes litigation
settlement charges of approximately $7,546,000. Provision for income taxesfor the quarter
ended December 31, 2006 includes a tax benefit of $2,746,000 from the finalization of the
related legal settlement. Operating expensesalso include related legal defense costs of
$604,000, $733,000, $1,386,000 and $645,000 in first, second, third and fourth quarters of
2006, respectively.(c)
    
    Total revenuesfor the quarter ended June 30, 2006 includes an increase in royalty
revenues of approximately $479,000. This change in estimate was due to the Companys
ability to reasonably estimate future product returns on sales of Testim based on actual
historical data.(d)
    
    Cost of net product sales and net income (loss) for the fourth quarter ended
December 31, 2007 includes $378,000 and $255,000 net of tax,
respectively, related to
intercompany profits included in inventory which were not properly
eliminated in prior quarters. The intercompany profit eliminations
were not considered to be material to the prior quarters. NOTE 14 BUSINESS SEGMENT INFORMATION
  F-35




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
     Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedNet product sales
    
    $
    112,329
    
    
    $
    670
    
    
    $
    
    
    
    $
    
    
    
    $
    112,999Licensing and collaboration
revenues
    
    
    561
    
    
    
    
    
    
    
    
    
    
    
    11,127
    
    
    
    11,688Total revenues
    
    
    112,890
    
    
    
    670
    
    
    
    
    
    
    
    11,127
    
    
    
    124,687Cost of net product sales
    
    
    62,809
    
    
    
    1,201
    
    
    
    
    
    
    
    
    
    
    
    64,010Gross profit
    
    
    50,081
    
    
    
    (531
    )
    
    
    
    
    
    
    11,127
    
    
    
    60,677Selling and marketing expense
    
    
    18,523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,523General and administrative expense
    
    
    9,613
    
    
    
    (55
    )
    
    
    
    
    
    
    7,515
    
    
    
    17,073Research and development expense
    
    
    1,801
    
    
    
    1,225
    
    
    
    3,926
    
    
    
    6,648
    
    
    
    13,600Depreciation and amortization
expense
    
    
    1,158
    
    
    
    149
    
    
    
    
    
    
    
    752
    
    
    
    2,059Separation costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,020
    
    
    
    2,020Loss on sale
of drug license
    
    
    (111
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )Income from operations
    
    
    18,875
    
    
    
    (1,850
    )
    
    
    (3,926
    )
    
    
    (5,808
    )
    
    
    7,291Interest income
    
    
    501
    
    
    
    
    
    
    
    
    
    
    
    591
    
    
    
    1,092Interest expense
    
    
    (588
    )
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (598
    )Other income (expense), net
    
    
    672
    
    
    
    (216
    )
    
    
    16,435
    
    
    
    (16,457
    )
    
    
    434Income before income taxes
    
    
    19,460
    
    
    
    (2,066
    )
    
    
    12,509
    
    
    
    (21,684
    )
    
    
    8,219Provision for income taxes
    
    
    5,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,534Net income (loss)
    
    
    13,926
    
    
    
    (2,066
    )
    
    
    12,509
    
    
    
    (21,684
    )
    
    
    2,685Expenditures for fixed assets
    
    
    9,686
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    9,989Expenditures for drug licenses
    
    
    2,473
    
    
    
    32
    
    
    
    
    
    
    
    157
    
    
    
    2,662
 F-36




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedReceivables, net
    
    $
    36,071
    
    
    $
    
    
    
    $
    
    
    
    $
    3,253
    
    
    $
    39,324Other current assets
    
    
    32,707
    
    
    
    274
    
    
    
    
    
    
    
    22,375
    
    
    
    55,356Fixed assets, net
    
    
    56,391
    
    
    
    
    
    
    
    
    
    
    
    2,800
    
    
    
    59,191Drug licenses and related costs, net
    
    
    13,206
    
    
    
    476
    
    
    
    
    
    
    
    2,942
    
    
    
    16,624Other non-current assets
    
    
    1,514
    
    
    
    
    
    
    
    
    
    
    
    1,087
    
    
    
    2,601Total assets
    
    
    139,889
    
    
    
    750
    
    
    
    
    
    
    
    32,457
    
    
    
    173,096Current liabilities
    
    
    28,282
    
    
    
    315
    
    
    
    
    
    
    
    4,486
    
    
    
    33,083Long term debt
    
    
    15,595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,595Non-current liabilities
    
    
    8,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,446Total liabilities
    
    
    52,323
    
    
    
    315
    
    
    
    
    
    
    
    4,486
    
    
    
    57,124
  Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedNet product sales
    
    $
    100,546
    
    
    $
    44
    
    
    $
    
    
    
    $
    
    
    
    $
    100,590Licensing and collaboration
revenues
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    8,366
    
    
    
    8,881Total revenues
    
    
    101,061
    
    
    
    44
    
    
    
    
    
    
    
    8,366
    
    
    
    109,471Cost of net product sales
    
    
    49,766
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    49,850Gross profit
    
    
    51,295
    
    
    
    (40
    )
    
    
    
    
    
    
    8,366
    
    
    
    59,621Selling and marketing expense
    
    
    16,153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,153General and administrative expense
    
    
    7,391
    
    
    
    
    
    
    
    71
    
    
    
    7,339
    
    
    
    14,801Research and development expense
    
    
    1,777
    
    
    
    
    
    
    
    4,341
    
    
    
    4,341
    
    
    
    10,459Depreciation and amortization
expense
    
    
    1,129
    
    
    
    87
    
    
    
    
    
    
    
    679
    
    
    
    1,895Litigation settlement
    
    
    8,543
    
    
    
    2,371
    
    
    
    
    
    
    
    
    
    
    
    10,914Gain on sale of license
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Income from operations
    
    
    16,340
    
    
    
    (2,498
    )
    
    
    (4,412
    )
    
    
    (3,993
    )
    
    
    5,437Interest income
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    681
    
    
    
    820Interest expense
    
    
    (158
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (158
    )Other income (expense), net
    
    
    (61
    )
    
    
    16
    
    
    
    
    
    
    
    2
    
    
    
    (43
    )Income before income taxes
    
    
    16,260
    
    
    
    (2,482
    )
    
    
    (4,412
    )
    
    
    (3,310
    )
    
    
    6,056Provision for income taxes
    
    
    5,082
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,082Net income (loss)
    
    
    11,178
    
    
    
    (2,482
    )
    
    
    (4,412
    )
    
    
    (3,310
    )
    
    
    974Expenditures for fixed assets
    
    
    14,487
    
    
    
    
    
    
    
    
    
    
    
    826
    
    
    
    15,313Expenditures for drug licenses
    
    
    1,856
    
    
    
    
    
    
    
    
    
    
    
    916
    
    
    
    2,772
 F-37




---



##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
  Specialty Generics
    
    Drug DeliveryEurope
    
    U.S.
    
    Europe
    
    U.S.
    
    ConsolidatedReceivables, net
    
    $
    30,558
    
    
    $
    39
    
    
    $
    
    
    
    $
    2,366
    
    
    $
    32,963Other current assets
    
    
    21,758
    
    
    
    1,338
    
    
    
    
    
    
    
    11,631
    
    
    
    34,727Fixed assets, net
    
    
    45,738
    
    
    
    
    
    
    
    
    
    
    
    2,818
    
    
    
    48,556Drug licenses and related costs, net
    
    
    10,697
    
    
    
    1,833
    
    
    
    
    
    
    
    3,496
    
    
    
    16,026Other non-current assets
    
    
    885
    
    
    
    
    
    
    
    
    
    
    
    1,199
    
    
    
    2,084Total assets
    
    
    109,636
    
    
    
    3,210
    
    
    
    
    
    
    
    21,510
    
    
    
    134,356Current liabilities
    
    
    24,651
    
    
    
    
    
    
    
    
    
    
    
    2,736
    
    
    
    27,387Non-current liabilities
    
    
    6,638
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,638Total liabilities
    
    
    31,289
    
    
    
    
    
    
    
    
    
    
    
    2,736
    
    
    
    34,025
  Specialty Generics
    
    
    Drug DeliveryEurope
    
    
    U.S.
    
    
    Europe
    
    
    U.S.
    
    
    ConsolidatedNet product sales
    
    $
    91,308
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    91,308Licensing and collaboration revenues
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    6,149
    
    
    
    6,422Total revenues
    
    
    91,581
    
    
    
    
    
    
    
    
    
    
    
    6,149
    
    
    
    97,730Cost of net product sales
    
    
    46,161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,161Gross profit
    
    
    45,420
    
    
    
    
    
    
    
    
    
    
    
    6,149
    
    
    
    51,569Selling and marketing expense
    
    
    16,347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,347General and administrative expense
    
    
    8,930
    
    
    
    
    
    
    
    17
    
    
    
    2,458
    
    
    
    11,405Research and development expense
    
    
    1,378
    
    
    
    
    
    
    
    2,044
    
    
    
    2,378
    
    
    
    5,800Depreciation and amortization expense
    
    
    1,068
    
    
    
    81
    
    
    
    
    
    
    
    609
    
    
    
    1,758Litigation settlement
    
    
    268
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    593Income from operations
    
    
    17,429
    
    
    
    (406
    )
    
    
    (2,061
    )
    
    
    704
    
    
    
    15,666Interest income
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    746
    
    
    
    928Interest expense
    
    
    (211
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211
    )Other income (expense), net
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    12Income before income taxes
    
    
    17,414
    
    
    
    (406
    )
    
    
    (2,061
    )
    
    
    1,448
    
    
    
    16,395Provision for income taxes
    
    
    5,476
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,476Net income (loss)
    
    
    11,938
    
    
    
    (406
    )
    
    
    (2,061
    )
    
    
    1,448
    
    
    
    10,919Expenditures for fixed assets
    
    
    10,821
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    11,018Expenditures for drug licenses
    
    
    945
    
    
    
    
    
    
    
    
    
    
    
    1,100
    
    
    
    2,045
  Specialty Generics
    
    
    Drug DeliveryEurope
    
    
    U.S.
    
    
    Europe
    
    
    U.S.
    
    
    ConsolidatedReceivables, net
    
    $
    23,469
    
    
    $
    
    
    
    $
    
    
    
    $
    3,447
    
    
    $
    26,916Other current assets
    
    
    26,443
    
    
    
    
    
    
    
    
    
    
    
    21,718
    
    
    
    48,161Fixed assets
    
    
    31,189
    
    
    
    
    
    
    
    
    
    
    
    2,177
    
    
    
    33,366Drug licenses and related costs
    
    
    8,931
    
    
    
    1,581
    
    
    
    
    
    
    
    3,346
    
    
    
    13,858Other non-current assets
    
    
    615
    
    
    
    
    
    
    
    
    
    
    
    1,304
    
    
    
    1,919Total assets
    
    
    90,647
    
    
    
    1,581
    
    
    
    
    
    
    
    31,992
    
    
    
    124,220Current liabilities
    
    
    25,639
    
    
    
    97
    
    
    
    
    
    
    
    2,944
    
    
    
    28,680Non-current liabilities
    
    
    3,944
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    3,951Total liabilities
    
    
    29,583
    
    
    
    97
    
    
    
    
    
    
    
    2,951
    
    
    
    32,631
    % of Total
    
    
    



    % of Total

    
    




    % of TotalRevenue source
    
    2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    

2005
    


    RevenuesOmeprazole
    
    $
    17,730
    
    
    
    14
    %
    
    $
    19,130
    
    
    
    18
    %

$
18,173
    


    18
    %Enalapril
    
    
    6,698
    
    
    
    5
    %
    
    
    6,650
    
    
    
    6
    %


5,859
    
    

    6
    %Simvastatin
    
    
    5,888
    
    
    
    5
    %
    
    
    7,471
    
    
    
    7
    %


 6,746
    
    

    7
    %Paroxetine
    
    
    4,945
    
    
    
    4
    %
    
    
    4,494
    
    
    
    4
    %


 4,455
    
    

    5
    %Lansoprazole
    
    
    4,875
    
    
    
    4
    %
    
    
    3,541
    
    
    
    3
    %


2,386
    
    

    2
    %All other products
    
    
    29,993
    
    
    
    24
    %
    
    
    24,449
    
    
    
    22
    %


21,875
    
    

    23
    %Sales to licensees and others
    
    
    42,870
    
    
    
    35
    %
    
    
    34,855
    
    
    
    32
    %


31,814
    
    

    32
    %Total net product sales
    
    
    112,999
    
    
    
    91
    %
    
    
    100,590
    
    
    
    92
    %


 91,308
    
    

    93
    %Licensing and collaborations
    
    
    11,688
    
    
    
    9
    %
    
    
    8,881
    
    
    
    8
    %


 6,422
    
    

    7
    %Total Revenues
    
    $
    124,687
    
    
    
    100
    %
    
    $
    109,471
    
    
    
    100
    %

    $
 97,730
    
    

    100
    %
 NOTE 15 COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
   F-38




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
     Year Ending December 31,
    
    Future Minimum Lease Payments2008
    
    $
    1,7542009
    
    
    8932010
    
    
    3442011
    
    
    562012
    
    
    23thereafter
    
    
    
    F-39




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##### Table of Contents



Bentley Pharmaceuticals, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
     F-40