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

                                    FORM 10-K

(Mark One)

 X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---      EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2003

         OR

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


                         Commission File Number 1-10581

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

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

Bentley Park, 2 Holland Way, Exeter, NH                           03833
(Address of principal executive offices)                        (Zip Code)

       Registrant's telephone number, including area code: (603) 658-6100

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

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

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

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

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

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

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

      Title of Class          Aggregate Market Value  As of Close of Business on
Common Stock, $.02 par value       $210,950,604            June 30, 2003


Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

      Title of Class           Shares Outstanding     As of Close of Business on
Common Stock, $.02 par value        20,598,875             March 2, 2004

                       DOCUMENTS INCORPORATED BY REFERENCE
  Proxy Statement for the 2004 Annual Meeting of Stockholders - Incorporated by
                   Reference into Part III of this Form 10-K

<PAGE>

                                     Part I

Item 1.  Business
         --------

Overview

We are a specialty pharmaceutical company focused on:

         o        research, development and licensing/commercialization of
                  advanced drug delivery technologies and pharmaceutical
                  products; and

         o        development, licensing and sales of generic and branded
                  pharmaceutical products and the manufacturing of
                  pharmaceuticals for others.

         In our research and development activities, we have patents and other
proprietary rights to technologies that facilitate the absorption of drugs. Our
pharmaceutical product sales activities are based in Spain, where we have a
significant commercial presence and we manufacture and market approximately 100
pharmaceutical products. These products represent various dosage strengths and
product formulations of more than 30 chemical entities in four primary
therapeutic areas: cardiovascular, gastrointestinal, neurological and infectious
diseases. We also manufacture pharmaceuticals for other drug companies.

         We develop products which incorporate our drug delivery technologies
and have licensed applications of our proprietary CPE-215(R) drug delivery
technology to Auxilium Pharmaceuticals, Inc., which launched Testim(TM), the
first product incorporating our drug delivery technology, in February 2003.
Testim is a gel indicated for testosterone replacement therapy which restores
serum testosterone levels in men and thereby improves symptoms of health
problems associated with low testosterone levels (hypogonadism), including loss
of muscle mass and a decrease in sexual desire, sexual motivation and frequency
of spontaneous erections. We are in discussions with other pharmaceutical and
biotechnology companies to form additional strategic alliances to facilitate the
development and commercialization of other products using our drug delivery
technologies, including product candidates that deliver insulin to diabetic
patients intranasally and treat nail fungus infections topically.

         Our generic and branded products are marketed to physicians,
pharmacists and hospitals by our three separate sales and marketing
organizations based in Spain: Laboratorios Belmac, Laboratorios Davur and
Laboratorios Rimafar. We continually add to our product portfolio in response to
increasing market demand for generic and branded therapeutic agents and divest
portfolio products that we consider to be redundant or that have become
non-strategic. Although most of our sales of these products are currently in the
Spanish market, we have recently focused on increasing our sales in other
European countries and other geographic regions through strategic alliances with
companies in these countries. We have a strategic alliance with Teva
Pharmaceutical Industries Ltd. granting us the right to register and market in
Spain more than 75 of Teva's pharmaceutical products through our sales force of
approximately 151 full-time personnel located in major cities throughout Spain.
In addition, our Spanish manufacturing facility produces pharmaceutical products
which are marketed by pharmaceutical companies both in Spain and in other
markets.


                                       1
<PAGE>

Industry Overview

Drug Delivery Industry

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

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

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

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

                                       2
<PAGE>

Pharmaceutical Industry in Europe and Spain

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

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

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

         With Spain's entry into the European Union in 1986, the Spanish
pharmaceutical market has been evolving steadily into a market that is
increasingly similar to those of other countries in Western Europe and the U.S.
With a population of approximately 40 million, Spain was ranked in 2000 as the
seventh largest pharmaceutical market in the world. Pharmaceutical sales in
Spain reached approximately $8.8 billion in 2003, according to IMS Health, and
have been growing at approximately 10% per year in the recent past.

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

         Although comprising less than five percent of the Spanish
pharmaceutical market (less than six percent of the units of pharmaceutical
products sold in Spain), generic pharmaceuticals are expected to significantly
increase their market penetration due to increases in drug usage driven by an
aging population and opportunities to launch new generic products as patents
expire for blockbuster drugs. Several initiatives are underway by the Spanish
government, including education, financial incentives to


                                       3
<PAGE>

prescribing physicians and public campaigns to stimulate the use of generic
pharmaceuticals in response to the rise in healthcare costs. Due to the
structure of the Spanish market for pharmaceutical products, producers generally
target physicians and pharmacies to market their products, emphasizing a
combination of quality and price.

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

Our Strategy

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

         o        advanced drug delivery and formulation technologies to improve
                  the delivery of new and existing pharmaceuticals; and

         o        development, licensing and sale of a broad range of generic
                  and branded pharmaceutical products in Spain, other parts of
                  Europe, and other international markets.

Our strategies to accomplish this objective include:

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

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

         Our CPE-215 technology enables the absorption of drugs across membranes
of the skin, mouth, nose, vagina and eye. Our CPE-215 technology can be
incorporated into a wide variety of pharmaceutical formats and products,
including those formulated as creams, ointments, gels, solutions, lotions,
sprays or patches. CPE-215 has a record of safety in humans as a food additive
and fragrance and received its first approval by the U.S. Food and Drug
Administration (FDA) in October 2002 as the delivery system in the Testim
testosterone replacement gel. We believe that this past experience with CPE-215
may result in reduced preclinical development time relating to its use in new
formulations of previously approved compounds. We market our CPE-215 technology
to pharmaceutical and biotechnology companies whose products we believe would
benefit from its permeation properties.

                                       4
<PAGE>

These benefits include:

         o        improving efficacy as compared to oral administration, which
                  subjects the drug to the effects of first-pass metabolism;

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

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

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

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

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

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

         We have also developed and filed a patent for improved oral dosage
forms of acetaminophen, and an improved method of manufacturing for drugs
requiring protection from stomach acid, such omeprazole and lansoprazole. In the
case of acetaminophen, we believe that we have developed dosages that result in:

         o        increased solubility in water for administration to patients
                  who have difficulty swallowing pills;

         o        faster relief of pain and inflammation; and

         o        better taste.

         With respect to omeprazole and lansoprazole, we believe that we have
created improved manufacturing processes, requiring less time, that efficiently
produces products with increased stability.

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

                                       5
<PAGE>

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

         We plan to increase our generic and branded product sales by expanding
the portfolio of products manufactured in Spain and by forming strategic
alliances to increase our sales outside Spain. We are expanding our product
portfolio through the acquisition or license of currently marketed and late
stage pharmaceutical products. We directly promote and sell these products in
Spain through our own sales force of approximately 151 full-time personnel
located in major cities throughout Spain and outside Spain through the
development of alliances with partners in other countries in Europe and
elsewhere.

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

         In July 2000, we entered into a strategic alliance with Teva, a world
leader in generic pharmaceutical products, pursuant to which we were granted a
royalty-free non-exclusive license to register and sell generic and/or branded
versions of more than 75 pharmaceutical products representing more than 25
different chemical entities. Under this license agreement, we will register
these products with Spain's Ministry of Health and, upon approval, sell these
products in Spain. We received marketing approval for certain of the Teva
products in 2003 and intend to begin marketing these products in 2004.

         We are expanding the sales of products outside Spain by developing
alliances with strategic partners in targeted markets that offer compatible
regulatory approval regimes and attractive margins. Most of these alliances
relate to specific products that our partners have expertise in marketing. We
have already developed alliances in Portugal, the United Kingdom, Germany,
France, Austria, the Netherlands, Morocco, Poland and Romania and are working on
adding additional alliances for targeted products in these and other countries.
In certain European countries which have a highly developed competitive market
for generics that is mostly based on price, we intend to sell either directly or
through our alliances to distributors. In countries which require a sales force
to market to physicians or consumers, we intend to continue to concentrate our
efforts through alliances with entities that have marketing forces already in
place. We are also evaluating and making modifications to our manufacturing
facility in Spain so that it will comply with U.S. regulatory requirements.
These modifications should enable us to perform additional clinical studies
under U.S. regulatory standards so that we may submit our products for marketing
approval by the FDA.

Our Proprietary Drug Technologies

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


                                       6
<PAGE>

CPE-215 Permeation Technology

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

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

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

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

         o        well tolerated - approved by the FDA for long-term topical use
                  in Testim.

         CPE-215 has a long history of safe use in humans as a food additive and
fragrance and our preclinical testing to date on CPE-215 for drug delivery has
further indicated its safety. In October 2002 it was approved as the delivery
technology for Testim testosterone replacement gel. We believe that this past
experience with CPE-215 may result in reduced preclinical development activities
required for new product formulations of previously approved pharmaceutical
compounds.

Solubility Enhancement Technology

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

                                       7
<PAGE>

Improved Oral Formulation Technologies

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

Hydrogel Technology

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

Licensed Product

Topical Testosterone Gel

         In February 2003, our licensee, Auxilium Pharmaceuticals, Inc. launched
Testim, a testosterone gel containing our CPE-215 drug delivery system, in the
United States. Testim is marketed by Auxilium under a license of our drug
delivery technology. Testim is a testosterone replacement therapy which restores
serum testosterone levels in men and thereby improves symptoms of health
problems associated with low testosterone levels, including loss of muscle mass
and a decrease in sexual desire, sexual motivation and frequency of spontaneous
erections.

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


                                       8
<PAGE>

testosterone replacement market has increased from $49 million in 1997 to over
$200 million in 2002 according to IMS Health, and is expected to reach $400
million in 2004 and continue to grow at an annual rate of 40%.

         Testim resulted from a May 2000 research agreement with Auxilium, an
emerging pharmaceutical company focused on urology and sexual health, pursuant
to which Auxilium agreed to develop and test various pharmaceutical compositions
of topical testosterone using our CPE-215 technology. We licensed to Auxilium
exclusive worldwide rights to develop, market and sell Testim, which became
effective in September 2000. After Auxilium conducted clinical trials, a New
Drug Application (NDA) was approved by the FDA on October 31, 2002. Testim was
launched in the United States by Auxilium in February 2003. In June 2003 Testim
was approved in the United Kingdom and in January 2004 Auxilium entered into an
agreement with Bayer Inc., a division of Bayer AG, to market Testim in Canada
upon approval of Testim by the Canadian authorities. Auxilium is currently in
discussions with a strategic partner to market the product in Europe and
elsewhere.

         In accordance with the terms of the license agreement with Auxilium, we
have received payments, based upon Auxilium's completion of certain milestones,
in the aggregate of $550,000 since 2000. Terms of the license agreement also
entitle us to royalties based on net sales of Testim. We recognized royalty
income totaling $1,018,000 in the year ended December 31, 2003, and have
deferred the recognition of royalty income totaling $634,000 as of December 31,
2003 subject to meeting all requirements of our revenue recognition policies.

Manufactured and Marketed Products

         In Spain, we manufacture approximately 100 pharmaceutical products,
representing various dosage strengths and product formulations of more than 30
chemical entities. We market these products primarily in Spain and have
developed alliances with other companies to market our products in other
countries, including Portugal, the United Kingdom, Germany, France, Austria, the
Netherlands, Morocco, Poland and Romania. In addition, we manufacture products
that are marketed by other companies both in Spain and elsewhere. Our product
lines consist of generic and branded products within four primary therapeutic
areas: cardiovascular, gastrointestinal, infectious and neurological diseases.
Our generic and branded products are marketed to physicians, pharmacists and
hospitals by our three Spanish sales and marketing organizations, Laboratorios
Belmac, Laboratorios Davur and Laboratorios Rimafar. We also market
over-the-counter products through Laboratorios Rimafar. There are approximately
130,000 physicians and 20,000 pharmacies in Spain. Spanish sales from two
product lines, whose active ingredients are omeprazole and simvastatin,
accounted for approximately 31% and 10% of our total revenues in 2003,
respectively.

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

                                       9
<PAGE>

Revenues

         Our revenues are generated through our five primary sales channels
(branded, generic, contract manufacturing, sales outside of Spain and licensing
and collaborations). See a summary of our revenues by sales channel and
top-selling product lines below:

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

<TABLE>
<CAPTION>
                                        Sales Within Spain
                                 ---------------------------------
                                                          Contract
                                Branded       Generic       Manu-       Other                    % of Total
       Product Line             Products      Products    facturing    Revenues       Total       Revenues
       ------------             --------      --------    ---------    --------      -------      --------
<S>                              <C>          <C>         <C>          <C>         <C>             <C>
Omeprazole                       $ 6,099      $13,863      $     -      $     -      $19,962           31%
Simvastatin                        2,176        4,412            -            -        6,588           10%
Enalapril                          2,610        1,878            -            -        4,488            7%
Codeisan                           2,713            -            -            -        2,713            4%
Pentoxifylline                         -        2,070            -            -        2,070            3%
All other products                 5,463        4,744            -            -       10,207           16%
Contract manufacturing                 -            -        9,536            -        9,536           15%
Sales outside of Spain                 -            -            -        7,391        7,391           11%
Licensing and collaborations           -            -            -        1,721        1,721            3%
                                 -------      -------      -------      -------      -------      --------
Total Revenues                   $19,061      $26,967      $ 9,536      $ 9,112      $64,676          100%
                                 =======      =======      =======      =======      =======      ========
% of 2003 Revenues                   29%          42%          15%          14%         100%
</TABLE>


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

<TABLE>
<CAPTION>
                                        Sales Within Spain
                                 ---------------------------------
                                                          Contract
                                Branded       Generic       Manu-       Other                   % of Total
       Product Line             Products      Products    facturing    Revenues       Total       Revenues
       ------------             --------      --------    ---------    --------      -------      --------
<S>                              <C>          <C>         <C>          <C>           <C>          <C>
Omeprazole                       $ 5,051      $ 9,813          $ -          $ -      $14,864           38%
Simvastatin                          322        1,261            -            -        1,583            4%
Enalapril                            955        1,515            -            -        2,470            6%
Codeisan                           1,944            -            -            -        1,944            5%
Pentoxifylline                         -        1,348            -            -        1,348            3%
All other products                 4,103        2,738            -            -        6,841           18%
Contract manufacturing                 -            -        7,406            -        7,406           19%
Sales outside of Spain                 -            -            -        2,262        2,262            6%
Licensing and collaborations           -            -            -          418          418            1%
                                 -------      -------      -------      -------      -------      --------
Total Revenues                   $12,375      $16,675      $ 7,406      $ 2,680      $39,136          100%
                                 =======      =======      =======      =======      =======      ========
% of 2002 Revenues                   32%          43%          19%           6%         100%
</TABLE>


                                       10
<PAGE>

Branded Pharmaceutical Products

         Our branded pharmaceutical product line consists of 43 pharmaceutical
products representing various product presentations, formulations and dosage
strengths of 32 chemical entities, which are represented by 18 trademarked brand
names. Sales of branded pharmaceuticals accounted for 29% of our revenues in
2003, compared to 32% in 2002 and 47% in 2001. We market our branded and, to a
lesser extent, certain of our generic and over-the-counter products through our
Laboratorios Belmac subsidiary, which has approximately 73 full-time sales
personnel located in major cities throughout Spain. A few branded products are
also marketed by the sales forces of Laboratorios Davur and Laboratorios
Rimafar. We supplement our sales and marketing efforts for branded products
through advertising in trade publications. Most of our branded products are
known in the industry as "branded generics" as they are being marketed by us
even though we are not the innovator of the product.

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

<TABLE>
<CAPTION>
Our Branded
Product Name                    Active Ingredient               Sold by Others as              Used to Treat
------------                    -----------------               -----------------              -------------
<S>                             <C>                             <C>                             <C>
Belmalip(R)                     simvastatin                     Zocor(R)(Merck)                 high cholesterol

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

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

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

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

Ibumac(R)                       ibuprofen                       Motrin(R)(McNeil)               rheumatoid arthritis

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

Pentoxifilina Belmac(R)         pentoxifylline                  Trental(R)(Aventis)             peripheral arterial disease

Senioral(R)                     oxymetazoline and               Denoral(R)(Aventis)             cold and sinus congestion
                                chlorpheniramine

Xetin(R)                        paroxetine                      Paxil(R)(GlaxoSmithKline)       depression
</TABLE>


Generic Pharmaceutical Products

         Our generic pharmaceutical product line consists of 50 pharmaceutical
products representing various product presentations, formulations and dosage
strengths of 12 chemical entities. We entered the generic pharmaceutical market
in Spain in September 2000. Laboratorios Davur, our sales and marketing
organization devoted primarily to generic products, markets generic
pharmaceutical products to


                                       11
<PAGE>

physicians and pharmacists through a sales force of approximately 61 full-time
sales personnel located in major cities throughout Spain. Laboratorios Rimafar,
our sales and marketing organization devoted primarily to generics and
over-the-counter products, all of which are generic, markets to pharmacists
through a sales force of approximately 17 full-time sales personnel throughout
Spain. Laboratorios Belmac also sells certain generic products. In 2003, generic
pharmaceuticals accounted for approximately 42% of our total revenues. We also
supplement our sales and marketing efforts for generic products through
advertising in trade publications.

         We believe we can grow by providing to our generic products sales force
a more extensive line of products to market to physician and pharmacy clients.
To strengthen our entry into the generic market, in July 2000, we entered into a
strategic alliance with Teva, one of the world's leaders in generic
pharmaceuticals. Under this alliance, we have licensed from Teva the right to
register and market in Spain generic and/or branded versions of more than 75 of
Teva's pharmaceutical products, representing more than 25 different chemical
entities. Pursuant to the arrangement, Teva will supply the pharmaceutical
products to us and we will register and, upon regulatory approval, market the
products in Spain. We received marketing approval for certain of the Teva
products in 2003 and intend to begin marketing these products in 2004.

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

<TABLE>
<CAPTION>
Our Generic
Product Name                    Active Ingredient             Sold by Others as                Used to Treat
------------                    -----------------             -----------------                -------------
<S>                             <C>                           <C>                               <C>
Amoxicilina Davur(R)            amoxicillin trihydrate        Amoxil(R)(GlaxoSmithKline)        infections

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

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

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

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

Paroxetene Davur(R)             paroxetine                    Paxil(R)(GlaxoSmithKline)         depression

Pentoxifilina Davur(R)          pentoxifylline                Trental(R)(Aventis)               peripheral arterial disease

Simvastatina Davur(R)           simvastatin                   Zocor(R)(Merck)                   high cholesterol
Simvastatina Rimafar(R)

Trimetazedine Davur(R)          trimetazedine                 Idaptan(R)(Servier)               coronary therapy
</TABLE>


Strategic Alliance with Teva

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


                                       12
<PAGE>

sell in Spain generic and/or branded versions of more than 75 pharmaceutical
products representing more than 25 different chemical entities. We are obligated
under this license agreement to submit a registration file for each product to
the regulatory authorities in Spain in order to receive marketing authorizations
in our name for that product. The marketing authorizations provide us with the
requisite approvals, licenses and permits from the regulatory authorities to
import, distribute, market and sell the products in Spain. We received marketing
approval for certain of the Teva products in 2003 and intend to begin marketing
these products in 2004.

         In connection with this strategic alliance, Teva also entered into a
supply agreement with us pursuant to which it would manufacture the products and
supply them to us for marketing and sale in Spain. Our obligation to purchase
the products from Teva is non-exclusive, allowing us to purchase any of the
products from sources other than Teva if we can demonstrate that Teva's price
for a product exceeds the current price from another qualified source and if
Teva has not exercised its right to match the lower price. The license agreement
and the supply agreement have five year terms and both are renewed automatically
for one-year terms for each product.

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

Contract Manufacturing and Sales Outside of Spain

         In addition to manufacturing our own products, our Spanish
manufacturing facility supplies branded and generic products to 14 entities in
Spain and more than 15 entities in other European countries which market these
products under their own name and with their own labeling. Typically we enter
into a supply agreement with these entities for one or more products and license
to the entity the registration dossiers we have prepared in order to assist them
in obtaining regulatory approval of our product in the country of sale. All of
the products we manufacture for others use the same active ingredients that are
used in our own marketed products.

         We believe contract manufacturing provides a stable, recurring source
of cash flow, a means of absorbing overhead costs, and experience in
manufacturing a broad line of formulations that is advantageous to us in
pursuing and integrating acquired products. Although the volume of our contract
manufacturing continues to increase, contract manufacturing as a percentage of
consolidated revenues decreased from approximately 50% in 1994 to approximately
15% in 2003. We attribute this change in product mix to the growth in sales of
our own branded and generic pharmaceutical products over this period. We expect
that contract manufacturing activities as a percentage of our overall revenues
will continue to decrease in the future.

         We market our contract manufacturing services through contacts made by
members of our senior management staff in Spain. Our contract manufacturing
customers include entities such as Antibioticos Farma S.A., Laboratorios Edigen
S.A. and Shire Iberica S.A. We compete for these sales on the basis of the price
we can offer for our high quality products as a result of the efficiencies of
our manufacturing facility.

                                       13
<PAGE>

Manufacturing Facility

         Our 80,000 square-foot manufacturing facility is located in Zaragoza,
Spain. Our manufacturing facility complies with European Good Manufacturing
Practices (GMP) and is capable of producing tablets, capsules, ointments,
lotions, liquids and sachets, as well as microgranulated products. The facility
also includes analytical chemistry, quality control, quality assurance and
formulation research laboratories. We are also evaluating and making
modifications to our manufacturing facility in Spain so that it will comply with
U.S. regulatory requirements. These modifications should enable us to perform
additional clinical studies under U.S. regulatory standards so that we may
submit our products for marketing approval by the FDA.

         We have fully integrated manufacturing support systems including
quality assurance, quality control, regulatory compliance and inventory control.
These support systems enable us to maintain high standards of quality for our
products and deliver reliable products and services to our customers on a timely
basis. We require a supply of quality raw materials and packaging materials to
manufacture and package drug products. Historically we have not had difficulty
obtaining raw materials and packaging materials from suppliers. Currently, we
rely on approximately 43 suppliers to deliver our required raw materials and
packaging materials, most of which is supplied by 20 of these entities. We have
no reason to believe that we will be unable to procure adequate supplies of raw
materials and packaging materials on a timely basis. Union Quimico Farmaceutica,
S.A. is our sole supplier of omeprazole and Indukern, S.A. is our sole supplier
of simvastatin. Spanish sales from two product lines, whose active ingredients
are omeprazole and simvastatin, accounted for approximately 31% and 10% of our
revenues in 2003, respectively. We believe that alternative sources of
omeprazole and simvastatin are available and we will obtain required
governmental approval to source from them, if necessary.

Products in Development

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

<TABLE>
<CAPTION>
Product Candidate                  Technology                       Used to Treat                        Status
-----------------                  ----------                       -------------                        ------
<S>                                <C>                              <C>                                  <C>
Generic products                   Various                          Various                              Bioequivalence
                                                                                                         and/or submitted for
                                                                                                         approval in Spain

Intranasal insulin                 CPE-215                          Diabetes                             Phase I

Antifungal nail lacquer            CPE-215                          Onychomycosis                        Phase I/II completed

Improved acetaminophen             Solubility enhancement           Pain; fever                          Submitted for
                                                                                                         approval in Spain

Topical hormonal therapy           CPE-215                          Osteoporosis;                        Preclinical
                                                                    Erectile dysfunction

Intranasal pain management         CPE-215                          Pain                                 Preclinical
</TABLE>


                                       14
<PAGE>

Generic Products


         We are continually evaluating which pharmaceutical products are good
candidates for us to develop, test and market in Spain and elsewhere. We select
products based on factors including the timing of expiration of the patent on
the innovator's product, the ability of our manufacturing facility to
efficiently produce the product, the availability and cost of the raw materials
to produce the product as well as the potential market size and pricing that can
be obtained for the product. Once we select a product, our scientists develop a
generic formulation of the product which then must be tested to determine if it
is bio-equivalent to the innovator's product. Products are then submitted for
marketing approval by the relevant regulatory authorities, generally starting
with Spain's Ministry of Health.

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

Intranasal Insulin

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

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

         Based on the results of this Phase I study, we are proceeding with the
design of a Phase II protocol for evaluation in diabetic patients. Work will
continue on formulation development and to select an appropriate administration
device for variable dosing.

         Diabetes is a metabolic disorder affecting approximately 100 million
people worldwide that is projected to affect more than 300 million people
worldwide in the next 25 years. The market for insulin treatment of diabetes in
the United States is estimated at $1.25 billion annually, and Frost & Sullivan
estimates that the worldwide market is approximately $3 billion. Diabetic
patients who must endure

                                       15
<PAGE>

frequent injections prefer less invasive methods of administering their
medications. Alternative and more desirable methods of delivery would not only
improve quality of life but also would contribute to patient compliance with
prescribed therapy.

Antifungal Nail Lacquer

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

         According to the National Onychomycosis Society, nail fungus affects
almost 30 million people, primarily between the ages of 40 and 65. Patients
electing to take oral therapy must undergo blood monitoring during the course of
treatment to monitor for liver damage. The cost of oral therapy is in excess of
$500 for a twelve-week treatment regimen, not including physician costs or other
periodic monitoring costs.

Improved Acetaminophen

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

Topical Hormonal Therapy

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

                                       16
<PAGE>

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

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

Intranasal Pain Management

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

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

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

Research Agreement with Pfizer

         In October 2001, we entered into a research collaboration with Pfizer
in which we were granted a non-exclusive worldwide royalty-free license to use
Pfizer's compounds and technology to assess the performance of our CPE-215
technology with Pfizer's compounds. As part of the agreement, we granted to
Pfizer the non-exclusive right to test the ability of our CPE-215 technology to
enable delivery of

                                       17
<PAGE>


certain compounds proprietary to Pfizer. Pfizer provided the funding necessary
to conduct these studies using our CPE-215 technology and agreed to provide
additional funding for costs of further studies that are approved by a joint
working committee consisting of designees of Pfizer and Bentley. Pfizer has
agreed to inform us if, following completion of the research, it is interested
in further development of the formulations. However, progress on this
collaboration has been slow following Pfizer's merger with Pharmacia and the
current agreement expires in April 2004. Pfizer would have to enter into a
separate license agreement with us with respect to the manufacture, use, sale,
offer for sale and import of the products using our CPE-215 technology before it
could begin to distribute, market and sell these products.

Research and Development Resources and Expenditures

         Our research and product development efforts take place in the United
States and in Spain and are focused on developing new product applications of
our drug delivery and drug formulation technologies. We currently have 16
scientists and technicians working on research and product development. For the
years ended December 31, 2003, 2002 and 2001, our research and product
development expenditures were $4,295,000, $2,960,000 and $2,084,000,
respectively.

Intellectual Property

         We actively seek to protect our products and proprietary information by
means of U.S. and foreign patents, trademarks and contractual arrangements. Our
success will depend in part on our ability to obtain and enforce patents on our
products, processes and technologies to preserve our trade secrets and other
proprietary information and to avoid infringing on the patents or proprietary
rights of others. Our CPE-215 technology is covered by our U.S. patent and 11
foreign patents, including those in Japan, Korea and most major European
countries. These patents for our CPE-215 technology expire in the U.S. in 2008
and in foreign countries between 2006 and 2014. In 2003, we acquired a U.S.
patent regarding our antifungal nail lacquer product which is pending in Europe
and other foreign countries. This U.S. patent expires in 2020. We also have four
international patents pending covering various applications of our CPE-215
technology, including testosterone and insulin compositions. We also have two
issued U.S. patents relating to our hydrogel technology that expire in 2005 and
2007.

         We were granted a patent in the United States for our improved oral
formulation of acetaminophen, which continues to be pending in Europe and
elsewhere. In 2003, we re-filed an international patent for improved oral
formulations of omeprazole and lansoprazole, updating the initial applications
which were filed in 2000 and 2001. This patent is also pending.

         At the end of 2003 we terminated our license from Dartmouth College of
the exclusive rights to a patent covering the novel use of androgen therapy for
treating fibromyalgia and chronic fatigue syndrome due to the cost of future
clinical trials for these indications and a re-evaluation of our clinical
priorities.

         We own approximately 108 trademarks for pharmaceutical products in
Spain. In addition, we also rely on unpatented proprietary technologies in the
development and commercialization of our products. We also depend upon the
unpatentable skills, knowledge and experience of our scientific and technical
personnel, as well as those of our advisors, consultants and other contractors.
To help protect our


                                       18
<PAGE>

proprietary know-how that is not patentable, and for inventions for which
patents may be difficult to enforce, we rely on trade secret protection and
confidentiality agreements to protect our interests. To this end, we require
employees, consultants and advisors to enter into agreements that prohibit the
disclosure of confidential information and, where applicable, require disclosure
and assignment to us of the ideas, developments, discoveries and inventions that
arise from their activities for us. Additionally, these confidentiality
agreements require that our employees, consultants and advisors do not bring to
us, or use without proper authorization, any third party's proprietary
technology.

Competition

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

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

Customers

         In Spain, our sales representatives from Laboratorios Belmac,
Laboratorios Davur and Laboratorios Rimafar actively promote our products to
physicians and retail pharmacists. We sell our products directly to
pharmaceutical distributors and indirectly to customers who purchase our
products from distributors. Outside Spain, we currently sell our products to our
strategic partners who then distribute our products directly or through
distributors in their respective territories. We expect to begin to market
certain products directly to distributors in selected markets. Our contract
manufacturing customers are regional and multinational pharmaceutical companies.
The wholesale distributor network for pharmaceutical products in Europe and more
specifically in Spain in recent years has been subject to increasing
consolidation, which has increased and we expect will continue to increase our,
and other industry participants', customer concentration.

         In 2003, 2002 and 2001, only one of our customers, Cofares, accounted
for more than ten percent of our consolidated total revenues. Sales to this
customer in each of the three years ended December 31, 2003, 2002 and 2001
accounted for approximately 14%, 14% and 15%, respectively, of our total
revenues.

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

                                       19
<PAGE>

Employees

         We employ approximately 309 people, 18 of whom are employed in the U.S.
and 291 of whom are employed in Spain, as of March 1, 2003. Approximately 93 of
these employees principally are engaged in manufacturing activities, 151 in
sales and marketing, 16 in product development and 49 in management and
administration. In general, we consider our relations with our employees to be
good.

Regulation

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

United States

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

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

         o        Phase I - involves the initial introduction of the
                  pharmaceutical into healthy human volunteers; the emphasis is
                  on testing for safety (adverse effects), dosage tolerance,
                  metabolism, excretion and clinical pharmacology.

         o        Phase II - involves studies in a limited patient population to
                  determine the efficacy of the pharmaceutical for specific
                  targeted indications, to determine dosage tolerance and
                  optimal dosage and to identify possible adverse side effects
                  and safety risks.

         o        Phase III - involves trials undertaken to evaluate clinical
                  efficacy once a compound is found to be effective and to have
                  an acceptable safety profile in Phase II evaluations, and to
                  further test for safety within an expanded patient population
                  at multiple clinical study sites.

         The FDA reviews both the clinical plans and the trial results and may
discontinue the trials at any time if there are significant safety issues. The
results of preclinical and clinical trials are submitted to the FDA in the form
of a New Drug Application for marketing approval. The approval process is
affected by a number of factors, including the severity of the disease, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. Additional animal studies or clinical trials may be


                                       20
<PAGE>

requested during the FDA review process and may delay marketing approval. After
FDA approval for the initial indications, further clinical trials would be
necessary to gain approval for the use of the product for any additional
indications. The FDA may also require post-marketing testing to monitor for
adverse effects, which can involve significant expense. Our products under
development and future products to be developed must go through the approval
process delineated above prior to gaining approval by the FDA for
commercialization.

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

         In addition to obtaining FDA approval for each product, each
manufacturer of drugs must be registered with the FDA. Domestic manufacturing
establishments are subject to biennial inspections by the FDA and must comply
with current Good Manufacturing Practices for drugs. To supply products for use
in the U.S., foreign manufacturing establishments must comply with GMPs and are
subject to periodic inspection by the FDA or by regulatory authorities in such
countries under reciprocal agreements with the FDA.

Spain and Europe

         As a pharmaceutical manufacturer in Spain, which is a member of the
European Union, we are subject to the regulations enacted by the European Union.
Prior to Spain's entry into the European Union in 1986, the pharmaceutical
regulations in Spain were less stringent. Since that time, we, along with all
Spanish pharmaceutical companies, must obtain manufacturing, marketing and
pricing authorizations to commercialize pharmaceutical products in Spain.

         Pharmaceutical manufacturers in Europe must obtain marketing approval
from the regulatory authority in each country it intends to market a product. In
Spain, that authority is the Spanish Ministry of Health. The development process
in Europe is similar to that in the United States described above, with the same
three clinical phases for branded drugs and bioequivalent studies for generic
drugs to assure their safety and efficacy. A dossier must be prepared for each
pharmaceutical product and, upon approval of the product, it may be marketed in
that country. In Spain, generic products are generally approved approximately
one year after submission, while branded products take considerably longer.
Spain and certain other European countries also regulate the price that can be
charged to the patient for each product as well as set the amount that the
public insurance programs will reimburse for each product, directly affecting a
product's profitability. In late October 2003, the Spanish government enacted a
regulation that reduced the prices that the government reimburses for certain
prescription pharmaceutical products. These new prices became effective on
December 26, 2003, but were voluntarily implemented by some companies, including
our Spanish subsidiaries, on December 1, 2003. (See Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations.)

                                       21
<PAGE>

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

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

Trends in Healthcare Regulation

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

         Continuing reviews of the utilization, safety and efficacy of
healthcare products and their components are being conducted by industry,
government agencies and others. These studies, which employ increasingly
sophisticated methods and techniques, can call into question the utilization,
safety and efficacy of previously marketed products and in some cases have
resulted, and may in the future result, in the discontinuance of such products
and give rise to claims for damages from persons who believe they have been
injured as a result of their use. We maintain product liability insurance for
such potential claims; however, no such claims have ever been asserted against
us. In Western Europe, efforts are under way by the European Union to harmonize
technical standards for many products, including drugs, to make more uniform the
requirements for marketing approval from the various regulatory agencies.

         Many countries, directly or indirectly through reimbursement
limitations, control the selling prices and reimbursement prices of certain
healthcare products. In addition, prices for prescription pharmaceutical
products in Spain must be approved by Spain's Ministry of Health. In order to
help

                                       22
<PAGE>

control rising healthcare costs, the Ministry of Health, in recent years, has
encouraged the substitution of generic-equivalent products. In further efforts
to reduce healthcare costs, the Ministry of Health had been contemplating new
laws and regulations that would significantly reduce the market prices of
certain pharmaceutical products, including generic-equivalent drugs. In late
October 2003, the Spanish government enacted a regulation that reduced the
prices that the government reimburses for certain prescription pharmaceutical
products. These new prices became effective on December 26, 2003, but were
voluntarily implemented by some companies, including our Spanish subsidiaries,
on December 1, 2003. As a result, certain of our selling prices for these
products have been reduced. (See Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations.) The regulation affected six
of our chemical entities sold in Spain which currently account for approximately
65% to 70% of our revenues, including the chemical entities omeprazole,
simvastatin and enalapril. However, we had been anticipating potential
government regulations that could lead to lower selling prices and have
developed, and continue to implement, a broad-based growth strategy that should
mitigate the impact of the new prices. We cannot assure you that the government
in Spain or in other countries will not implement additional price reductions in
the future.

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

Other Regulations

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

Internet Information and SEC Documents

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

RISK FACTORS

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

                                       23
<PAGE>

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

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

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

         The growth of our generic and branded operations may be adversely
impacted by claims by others that our products infringe on the proprietary
rights of their existing "brand-name" products.

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

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


                                       24
<PAGE>

periods before commercialization of any of these products are long and
uncertain. Risks during development include the possibility that:

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

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

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

         o        other pharmaceutical companies may market equivalent or
                  superior products.


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

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

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

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

                                       25
<PAGE>

A significant portion of our revenues are generated by the sale of products that
are formulated from two active ingredients.

         Spanish sales from two product lines whose active ingredients are
omeprazole and simvastatin accounted for approximately 31% and 10% of our total
revenues in 2003, respectively. The active pharmaceutical ingredient for our
omeprazole products are currently purchased from one supplier. In addition, we
only have one supplier for the active pharmaceutical ingredient for our
simvastatin products. If we lose and cannot effectively replace either of these
suppliers or are otherwise unable to continue the sales of products that contain
these active ingredients, our revenues would decline significantly.

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

         Our revenues and profitability may be adversely affected by the
continuing efforts of governmental and third party payors to contain or reduce
the costs of healthcare. A substantial portion of our operations consists of
marketing and manufacturing, primarily in Spain, generic and branded
pharmaceutical products. The use of generic drugs is regulated in Spain, the
U.S. and many other countries, subject to many changing and competing public
policy considerations. In addition, in certain markets, such as Spain, pricing
or profitability of prescription pharmaceuticals is subject to government
control through reimbursement limitations. In addition, prices for prescription
pharmaceutical products in Spain must be approved by Spain's Ministry of
Health. In order to help control rising healthcare costs, the Ministry of
Health, in recent years, has encouraged the substitution of generic-equivalent
products. In further efforts to reduce healthcare costs, the Ministry of Health
had been contemplating new laws and regulations that would significantly reduce
the market prices of certain pharmaceutical products, including
generic-equivalent drugs. In late October 2003, the Spanish government enacted a
regulation that reduced the prices that the government reimburses for certain
prescription pharmaceutical products. These new prices became effective on
December 26, 2003; however, we voluntarily implemented the lower prices
beginning December 1, 2003. (See Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations.) The regulation affected six
of our chemical entities sold in Spain, which currently account for
approximately 65% to 70% of our revenues, including the chemical entities
omeprazole, simvastatin and enalapril.

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

                                       26
<PAGE>

adversely affect the business, financial condition and profitability of
companies that are prospective strategic partners.

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

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

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

         o        slow or insufficient patient enrollment;

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

         o        longer treatment time required to demonstrate efficacy;

         o        lack of sufficient supplies of the product candidate;

         o        adverse medical reactions or side effects in treated patients;

         o        lack of effectiveness of the product candidate being tested;

         o        regulatory requests for additional clinical trials; and

         o        instability of the pharmaceutical formulations.

                                       27
<PAGE>

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

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

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

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

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

                                       28
<PAGE>

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

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

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

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

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

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

All of our products are manufactured in one facility.

         All of our manufactured products are produced in one factory in
Zaragoza, Spain. Although we have constructed the factory with redundant lines
for our most significant products that are in separate areas of the factory, and
installed a fire suppression system, the destruction of the factory by a fire or

                                       29
<PAGE>

other catastrophe would have a material impact on our revenues until we are able
to rebuild the factory or secure an alternative manufacturing site.

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

         During the year ended December 31, 2003, 86% of our revenues were
derived from sales made by our Spanish subsidiaries in Spain and 11% of our
revenues were derived from sales made by our Spanish subsidiaries to customers
in other foreign countries. We believe that a significant portion of our
revenues will continue to be derived from sales in foreign countries. Conducting
business internationally subjects us to a number of risks and uncertainties,
including:

         o        unexpected delays or changes in regulatory requirements;

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

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

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

         o        political and economic instability;

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

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

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

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

         o        adverse tax consequences or overlapping tax structures.


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

         Our revenues may be impacted by fluctuations in local currencies due to
the fact that 97% of our revenues currently are generated by our Spanish
subsidiaries, Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar.
Our Spanish subsidiaries reported an increase in net sales of 36% in local
currency for the year ended December 31, 2003 compared to the prior year;
however, an increase in the value of the Euro, in relation to the U.S. Dollar,
had the effect of increasing revenues by approximately $10,449,000 during the
year ended December 31, 2003. We do not currently engage in foreign exchange


                                       30
<PAGE>

hedging transactions to manage our foreign currency exposure because much of our
expenditures are in the same currency as our revenues. Our foreign operations
expose us to a number of currency related risks, including the following:

         o        fluctuations in currency exchange rates;

         o        limitations on the conversion of foreign currency;

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

         o        limitations on the remittance of dividends by foreign
                  subsidiaries.


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

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

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

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

                                       31
<PAGE>

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

         Our revenues increased 65% and our research and development
expenditures increased 45% from the year ended December 31, 2002 to the year
ended December 31, 2003, challenging our management, administrative, financial,
marketing, operational and research and development resources. In addition, we
routinely consider acquisition and investment opportunities, although we have no
current agreements or commitments with respect to any acquisitions or
investments. Any future acquisitions or investments would further challenge our
resources. If we do not properly meet the increasing expenses and demands on our
resources from future growth, we will be adversely affected. To properly manage
our growth, we must, among other things, implement additional and improve
existing administrative, financial, marketing, operational and research and
development systems, procedures and controls on a timely basis. We may also need
to expand our staff in these and other areas. We may not be able to complete the
improvements to our systems, procedures and controls necessary to support our
future operations in a timely manner. We may not be able to hire, train,
integrate, retain, motivate and manage required personnel, successfully
integrate acquisitions or investments, nor successfully identify, manage and
pursue existing and potential market opportunities. If we fail to generate
additional revenue in excess of increased operating expenses in any fiscal
period, we may incur losses.

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

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

         In addition to development and other costs, we expect to incur capital
expenditures from time to time. These capital expenditures will be influenced by
our regulatory compliance efforts, our success, if any, at developing
collaborative arrangements with strategic partners, our needs for additional
facilities and capital equipment and the growth, if any, of our business in
general. We cannot assure you that we will receive additional funding on
favorable terms if at all, or that we will be successful in attracting strategic
partners. If we cannot raise funds or engage strategic partners on acceptable
terms when needed, we may not be able to continue our research and development
activities, develop or enhance our products and services, take advantage of
future opportunities, grow our business or respond to competitive pressures or
unanticipated requirements.

                                       32
<PAGE>

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

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

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

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

         Our inability to obtain sufficient product liability insurance at an
acceptable cost to protect against potential product liability claims could
inhibit or prevent the commercialization of pharmaceutical products we develop
alone or with corporate collaborators. We maintain product liability insurance
in the amount of $3 million Euros (approximately $3.8 million U.S. Dollars) and
clinical trial insurance in connection with our clinical testing activities in
various amounts on a study-by-study basis. While management believes that this
insurance is reasonable, we cannot assure you that any of this coverage will be
adequate to protect us in the event of a claim. We, or any corporate
collaborators, may not be able to obtain or maintain insurance at a reasonable
cost, if at all. Even if our agreements with any future corporate collaborators
entitle us to indemnification against losses, such indemnification may not be
available or adequate if any claim arises.


                                       33
<PAGE>

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

         As of December 31, 2003, we had the following capital structure:

<TABLE>
<CAPTION>
                                                                       No. of Shares
                                                                       -------------
<S>                                                                      <C>
Common stock outstanding                                                 20,573,000

Common stock issuable upon:
   Exercise of stock purchase warrants                                      420,000
   Exercise of options which are outstanding                              3,920,000
   Exercise of options which have not been granted                        1,578,000
                                                                         ----------
Total common stock outstanding assuming exercise of all of the above     26,491,000
                                                                         ==========
</TABLE>

         As of December 31, 2003, we had outstanding options and warrants to
purchase approximately 4,340,000 shares of common stock at exercise prices
ranging from $1.50 to $20.00 (exercisable at a weighted average of $6.33 per
share), of which approximately 3,259,000 options and warrants were then vested
and exercisable. Since December 31, 2003 we have granted options to purchase
approximately 403,000 shares of common stock, exercisable at a weighted average
exercise price of $13.27 per share. In addition, we may conduct future offerings
of our common stock or other securities with rights to convert the securities
into shares of our common stock. Exercise of our outstanding options and
warrants into shares of our common stock may significantly and negatively affect
the market price for our common stock as well as decrease your percentage
ownership and voting power.

Our stock is volatile.

         The market prices for our securities and for securities of emerging
growth companies have historically been highly volatile. During the last two
years, the price of our common stock has ranged from a high of $18.80 to a low
of $6.40. Future announcements concerning us or our competitors may have a
significant impact on the market price of our common stock. Factors which may
affect our market price include:

         o        progress of our relationships with strategic partners;

         o        results of clinical studies and regulatory reviews;

         o        technological innovations by us or our competitors;

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

         o        effect of regulatory authorities on pricing of products;

         o        competitive products;

         o        financings;

                                       34
<PAGE>

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

         o        our results of operations and financial condition;

         o        proprietary rights;

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

         o        general economic conditions.

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

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

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

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

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

         Our certificate of incorporation and bylaws include provisions that
also may have the effect of discouraging, delaying or preventing a change in
control or an unsolicited acquisition proposal that a stockholder might consider
favorable. Our board of directors is divided into three classes with staggered
three-year terms, which makes it more difficult for an acquiror to change the
overall composition of the board in a short period of time. The positive vote of
at least two-thirds is required to approve a merger, a


                                       35
<PAGE>

sale or lease of all or most of our assets, certain other business combinations
or dissolution or liquidation, and an affirmative vote of two-thirds is required
to amend any provision in our certificate of incorporation relating to our
directors and officers or to amend any provision in our certificate of
incorporation. Additionally, our certificate of incorporation authorizes our
board of directors to issue preferred stock in one or more series with the
rights, obligations and preferences of each series to be determined by our board
without stockholder approval. Our staggered board, the super-majority voting
provisions and the potential issuance of preferred stock may have the effect of
delaying, preventing or discouraging third parties or stockholders from
attempting to replace our management.

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

Item 2.  Properties
         ----------

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

         We own an 80,000 square foot facility in Zaragoza, Spain, which
accommodates our manufacturing plant, warehouse, research and development
laboratory and office space. The facility is located in an industrial park and
is situated on sufficient acreage to accommodate future expansion.

                                       36
<PAGE>

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

         We believe that each of our facilities has sufficient space for our
current needs and our contemplated expansion in the near future. Our
manufacturing facility is currently operating at approximately 67% of its
capacity, if it were operating for three shifts per day, five days per week.

Item 3.  Legal Proceedings
         -----------------

         On February 4, 2002, we were notified that a legal proceeding had been
commenced against us by Merck & Co. Inc. and its Spanish subsidiary, Merck Sharp
& Dohme de Espana, S.A., alleging that we violate their patents in our
production of the product simvastatin and requesting an injunction ordering us
not to manufacture or market the product. The case was brought against our
Spanish subsidiaries in the 39th First Instance Court of the City of Madrid.
After a hearing on February 18, 2002, the court refused to grant the requested
injunction and dismissed the case on February 25, 2002, awarding us court costs
and legal fees. Merck has appealed the award of fees. Merck re-instituted its
claim against us in another proceeding brought in the 19th First Instance Court
of the City of Madrid, which we received notice of on January 23, 2003. This
case also alleges violation of Merck's patents in the production of the product
simvastatin, requests an order that we cease manufacturing the product and
demands damages during the period of manufacture. A trial with respect to this
matter was held on February 19 and 20, 2004, and we are waiting for the court's
decision. We are vigorously opposing this claim as we believe it is without
merit. We launched our simvastatin product line in January 2002.

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

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

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

         Not applicable.


                                       37
<PAGE>

                                     Part II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters
         ---------------------------------------------------------------------

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

                                                  High            Low
                                              ---------      ----------
Fiscal Year Ended December 31, 2002
First Quarter                                 $   11.57      $    7.60
Second Quarter                                    12.08           9.91
Third Quarter                                     11.60           8.35
Fourth Quarter                                    10.00           6.40

Fiscal Year Ended December 31, 2003
First Quarter                                      9.70           7.85
Second Quarter                                    14.05           8.20
Third Quarter                                     18.80          12.81
Fourth Quarter                                    17.15          11.34

Fiscal Year Ending December 31, 2004
First Quarter (through March 2, 2004)             14.76          10.62


         As of March 2, 2004 there were 1,079 holders of record of our common
stock, which does not reflect stockholders whose shares are held in street name.

Dividends

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

                                       38
<PAGE>

Item 6.  Selected Financial Data
         -----------------------

         The following sets forth the selected consolidated statement of
operations data for each of the five years in the period ended December 31, 2003
and consolidated balance sheet data as of December 31, 1999, 2000, 2001, 2002
and 2003, all of which are derived from our audited consolidated financial
statements and related notes. The following selected financial data for each of
the three years in the period ended December 31, 2003 and as of December 31,
2002 and 2003 should be read together with our consolidated financial statements
and related notes appearing elsewhere in Item 15 of this Annual Report on Form
10-K and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The consolidated statement of operations data for the
periods ended December 31, 1999 and 2000 and the consolidated balance sheet data
as of December 31, 1999, 2000 and 2001 are derived from our audited consolidated
financial statements and related notes not included in Item 15 of this Annual
Report on Form 10-K.

Consolidated Statement of Operations Data

<TABLE>
<CAPTION>
                                                                         For The Year Ended December 31,
                                                         ---------------------------------------------------------------
(in thousands, except per share data)                      1999          2000          2001          2002         2003
                                                         --------      --------      --------      --------     --------
<S>                                                      <C>           <C>           <C>           <C>          <C>
Total revenues                                           $ 20,249      $ 18,617      $ 26,411      $ 39,136     $ 64,676
Cost of sales                                               8,445         7,189        11,462        16,477       26,399
                                                         --------      --------      --------      --------     --------
Gross profit                                               11,804        11,428        14,949        22,659       38,277
Operating expenses                                         11,226        11,942        16,137        19,277       26,848
Gain on sale of drug licenses                                   -             -         5,050           650            -
Other income (expenses), net                                 (887)           (9)          (49)          138           91
Provision for income taxes                                    781           222         2,452         2,534        5,423
                                                         --------      --------      --------      --------     --------
Net income (loss)                                        $ (1,090)     $   (745)     $  1,361      $  1,636     $  6,097
                                                         ========      ========      ========      ========     ========

Net income (loss) per common share - basic               $  (0.12)     $  (0.06)     $   0.10      $   0.10     $   0.34
                                                         ========      ========      ========      ========     ========

Net income (loss) per common share - diluted             $  (0.12)     $  (0.06)     $   0.08      $   0.08     $   0.28
                                                         ========      ========      ========      ========     ========

Weighted average common shares outstanding - basic          9,147        12,981        14,196        16,569       17,997
                                                         ========      ========      ========      ========     ========

Weighted average common shares outstanding - diluted        9,147        12,981        16,147        19,798       21,637
                                                         ========      ========      ========      ========     ========
</TABLE>



                                       39
<PAGE>

Consolidated Balance Sheet Data

<TABLE>
<CAPTION>
                                                       December 31,
                               ------------------------------------------------------------
(in thousands)                   1999         2000         2001         2002         2003
                               --------     --------     --------     --------     --------
<S>                            <C>          <C>          <C>          <C>          <C>
Working capital                $  1,130     $  3,742     $  6,276     $ 30,703     $ 45,701
                               ========     ========     ========     ========     ========

Currrent assets                $ 11,689     $ 13,104     $ 15,839     $ 43,972     $ 66,899
Non-current assets               10,548       15,773       16,280       20,720       33,564
                               --------     --------     --------     --------     --------
Total assets                   $ 22,237     $ 28,877     $ 32,119     $ 64,692     $100,463
                               ========     ========     ========     ========     ========

Current liabilities            $ 10,559     $  9,362     $  9,563     $ 13,269     $ 21,198
Long-term debt                        -          908          142          345          369
Other non-current liabilities       104          791        1,990        2,327        2,731
                               --------     --------     --------     --------     --------
Total liabilities              $ 10,663     $ 11,061     $ 11,695     $ 15,941     $ 24,298
                               ========     ========     ========     ========     ========

Redeemable preferred stock     $      -     $      -     $      -     $      -     $      -
                               ========     ========     ========     ========     ========

Stockholders' equity           $ 11,574     $ 17,816     $ 20,424     $ 48,751     $ 76,165
                               ========     ========     ========     ========     ========
</TABLE>



                                       40
<PAGE>

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

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

Business Environment

We are a specialty pharmaceutical company focused on:

         o        research, development and licensing/commercialization of
                  advanced drug delivery technologies and pharmaceutical
                  products; and

         o        development, licensing and sales of generic and branded
                  pharmaceutical products and the manufacturing of
                  pharmaceuticals for others.

         In our research and development activities, we have patents and other
proprietary rights to technologies that facilitate the absorption of drugs. Our
pharmaceutical product sales activities are based in Spain, where we have a
significant commercial presence and we manufacture and market approximately 100
pharmaceutical products. These products represent various dosage strengths and
product formulations of more than 30 chemical entities in four primary
therapeutic areas: cardiovascular, gastrointestinal, neurological and infectious
diseases. We also manufacture pharmaceuticals for other drug companies.

         We develop products which incorporate our drug delivery technologies
and have licensed applications of our proprietary CPE-215(R) drug delivery
technology to Auxilium Pharmaceuticals, Inc., which launched Testim(TM), the
first product incorporating our drug delivery technology, in February 2003.
Testim a gel indicated for testosterone replacement therapy which restores serum
testosterone levels in men and thereby improves symptoms of health problems
associated with low testosterone levels (hypogonadism), including loss of muscle
mass and a decrease in sexual desire, sexual motivation and frequency of
spontaneous erections. We are in discussions with other pharmaceutical and
biotechnology companies to form additional strategic alliances to facilitate the
development and commercialization of other products using our drug delivery
technologies, including product candidates that deliver insulin to diabetic
patients intranasally and treat nail fungus infections topically.

         Our generic and branded products are marketed to physicians,
pharmacists and hospitals by our three separate sales and marketing
organizations based in Spain: Laboratorios Belmac, Laboratorios Davur and
Laboratorios Rimafar. We continually add to our product portfolio in response to
increasing market demand for generic and branded therapeutic agents and divest
portfolio products that we consider to be redundant or that have become
non-strategic. Although most of our sales of these products are currently in the
Spanish market, we have recently focused on increasing our sales in other
European countries and other geographic regions through strategic alliances with
companies in these countries. We have a strategic alliance with Teva
Pharmaceutical Industries Ltd. granting us the right to register and market in
Spain more than 75 of Teva's pharmaceutical products through our sales force of
approximately

                                       41
<PAGE>

151 full-time personnel located in major cities throughout Spain. In addition,
our Spanish manufacturing facility produces pharmaceutical products which are
marketed by pharmaceutical companies both in Spain and in other markets.

Consolidated Results of Operations

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

Revenues

<TABLE>
<CAPTION>
(in thousands)                                                                          Increase
                                                                                   -------------------
                                             2003      %         2002      %          $           %
                                           --------------      --------------      -------     -------
<S>                                        <C>                 <C>                 <C>         <C>
Revenues:

  Net product sales                        $62,955    97%      $38,718    99%      $24,237         63%
  Licensing and collaboration revenues       1,721     3%          418     1%        1,303        312%
                                           --------------      --------------      -------     -------
Total revenues                             $64,676   100%      $39,136   100%      $25,540         65%
                                           ==============      ==============      =======     =======
</TABLE>

         Our total revenues increased 65% from the prior year. The increase is
primarily attributed to the continuing growth of our Spanish operations and
secondarily to the advancement of our proprietary drug delivery programs in the
U.S., as evidenced by the launch of Testim, the first product incorporating our
drug delivery technology, by our licensee in February 2003.

         Our revenues are generated through our five primary sales channels
(branded, generic, contract manufacturing, sales outside of Spain and licensing
and collaborations). See a summary of our revenues by sales channel and
top-selling product lines below:

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

<TABLE>
<CAPTION>
                                        Sales Within Spain
                                 ---------------------------------
                                                          Contract
                                Branded       Generic       Manu-        Other                   % of Total
       Product Line             Products      Products    facturing    Revenues       Total       Revenues
       ------------             --------      --------    ---------    --------      -------     ----------
<S>                             <C>           <C>         <C>          <C>          <C>             <C>
Omeprazole                       $ 6,099      $13,863          $ -          $ -      $19,962           31%
Simvastatin                        2,176        4,412            -            -        6,588           10%
Enalapril                          2,610        1,878            -            -        4,488            7%
Codeisan                           2,713            -            -            -        2,713            4%
Pentoxifylline                         -        2,070            -            -        2,070            3%
All other products                 5,463        4,744            -            -       10,207           16%
Contract manufacturing                 -            -        9,536            -        9,536           15%
Sales outside of Spain                 -            -            -        7,391        7,391           11%
Licensing and collaborations           -            -            -        1,721        1,721            3%
                                 -------      -------      -------      -------      -------      --------
Total Revenues                   $19,061      $26,967      $ 9,536      $ 9,112      $64,676          100%
                                 =======      =======      =======      =======      =======      ========
% of 2003 Revenues                   29%          42%          15%          14%         100%
</TABLE>


                                       42
<PAGE>

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

<TABLE>
<CAPTION>
                                        Sales Within Spain
                                ----------------------------------
                                                          Contract
                                Branded       Generic       Manu-        Other                   % of Total
       Product Line             Products      Products    facturing    Revenues       Total       Revenues
       ------------             --------      --------    ---------    --------      -------     ----------
<S>                             <C>           <C>         <C>          <C>          <C>          <C>
Omeprazole                       $ 5,051      $ 9,813          $ -          $ -      $14,864           38%
Simvastatin                          322        1,261            -            -        1,583            4%
Enalapril                            955        1,515            -            -        2,470            6%
Codeisan                           1,944            -            -            -        1,944            5%
Pentoxifylline                         -        1,348            -            -        1,348            3%
All other products                 4,103        2,738            -            -        6,841           18%
Contract manufacturing                 -            -        7,406            -        7,406           19%
Sales outside of Spain                 -            -            -        2,262        2,262            6%
Licensing and collaborations           -            -            -          418          418            1%
                                 -------      -------      -------      -------      -------      --------
Total Revenues                   $12,375      $16,675      $ 7,406      $ 2,680      $39,136          100%
                                 =======      =======      =======      =======      =======      ========
% of 2002 Revenues                   32%          43%          19%           6%         100%
</TABLE>


         Spanish Operations. The core of our Spanish operations has been the
efficient manufacturing and domestic marketing of branded and generic
pharmaceutical products. Historically, our pharmaceutical products were sold
only within Spain. However, the execution of our long-term strategic plan over
the past eight years has created an opportunity for our Spanish operations to
expand beyond the borders of Spain and into other European countries and other
countries outside of Europe. The 65% growth in revenues was fueled by an
increase in sales of our two major product lines, omeprazole and simvastatin.
Sales of omeprazole and simvastatin increased 61% to $26,550,000 in 2003
compared to $16,447,000 in the prior year. The growth of these two product lines
accounted for 40% of our growth in revenues in the current year. An increase in
the weighted average value of the Euro, in relation to the U.S. Dollar over the
past 12 months, had the effect of increasing revenues by approximately
$10,449,000, or 27%, during the year ended December 31, 2003.

         Prices for prescription pharmaceutical products in Spain must be
approved by the Ministry of Health. In order to help control rising healthcare
costs, the Ministry of Health, in recent years, has encouraged the substitution
of generic-equivalent products. In further efforts to reduce healthcare costs,
the Ministry of Health had been contemplating new laws and regulations that
would significantly reduce the market prices of certain pharmaceutical products,
including generic-equivalent drugs. In late October 2003, the Spanish government
enacted a regulation that reduced the prices that the government reimburses for
six of our chemical entities, including the chemical entities omeprazole,
simvastatin and enalapril, which accounted for approximately 65% to 70% of
revenues in the year ended December 31, 2003. These new prices were required to
take effect on December 26, 2003. However, we, and some other pharmaceutical
companies in Spain, strategically implemented the new prices on December 1,
2003. Our strategy was to gain additional market share by selling to customers
that wanted to buy the products at the new lower prices. We anticipated this
opportunity as some of our customers delayed placing orders in November.
November sales declined by approximately 19% percent from October


                                       43
<PAGE>

levels; however, December sales demand was very strong as we gained market share
as a result of our pricing strategy. The increase in December unit volume offset
the impact of the lower prices. While the adoption of the new prices did not
have a material effect on our total sales in December, it did reduce our
margins. Over the years, we had steadily improved our gross margins on net
product sales from 57% in 2001 to 59% for the ten months ended October 31, 2003.
The improved margins were the result of economies of scale. Our gross margins in
November slipped to 55% as our fixed costs were absorbed by fewer units sold in
that month. Upon reducing our prices in December of 2003, our gross margins
remained constant at 55%, but unit volume increased by approximately 60% over
November levels.

         We have implemented several initiatives to mitigate the decline in
margins. We expect to continue to increase our future sales volume through our
pipeline of approximately 100 products, consisting of approximately 20 chemical
entities that are not affected by the new pricing regulations. In addition, we
have modified our pricing structure in efforts to increase our sales volume and
market share throughout Spain. We will continue to focus on acquiring,
developing and launching new products that will improve our product mix. We will
also continue our efforts to increase our sales outside of Spain through
additional registration, marketing, and supply agreements. We have made
significant investments in renovating and increasing capacity in our
manufacturing facility, as well as investments in new high speed, high volume
equipment. These investments will enable us to manufacture and package larger
quantities of products more efficiently and cost effectively. We anticipate that
the current gross margins will continue until the existing inventory is
depleted, near the end of the first quarter of 2004 and then we expect to see
margins increase by about two percentage points. Thereafter, we expect margins
to gradually improve, as they have in the past, as a result of increasing
volumes and economies of scale.

Branded Pharmaceutical Products
-------------------------------

<TABLE>
<CAPTION>
(in thousands)                                                                Increase
                                                                         --------------------
                                   2003      %         2002      %          $           %
                                 ---------------     ---------------     -------     --------
<S>                              <C>                 <C>                 <C>         <C>
Branded Product Sales:
  Simvastatin                    $ 2,176     11%     $   322      2%     $ 1,854         576%
  Enalapril                        2,610     14%         955      8%       1,655         173%
  Omeprazole                       6,099     32%       5,051     41%       1,048          21%
  Codeisan                         2,713     14%       1,944     16%         769          40%
  All other branded products       5,463     29%       4,103     33%       1,360          33%
                                 ---------------     ---------------     -------     --------
Total branded sales              $19,061    100%     $12,375    100%     $ 6,686          54%
                                 ===============     ===============     =======     ========
</TABLE>

         Sales of our branded pharmaceutical products increased by 54% compared
to the prior year, although they accounted for only 29% of total revenues in
2003 compared to 32% in 2002. Sales of our branded simvastatin increased by
approximately $1,854,000, or approximately 576% from the prior year. Sales of
our branded enalapril increased by approximately $1,655,000, or approximately
173% from the prior year. Sales of our branded omeprazole increased by
approximately $1,048,000, or 21% from the prior year. Sales of our branded
codeisan increased by approximately $769,000, or approximately 40% from the
prior year. While we expect to continue to develop, acquire, and launch new
branded products, our focus on generics and sales outside of Spain are expected
to increase at a significantly higher pace than that of our branded products. An
increase in the weighted average value of the Euro, in relation to the U.S.
Dollar over the past 12 months, had the effect of increasing branded net product
sales by approximately $3,153,000, or 25%, during the year ended December 31,
2003.


                                       44
<PAGE>

Generic Pharmaceutical Products
-------------------------------

<TABLE>
<CAPTION>
(in thousands)                                                                 Increase
                                                                         -------------------
                                   2003      %         2002      %          $           %
                                 --------------      --------------      -------     -------
<S>                              <C>                 <C>                 <C>
Generic Product Sales:
  Omeprazole                     $13,863     51%     $ 9,813     59%     $ 4,050          41%
  Simvastatin                      4,412     16%       1,261      8%       3,151         250%
  Pentoxifylline                   2,070      8%       1,348      8%         722          54%
  Enalapril                        1,878      7%       1,515      9%         363          24%
  All other generic products       4,744     18%       2,738     16%       2,006          73%
                                 ---------------     ---------------     -------     --------
Total generic sales              $26,967    100%     $16,675    100%     $10,292          62%
                                 ===============     ===============     =======     ========
</TABLE>

         Sales of our generic pharmaceutical products increased by 62% compared
to the prior year. Sales of our generic omeprazole increased by approximately
$4,050,000, or approximately 41% from the prior year. Sales of our generic
simvastatin increased by approximately $3,151,000, or approximately 250% from
the prior year. Sales of our generic pentoxifylline increased by approximately
$722,000, or approximately 54% from the prior year. Generic products launched in
2003, such as trimetazedine and paroxetine, accounted for approximately
$1,600,000 of our 2003 revenues. We expect to continue to increase our generic
drug portfolio and increase our generic drug sales in Spain as products come off
patent in the future. An increase in the weighted average value of the Euro, in
relation to the U.S. Dollar over the past 12 months, had the effect of
increasing generic net product sales by approximately $4,461,000, or 27%, during
the year ended December 31, 2003.

Contract Manufacturing
----------------------

(in thousands)                                        Increase
                                                 ------------------
                            2003       2002         $            %
                           ------     ------     ------         ---
Contract manufacturing     $9,536     $7,406     $2,130         29%


         In addition to manufacturing our own products, our Spanish
manufacturing facility supplies branded and generic products to 14 entities in
Spain which market these products under their own name and with their own
labeling. Revenues generated from contract manufacturing have increased by
approximately 29% from the prior year, but represented only 15% of total
revenues in 2003, compared to 19% of total revenues in 2002. The increase is
primarily attributable to increased demand for formulations of omeprazole, our
largest contract manufactured product line. Our increased capacity and high
speed, high volume equipment enable us to manufacture pharmaceutical products at
low costs. This competitive advantage could lead to an increase in contract
manufacturing agreements in 2004 as other pharmaceutical companies in Spain
search to find low cost alternatives to mitigate the new lower selling prices.
An increase in the weighted average value of the Euro, in relation to the U.S.
Dollar over the past 12 months, had the effect of increasing contract
manufacturing sales by approximately $1,577,000, or 21%, during the year ended
December 31, 2003.


                                       45
<PAGE>

Sales Outside of Spain
----------------------

(in thousands)                                        Increase
                                                 ------------------
                            2003       2002         $            %
                           ------     ------     ------        ----
Sales outside of Spain     $7,391     $2,262     $5,129        227%


         We have entered into license and supply agreements with more than 15
entities to sell our products outside of Spain. Sales under these supply
agreements have increased 227% from 6% of total revenues in 2002 to 11% of total
revenues in 2003. The $5,129,000 increase is primarily attributable to demand
for formulations of omeprazole, our largest selling product outside of Spain. An
increase in the weighted average value of the Euro, in relation to the U.S.
Dollar over the past 12 months, had the effect of increasing sales outside of
Spain by approximately $1,223,000, or 54%, during the year ended December 31,
2003.

         Licensing and Collaboration Revenues. Licensing and collaboration
revenues now account for 3% of total revenues and increased by approximately
$1,303,000, or approximately 312%, in 2003 and include milestone payments and
royalties from the commercialization and continued sales of Testim, the first
product incorporating our drug delivery technology, which was launched by our
licensee, Auxilium, in February 2003. Testim is currently reported to capture
approximately 10% of all new testosterone replacement prescriptions in the
market. We have also recognized revenues totaling $203,000 during the year ended
December 31, 2003, related to product licensing activities in Europe, which we
have included in the Consolidated Income Statements as licensing and
collaboration revenues.

         Gross Profit. Gross profit increased by approximately 69% from the
prior year. Approximately $14,315,000, or 92% of increase, is due to the 63%
increase in net product sales (and slightly improved gross margins in 2003) and
$1,303,000, or 8% of the increase, is due to the increased licensing and
collaboration revenues in the current year. Our gross margins on net product
sales in 2003 increased slightly to 58.0% compared to 57.4% in the prior year as
result of economies of scale (allocation of fixed costs over a larger number of
units, reducing the per-unit cost), partially offset by lower margins of generic
products, which typically have lower prices, and the sales of certain of our
products in the month of December at reduced selling prices. We experienced an
increase in gross profit of 42% in local currency in 2003 compared to the prior
year. An increase in the weighted average value of the Euro, in relation to the
U.S. Dollar over the past 12 months, had the effect of increasing gross profit
by approximately $6,065,000 during the year ended December 31, 2003.

         Gross margins on certain of our products have decreased as a result of
the recently reduced selling prices in Spain. Although we were not required to
sell products at the new lower prices until December 26, 2003, we strategically
implemented the new price structure beginning December 1, 2003. Our strategy was
to gain additional market share by selling to customers that wanted to buy the
products at the new lower prices. See discussion above in Spanish Operations.

         As discussed above, we have implemented several initiatives to mitigate
the decline in margins. We expect to continue to increase our future sales
volume through our pipeline of approximately 100 products, consisting of
approximately 20 chemical entities that are not affected by the new pricing


                                       46
<PAGE>

regulations. In addition, we have modified our pricing structure in efforts to
increase our sales volume and market share throughout Spain. We will continue to
focus on acquiring, developing and launching new products that will improve our
product mix. We will also continue our efforts to increase our sales outside of
Spain through additional registration, marketing, and supply agreements. We have
made significant investments in renovating and increasing capacity in our
manufacturing facility, as well as investments in new high speed, high volume
equipment. These investments will enable us to manufacture and package larger
quantities of products more efficiently and cost effectively. We anticipate that
the current gross margin percentages will continue until the existing inventory
is depleted near the end of the first quarter of 2004 and then we expect to see
margins increase by about two percentage points. Thereafter, we expect margins
to gradually improve, as they have in the past, as a result of increasing
volumes and economies of scale.

         Gross margins could decrease in the future if sales of higher priced
products are replaced with sales of lower priced generic products, as a result
of a change in our product mix or by additional governmental action. However, as
previously discussed we have developed, and continue to implement, a broad-based
growth strategy that should mitigate the impact on our margins over time.

Selling and Marketing Expenses
------------------------------

(in thousands)                                        Increase
                                                 ------------------
                            2003       2002         $            %
                           ------     ------     ------         ---
Selling and marketing     $14,212    $10,400     $3,812         37%


         Selling and marketing expenses increased by approximately 37% from the
prior year. The $3,812,000 increase, of which approximately 75% represented
increased sales force costs and approximately 25% represented increased
promotion and marketing programs, was instrumental in achieving a 63% increase
in net product sales. However, the increase in the weighted average value of the
Euro, in relation to the U.S. Dollar, over the past 12 months had the effect of
increasing selling and marketing expenses by approximately $2,361,000 in 2003,
accounting for approximately 62% of the increase. Selling and marketing expenses
as a percentage of net product sales decreased to 23% in 2003 compared to 27% of
net product sales in 2002.

General and Administrative Expenses
-----------------------------------

(in thousands)                                             Increase
                                                      ------------------
                                 2003       2002         $            %
                                ------     ------     ------         ---
General and administrative      $7,001     $4,902     $2,099         43%


         General and administrative expenses increased 43% from the prior year.
The $2,099,000 increase was the result of increased general and administrative
activities required to support our revenue growth in 2003 and prepare for our
anticipated future growth. Such expenditures included costs of additional
employees, outside services, occupancy costs, corporate communications,
insurance, etc. General and administrative expenses as a percent of total
revenues decreased to 11% in 2003, compared to 13% of total revenues in 2002.
General and administrative expenses would have been approximately $642,000 lower
in 2003, absent the increase in the weighted average value of the Euro, in
relation to the U.S. Dollar, over the past 12 months. We expect that our future
expenditures for general and administrative expenses will continue to increase
as we grow. Although we cannot reasonably estimate the costs associated with


                                       47
<PAGE>

implementation of the internal control provisions of the Sarbanes-Oxley Act of
2002, we do expect to incur costs not previously experienced.

Research and Development Expenses
---------------------------------

(in thousands)                                        Increase
                                                 ------------------
                            2003       2002         $            %
                           ------     ------     ------         ---
Research and development   $4,295     $2,960     $1,335         45%


         Research and development expenses increased approximately 45% from the
prior year. The $1,335,000 increase is due to pre-clinical programs underway in
collaboration with universities and with product formulation and testing efforts
being performed in the laboratory in our U.S. headquarters and at our facility
in Zaragoza, Spain. We are using our U.S. laboratory to develop potential
product applications using our drug delivery technologies. The expenditures in
research and development reflect our focus on projects that are necessary for
expansion of our portfolio of marketed products and clinical trials involving
our drug delivery technologies.

         We expect that our future expenditures for research and development
activities will continue to increase as a result of programs that are necessary
to advance new applications of our technologies. We are currently in the
planning stages of clinical programs to support the eventual distribution of
certain of our Spanish generic pharmaceutical products in other countries,
including the U.S. We have also undertaken a clinical program for the intranasal
delivery of insulin and have recently completed a successful Phase I study and
are in the planning stages of additional clinical trials. We expect to incur
costs to conduct clinical trials and support the required regulatory submissions
for these programs. Although some of our cost estimates are preliminary, and the
specific timing is not known, our research and development expenses in 2004
could be $2,000,000 higher than in the year ended December 31, 2003.

Provision for Income Taxes
--------------------------

                                                           2003
                                             ---------------------------------
                                                                       Consol-
(in thousands)                                Spain         U.S.       idated
                                             -------      -------      -------
Income (loss) before income taxes            $15,091      $(3,571)     $11,520

Provision (benefit) for income taxes           5,092       (1,017)       4,075
Valuation allowance                                -        1,348        1,348
                                             -------      -------      -------
Net provision (benefit) for income taxes       5,092          331        5,423
                                             -------      -------      -------
Net income (loss)                            $ 9,999      $(3,902)     $ 6,097
                                             =======      =======      =======
Effective tax rate                               34%         (9)%          47%
                                             =======      =======      =======



         We recorded a provision for foreign income taxes totaling $5,092,000
(approximately 34% of the Spanish pretax income of $15,091,000) for the year
ended December 31, 2003 compared to a provision for foreign income taxes of
$2,534,000 (approximately 37% of the Spanish pretax income of $6,913,000) in the
prior year. The 2003 provision for Spanish income taxes results from reporting
taxable income from operations in Spain, whereas the 2002 Spanish provision for
income taxes included approximately

                                       48
<PAGE>

$2,304,000 as a result of reporting taxable income from operations in Spain and
approximately $230,000 as a result of capital gains taxes arising from the sale
of Biolid(R), Lactoliofil(R) and other drug licenses. The 2003 provision for
foreign income taxes would have been approximately $854,000 lower than reported,
absent the increase in the weighted average value of the Euro, in relation to
the U.S. Dollar, over the past 12 months.

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

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

Net Income
----------

<TABLE>
<CAPTION>
(in thousands)                                                              Increase
                                                                        ---------------
                                                  2003        2002         $        %
                                                -------     -------     -------    ----
<S>                                             <C>         <C>         <C>        <C>
Net income                                      $ 6,097     $ 1,636     $ 4,461    273%
                                                =======     =======     =======    ====

Net income per common share:

   Basic                                        $  0.34     $  0.10     $  0.24    243%
                                                =======     =======     =======    ====
   Diluted                                      $  0.28     $  0.08     $  0.20    241%
                                                =======     =======     =======    ====

Weighted average common shares outstanding:

   Basic                                         17,997      16,569       1,428      9%
                                                =======     =======     =======    ====
   Diluted                                       21,637      19,798       1,839      9%
                                                =======     =======     =======    ====
</TABLE>



         We reported 2003 income from operations of $11,429,000 compared to 2002
income from operations of $4,032,000 (including the $650,000 pre-tax gain on
sale of the Biolid, Lactoliofil and other drug licenses). The combination of
income from operations of $11,429,000 and the non-operating items, primarily the
provision for income taxes of $5,423,000, resulted in 2003 net income of
$6,097,000, or $.34 per basic common share ($.28 per diluted common share) on
17,997,000 weighted average basic common shares outstanding (21,637,000 weighted
average diluted common shares outstanding), compared to 2002 net income of
$1,636,000, or $.10 per basic common share ($.08 per diluted common share) on
16,569,000 weighted average basic common shares outstanding (19,798,000 weighted
average diluted common shares outstanding). Net income in the future could be
negatively impacted as a result of the lower selling prices in Spain and
anticipated increases in research and development programs that are expected to
benefit future periods. However, as previously discussed, our broad-based growth
strategy should mitigate the impact of these developments over time.

                                       49
<PAGE>

Fiscal Year Ended December 31, 2002 Compared To Fiscal Year Ended December 31,
2001

Revenues
--------

<TABLE>
<CAPTION>
(in thousands)                                                           Increase
--------------                                                     -------------------
                                             2002       2001          $            %
                                           -------     -------     -------       -----
<S>                                        <C>         <C>         <C>           <C>
Revenues:
  Net product sales                        $38,718     $26,411     $12,307         47%
  Licensing and collaboration revenues         418           -         418          *
                                           -------     -------     -------       -----
Total revenues                             $39,136     $26,411     $12,725         48%
                                           =======     =======     =======       =====
* Not meaningful
</TABLE>

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

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

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

         Gross Profit. Gross profit increased by 52% from $14,949,000 in 2001 to
$22,659,000 in 2002. The $7,710,000 increase was the direct result of the growth
in our net product sales from 2001 to 2002. Our gross margins on net product
sales in 2002 increased slightly to 57.4% compared to 56.6% in the prior

                                       50
<PAGE>

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

<TABLE>
<CAPTION>
         Selling and Marketing Expenses
         ------------------------------

         (in thousands)                                                        Increase
                                                                           ----------------
                                                  2002        2001            $          %
                                               --------     --------       -------     ----
<S>                                            <C>          <C>             <C>         <C>
         Selling and marketing                 $ 10,400     $  9,057        $1,343      15%
</TABLE>

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

         General and Administrative Expenses
         -----------------------------------

<TABLE>
<CAPTION>
         (in thousands)                                                        Increase
                                                                           ----------------
                                                  2002        2001            $          %
                                               --------     --------       -------      ---
<S>                                            <C>          <C>             <C>         <C>
         General and administrative            $  4,902     $  4,085        $  817      20%
</TABLE>

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

                                       51
<PAGE>

         Research and Development Expenses
         ---------------------------------

<TABLE>
<CAPTION>
         (in thousands)                                                        Increase
                                                                           ----------------
                                                  2002        2001            $          %
                                               --------     --------       -------     ----
<S>                                            <C>          <C>             <C>         <C>
         Research and development              $  2,960     $  2,084        $  876      42%
</TABLE>

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

<TABLE>
<CAPTION>
         Depreciation and Amortization Expenses
         --------------------------------------

         (in thousands)                                                        Increase
                                                                           ----------------
                                                  2002        2001            $          %
                                               --------     --------       -------     ----
<S>                                            <C>          <C>             <C>         <C>
         Depreciation and amortization         $  1,015     $    911        $  104      11%
</TABLE>

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

<TABLE>
<CAPTION>
         Provision for Income Taxes
         --------------------------
                                                                             2002
                                                       -----------------------------------------------
         (in thousands)                                  Spain              U.S.          Consolidated
                                                       --------          --------         ------------
         <S>                                           <C>               <C>                <C>
         Income (loss) before income taxes             $ 6,913           $(2,743)           $ 4,170

         Provision (benefit) for income taxes            2,534              (933)             1,601

         Valuation allowance                                 -               933                933
                                                       -------           -------            -------
         Net provision for income taxes                  2,534                 -              2,534
                                                       -------           -------            -------
         Net income (loss)                             $ 4,379           $(2,743)           $ 1,636
                                                       =======           =======            =======
         Effective tax rate                                37%                0%                61%
                                                       =======           =======            =======
</TABLE>

         We generated additional U.S. federal net operating loss carry-forwards
in 2002. However, since we are not assured of future profitable domestic
operations, we have recorded a valuation allowance for any future tax benefit of
such losses in the U.S. Therefore, no benefit has been recognized with respect
to U.S. losses reported in 2002. We recorded a provision for foreign income
taxes totaling $2,534,000 (37% of Spanish pre-tax income) for the year ended
December 31, 2002 compared to a provision for foreign income taxes of $2,452,000
in the prior year. The provision for income taxes for 2002 included


                                       52
<PAGE>

approximately $2,304,000 as a result of reporting taxable income from operations
in Spain and approximately $230,000 as a result of capital gains taxes arising
from the sale of Biolid(R), Lactoliofil(R) and other drug licenses, whereas the
provision for income taxes in the prior year included approximately $607,000 as
a result of reporting taxable income from operations in Spain and approximately
$1,845,000 as a result of capital gains taxes arising from the sale of drug
licenses. The provision for income taxes would have been approximately $110,000
lower than reported, absent the increase in the weighted average value of the
Euro, in relation to the U.S. Dollar.

<TABLE>
<CAPTION>
         Net Income
         ----------

         (in thousands)                                                                   Increase
                                                                                   --------------------
                                                       2002          2001              $            %
                                                      ------        ------          =======        ===
<S>                                                  <C>           <C>              <C>            <C>
Net income                                           $ 1,636       $ 1,361          $   275        20%
                                                     =======       =======          =======        ===
Net income per common share:
   Basic                                             $  0.10       $  0.10          $     -          -
                                                     =======       =======          =======        ===
   Diluted                                           $  0.08       $  0.08          $     -          -
                                                     =======       =======          =======        ===

Weighted average common shares outstanding:
   Basic                                              16,569        14,196            2,373        17%
                                                     =======       =======          =======        ===
   Diluted                                            19,798        16,147            3,651        23%
                                                     =======       =======          =======        ===
</TABLE>

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


                                       53
<PAGE>

Selected Quarterly Financial Data

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

<TABLE>
<CAPTION>
                                                     Fiscal 2002                                      Fiscal 2003
                                    ------------------------------------------------  ---------------------------------------------
                                                                      Three Months Ended (Unaudited)
                                    ------------------------------------------------------------------------------------------------
                                    3/31/2002(a) 6/30/2002(a) 9/30/2002(a) 12/31/2002 3/31/2003   6/30/2003    9/30/2003  12/31/2003
                                    ------------------------------------------------- ----------------------------------------------
                                                                      (in thousands, except per share data)
<S>                                   <C>          <C>         <C>         <C>         <C>         <C>         <C>         <C>
Total revenues                        $  9,174     $  9,867    $  8,571    $ 11,524    $ 14,988    $ 16,754    $ 14,875    $ 18,059
Cost of sales                            3,776        4,249       3,579       4,873       6,121       6,819       5,744       7,715
                                      --------     --------    --------    --------    --------    --------    --------    --------
Gross profit                             5,398        5,618       4,992       6,651       8,867       9,935       9,131      10,344
Operating expenses                       4,715        4,743       4,300       5,519       6,213       6,619       6,290       7,726
Gain on sale of drug licenses               72          520           -          58           -           -           -           -
                                      --------     --------    --------    --------    --------    --------    --------    --------
Income from operations                     755        1,395         692       1,190       2,654       3,316       2,841       2,618
Other income/(expenses), net               (23)          10          67          84          29          18          20          24
Provision for income taxes                 597          886         468         583       1,151       1,805       1,513         954
                                      --------     --------    --------    --------    --------    --------    --------    --------
Net income                            $    135     $    519    $    291    $    691    $  1,532    $  1,529    $  1,348    $  1,688
                                      ========     ========    ========    ========    ========    ========    ========    ========

Net income per common share:
Basic                                 $   0.01     $   0.03    $   0.02    $   0.04    $   0.09    $   0.09    $   0.08    $   0.09
                                      ========     ========    ========    ========    ========    ========    ========    ========
Diluted                               $   0.01     $   0.03    $   0.01    $   0.03    $   0.08    $   0.07    $   0.06    $   0.08
                                      ========     ========    ========    ========    ========    ========    ========    ========

Weighted average common shares
  outstanding:
  Basic                                 14,634       16,823      17,377      17,405      17,455      17,534      17,911      19,071
                                      ========     ========    ========    ========    ========    ========    ========    ========
  Diluted                               17,922       20,484      20,706      20,121      20,350      20,878      22,228      22,418
                                      ========     ========    ========    ========    ========    ========    ========    ========
</TABLE>

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

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

Liquidity and Capital Resources

         Total assets increased 55% from $64,692,000 at December 31, 2002 to
$100,463,000 at December 31, 2003, while stockholders' equity increased 56% from
$48,751,000 at December 31, 2002 to $76,165,000 at December 31, 2003. The
increase in stockholders' equity reflects primarily the net proceeds from the
exercise of stock options and warrants totaling $15,222,000, the positive impact
of the fluctuation of the Euro/US dollar exchange rate which totaled $5,585,000
and net income of $6,097,000.

         Working capital increased 49% from $30,703,000 at December 31, 2002 to
$45,701,000 at December 31, 2003, primarily as a result of proceeds from
exercises of stock options and warrants and positive cash flow from operations,
which was partially offset by additions to fixed assets.

         Cash, cash equivalents and marketable securities increased 51% from
$26,977,000 at December 31, 2002 to $40,645,000 at December 31, 2003, primarily
as a result of net proceeds received from exercises of stock options and
warrants totaling $15,222,000 and cash provided by operating activities of
$8,168,000, partially offset by additions to fixed assets totaling $8,076,000
and additions to drug licenses and related costs of $2,298,000. Also included in
cash and cash equivalents at December


                                       54
<PAGE>

31, 2003 are approximately $29,156,000 of short-term liquid investments
considered to be cash equivalents.

         Receivables increased from $10,874,000 at December 31, 2002 to
$18,036,000 at December 31, 2003 as a direct result of the increase in net
product sales. Trade receivables comprise 90% of total 2003 receivables,
totaling $16,233,000. Receivables at December 31, 2003 also include royalties
receivable totaling $884,000 and taxes receivable totaling $953,000. Receivables
increased by approximately $4,119,000 in local currency, but fluctuations in
foreign currency exchange rates increased receivables reported in U.S. dollars
by approximately $3,043,000. We have not experienced any material delinquencies
on our receivables that have had a material effect on our financial position,
results of operations or cash flows. Inventories increased from $5,133,000 at
December 31, 2002 to $7,106,000 at December 31, 2003 primarily as a result of
raw materials purchases and strategic increases in finished goods inventories in
anticipation of continuing demand for our generic products. Inventories
increased by approximately $801,000 in local currency, but fluctuations in
foreign currency exchange rates increased inventories reported in U.S. dollars
by approximately $1,172,000.

         The combined total of accounts payable and accrued expenses increased
from $11,265,000 at December 31, 2002 to $17,257,000 at December 31, 2003,
primarily due to the effect of fluctuations in foreign currency exchange rates
(approximately $2,864,000), accruals for taxes payable (approximately
$1,784,000) and additions to fixed assets of $733,000.

         Short-term borrowings and current portion of long-term debt increased
from $1,725,000 at December 31, 2002 to $1,985,000 at December 31, 2003, as a
result of the effect of fluctuations in foreign currency exchange rates
partially offset by net repayment of short-term borrowings. The weighted average
interest rate on our short-term borrowings and current portion of long-term debt
is 3.8%.

         Long-term debt, which totaled $345,000 at December 31, 2002, increased
to $369,000 during the year ended December 31, 2003 as a result of imputed
interest on certain interest-free loans in Spain. The weighted average interest
rate (including imputed interest) on our long-term debt is 5.6%.

         In addition to our short-term borrowings and long-term debt, we have
fixed contractual obligations under various lease agreements. Our contractual
obligations were comprised of the following as of December 31, 2003
(in thousands):

<TABLE>
<CAPTION>
                                                                                            Payments Due By Period
                                                                         --------------------------------------------------------
                                                                         Less than 1        1 - 3           4 - 6          7 - 10
                                                           Total             year           years           years           years
                                                          -------        -----------        -----           -----          ------
<S>                                                        <C>             <C>             <C>             <C>             <C>
Long-term debt, including imputed interest of $83          $  522          $   70          $  107          $  194          $  151
Capital leases                                                  -               -               -               -               -
Operating leases                                            1,405             708             686              11               -
Purchase obligations(1)                                         -               -               -               -               -
Other long-term liabilities(2)                              2,731              15           1,134           1,118             464
                                                           ------          ------          ------          ------          ------

Total contractual cash obligations(3)                      $4,658          $  793          $1,927          $1,323          $  615
                                                           ======          ======          ======          ======          ======
</TABLE>

(1)       Purchase orders or contracts for the purchase of raw materials and
          other goods and services are not included in the table above as our
          purchase orders represent authorizations to purchase rather than
          binding agreements. For the purposes of this table, contractual
          obligations for purchase of goods or services are defined as
          agreements


                                       55
<PAGE>

         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 orders are based on
         our current manufacturing needs and are fulfilled by our vendors within
         short time frame. We do not have agreements for the purchase of raw
         materials or other goods specifying minimum quantities. We also enter
         into contracts for outsourced services including payroll, information
         technology and maintenance; however, the obligations under these
         contracts are not significant and the contracts contain clauses
         allowing for cancellation at will, without significant penalty.

(2)      Other long-term liabilities represents other long-term liabilities as
         reflected in the Company's Consolidated Balance Sheet as of December
         31, 2003. These amounts are primarily tax payments due to the Spanish
         Ministry of Taxes from the sale of certain drug licenses in prior
         years.

(3)      Not included in the chart above are key executive compensation
         agreements which have been entered into subsequent to December 31, 2003
         whereby the Company is currently obligated to pay approximately
         $1,490,000 to its key executives in 2004 and $350,000 in 2005. Such
         agreements are generally for one to two years in duration.

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

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

         Operating activities for the year ended December 31, 2003 provided net
cash of $8,168,000. Investing activities, primarily additions to machinery and
equipment and capital improvements made to the manufacturing facility in Spain,
the purchase of a commercial building in the U.S. and additions to drug licenses
used net cash of $10,843,000 during the year ended December 31, 2003. Financing
activities, consisting primarily of the proceeds received from the exercise of
stock options and warrants (approximately $15,222,000), partially offset by net
repayments of borrowings (approximately $21,000) provided net cash of
$14,201,000 during the year ended December 31, 2003.

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

         We plan to continue making improvements to our manufacturing facility
during 2004 that include the acquisition of additional manufacturing equipment
and expansion of our warehouse, in order to accommodate our expected growth. We
have budgeted approximately $4,600,000 for capital expenditures during 2004.

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

                                       56
<PAGE>

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







                                       57
<PAGE>


Critical Accounting Policies and Estimates

         Our significant accounting policies are more fully described in Note 2
to our consolidated financial statements in this Annual Report on Form 10-K for
the year ended December 31, 2003. However, certain of our accounting policies
are particularly important to the portrayal of our financial position, and
results of operations and cash flows and require the application of significant
judgment by our management; as a result they are subject to an inherent degree
of uncertainty. In applying those policies, our management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain
estimates. Those estimates are based on our historical experience, terms of
existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources,
as appropriate. Our critical accounting policies and estimates include:

         o        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 and/or risk of loss has
                           passed to the customer. We provide our customers with
                           a right of return. Revenue is recognized upon
                           delivery of products, at which time a reserve for
                           sales returns is recorded. We have demonstrated the
                           ability to make reasonable and reliable estimates of
                           product returns in accordance with Statement of
                           Financial Accounting Standards ("SFAS") No. 48,
                           Revenue Recognition When Right of Return Exists, and
                           of allowances for doubtful accounts based on
                           significant historical experience.

                  o        Revenue from service, research and development, and
                           licensing and supply agreements is recognized when
                           the service procedures have been completed or as
                           revenue recognition criteria have been met for each
                           separate unit of accounting (as defined in Emerging
                           Issues Task Force ("EITF") Issue No. 00-21,
                           Accounting for Revenue Arrangements with Multiple
                           Deliverables.)

                  o        Royalty revenue is recognized based on an estimate of
                           sell-through of product based on prescriptions
                           written, until such time that returns from
                           wholesalers and pharmacies can be reasonably
                           estimated.

         o        Inventories. Inventories are stated at the lower of cost or
                  market, cost being determined on the first-in, first-out
                  method. Reserves for slow moving and obsolete inventories are
                  provided based on historical experience and current product
                  demand. We evaluate the adequacy of these reserves quarterly.

                                       58
<PAGE>

         o        Drug licenses and related costs. Drug licenses and related
                  costs incurred in connection with acquiring licenses, patents
                  and other proprietary rights related to our commercially
                  developed products are capitalized. Capitalized drug licenses
                  and related costs are being amortized on a straight-line basis
                  for periods not exceeding 15 years from the dates of
                  acquisition. Carrying 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.

         o        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 for the remainder of our
                  deferred income taxes, consisting primarily of net operating
                  loss carryforwards in the U.S., because of uncertainty
                  regarding their realization.

                  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.

         o        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 (loss) in the Consolidated Balance
                  Sheets. Foreign currency translation gains and losses arising
                  from cash transactions are credited to or charged against
                  current earnings.

New Accounting Standards

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


                                       59
<PAGE>

provisions for interim financial statements were effective for interim periods
beginning after December 15, 2002. We have chosen not to adopt the fair value
method of accounting for stock-based employee compensation at this time.
Therefore, we continue to account for stock-based compensation utilizing the
intrinsic value method of accounting for stock-based employee compensation
described by APB Opinion No. 25.

         In November 2002, the EITF issued EITF Issue No. 00-21, which addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. EITF Issue No. 00-21
establishes three principles: revenue arrangements with multiple deliverables
should be divided into separate units of accounting; arrangement consideration
should be allocated among the separate units of accounting based on their
relative fair values; and revenue recognition criteria should be considered
individually for each separate unit of accounting. EITF Issue No. 00-21 is
effective for all revenue arrangements entered into in fiscal periods beginning
after June 15, 2003, with early adoption permitted. The adoption of EITF Issue
No. 00-21 in our third quarter of 2003 has not had a material effect on our
financial position, results of operations or cash flows for the year ended
December 31, 2003. However, the adoption of EITF Issue No. 00-21 may require the
deferral and recognition over extended periods, of certain up-front fees
associated with our multiple element collaboration and license agreements and of
our marketing, distribution and supply agreements.






                                       60
<PAGE>

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
         ----------------------------------------------------------

         Foreign Currency. A substantial amount of our business is conducted in
Europe and is therefore influenced to the extent to which there are fluctuations
in the U.S. Dollar's value against other currencies, specifically the Euro. The
exchange rate at December 31, 2003 and 2002 was .80 Euros and .95 Euros per U.S.
Dollar, respectively. The weighted average exchange rate for the years ended
December 31, 2003, 2002 and 2001 was .89 Euros, 1.06 Euros and 1.12 Euros per
U.S. Dollar, respectively. The effect of foreign currency fluctuations on long
lived assets for the year ended December 31, 2003 was an increase of $5,585,000
and the cumulative historical effect was an increase of $5,169,000, as reflected
in our Consolidated Balance Sheets as accumulated other comprehensive income
(loss). Although exchange rates fluctuated significantly in recent years, we do
not believe that the effect of foreign currency fluctuation is material to our
results of operations as the expenses related to much of our foreign currency
revenues are in the same functional currency as those revenues, the Euro.
However, the carrying value of assets and liabilities can be materially impacted
by foreign currency translation, as can the translated amounts of revenues and
expenses. Nonetheless, we do not plan to modify our business practices.

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

         Interest Rates. The weighted average interest rate on our short-term
borrowings and current portion of long-term debt is 3.8% and the balance
outstanding is $1,915,000 as of December 31, 2003. A portion of our long-term
borrowings is non-interest bearing and the balance outstanding on these
borrowings at December 31, 2003 is $369,000 including imputed interest (ranging
from 4.8% to 6.0%) of $83,000. The balance of our long-term borrowings of
$70,000 bears interest at the rate of 2.9%. Consequently, the weighted average
interest rate on our long-term borrowings is 5.6%. The effect of an increase in
the interest rate of one percentage point (one hundred basis points) to 4.8% on
short-term borrowings and to 6.6% on long-term borrowings would have the effect
of increasing interest expense by approximately $24,000 annually.

Item 8.  Financial Statements and Supplementary Data
         -------------------------------------------

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

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

         Not applicable.

                                       61
<PAGE>

Item 9A. Controls and Procedures
         -----------------------

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

         Bentley carried out an evaluation, under the supervision and with the
participation of Bentley's management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of Bentley's disclosure controls and procedures. Based on that
evaluation, Bentley's Chief Executive Officer and Chief Financial Officer
concluded that (i) Bentley's disclosure controls and procedures were effective
as of December 31, 2003 and (ii) no change in internal control over financial
reporting occurred during the quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, such internal
control over financial reporting. Although Bentley's management continues to
evaluate the internal control structure and strengthen Bentley's control
procedures, particularly in connection with the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002, there have been no significant changes in
Bentley's internal controls or in other factors which could significantly affect
internal controls since that evaluation.


                                       62
<PAGE>

                                    Part III

Item 10. Directors and Executive Officers of the Registrant
         --------------------------------------------------

<TABLE>
<CAPTION>
Name                                      Position
----                                      --------
<S>                              <C>      <C>
James R. Murphy                  54       Chairman, President, Chief Executive Officer and Director

Michael McGovern                 60       Vice Chairman and Director

Robert M. Stote, M.D.            64       Senior Vice President, Chief Science Officer and Director

Michael D. Price                 46       Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Robert J. Gyurik                 57       Vice President of Pharmaceutical  Development and  Director

Jordan A. Horvath                42       Vice President and General Counsel

Charles L. Bolling               80       Director

Miguel Fernandez                 73       Director

William A. Packer                68       Director

John W. Spiegel                  62       Director
</TABLE>

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

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


                                       63
<PAGE>

Development Company. Mr. McGovern received a B.S. and M.S. in accounting and his
Juris Doctor from the University of Illinois. Mr. McGovern is a Certified Public
Accountant.

         Robert M. Stote, M.D. became Senior Vice President and Chief Science
Officer of Bentley in March 1992 and has served as one of our directors since
1993. Prior to joining Bentley, Dr. Stote was employed for 20 years by
SmithKline Beecham Corporation serving in a variety of executive clinical
research positions. Dr. Stote was Chief of Nephrology at Presbyterian Medical
Center of Philadelphia from 1972 to 1989 and was Clinical Professor of Medicine
at the University of Pennsylvania. Dr. Stote also serves as a Director of
Datatrak International, Inc. Dr. Stote received a B.S. in Pharmacy from the
Albany College of Pharmacy, an M.D. from Albany Medical College and is Board
Certified in Internal Medicine and Nephrology. He was a Fellow in Nephrology and
Internal Medicine at the Mayo Clinic and is currently a Fellow of the American
College of Physicians.

         Michael D. Price became Chief Financial Officer, Vice
President/Treasurer and Secretary of Bentley in October 1993, April 1993 and
November 1992, respectively, and has served as one of our directors since 1995.
He has served Bentley in other capacities since March 1992. Prior to joining
Bentley, he was employed as a financial and management consultant with Carr
Financial Group from March 1990 to March 1992. Prior thereto, he was employed as
Vice President of Finance with Premiere Group, Inc. from June 1988 to February
1990. Prior thereto, Mr. Price was employed by Price Waterhouse (now
PriceWaterhouseCoopers) from January 1982 to June 1988 where his last position
with that firm was as an Audit Manager. Mr. Price received a B.S. in Business
Administration with a concentration in Accounting from Auburn University and an
M.B.A. from Florida State University. Mr. Price is a Certified Public Accountant
licensed by the State of Florida.

         Robert J. Gyurik has served as one of our directors since 1998 and
became Vice President of Pharmaceutical Development of Bentley in March 1999.
Before joining Bentley, Mr. Gyurik was Manager of Development and Quality
Control at MacroChem Corporation, a position he held from May 1993 to February
1999. From 1971 to 1993 Mr. Gyurik worked in various research and development
positions at SmithKline Beecham. Prior thereto, Mr. Gyurik worked at Schering as
a Medicinal Chemist. Mr. Gyurik received a B.A. in Biology and Chemistry from
Immaculata College. Mr. Gyurik is a member of the American Chemical Society,
International Society for Chronobiology and the New York Academy of Sciences.

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

         Charles L. Bolling has served as one of our directors since 1991. Mr.
Bolling served from 1968 to 1973 as Vice President of Product Management and
Promotion (U.S.), from 1973 to 1977 as Vice President of Commercial Development
and from 1977 to 1986 as Director of Business Development (International) at
SmithKline & French Laboratories. Mr. Bolling received an A.B. from Princeton
University. Mr. Bolling has been retired since 1986.

         Miguel Fernandez has served as one of our directors since 1999. Mr.
Fernandez served from 1980 to 1996 as President of the International Division
and corporate Vice President at Carter-Wallace, Inc., where he was responsible
for all product lines outside of the United States. Prior

                                       64
<PAGE>

thereto, Mr. Fernandez was employed for approximately eight years by SmithKline
& French, where his last position was President of the division that included
France, Portugal and Switzerland. Before SmithKline, Mr. Fernandez served as
Managing Director of Warner Lambert in Argentina for two years. From 1962 to
1970, Mr. Fernandez was employed by Merck/Frost in Canada. Mr. Fernandez
attended the University of British Columbia in Canada and received an M.B.A.
from the Ivey School of Business at the University of Western Ontario in London,
Ontario, Canada. Mr. Fernandez has been retired since 1996.

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers and directors, and any persons who own more than
10% of any class of our equity securities, to file certain reports relating to
their ownership of such securities and changes in such ownership with the
Securities and Exchange Commission and the American Stock Exchange and to
furnish us with copies of such reports. To the best of our knowledge during the
year ended December 31, 2003, all Section 16(a) filing requirements have been
satisfied.

Item 11. Executive Compensation
         ----------------------

         The information called for by this item is incorporated by reference to
our definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A.

Item 12. Security Ownership of Certain Beneficial Owners and Management
         --------------------------------------------------------------

         The information called for by this item is incorporated by reference to
our definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A.


                                       65
<PAGE>

Item 13. Certain Relationships and Related Transactions
         ----------------------------------------------

         The information called for by this item is incorporated by reference to
our definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A.

Item 14. Principal Accounting Fees and Services
         --------------------------------------

         The information called for by this item is incorporated by reference to
our definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A.


                                       66

<PAGE>

                                     Part IV

Item 15.      Exhibits, Financial Statement Schedules and Reports on Form 8-K
              ---------------------------------------------------------------

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

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

     (1) Financial Statements:

     Consolidated Financial Statements of
     Bentley Pharmaceuticals, Inc. and subsidiaries                  F-1 to F-31


                                       67

<PAGE>

                                  EXHIBIT INDEX

(3)  Exhibits filed as part of this report:

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

3.1      Articles of Incorporation of the Registrant, as amended and restated.
         (Reference is made to Appendix B to the Registrant's Definitive Proxy
         Statement for the Annual Meeting of Stockholders filed with the
         Securities and Exchange Commission on May 18, 1999, Commission File No.
         1-10581,which exhibit is incorporated herein by reference.)

3.2      Bylaws of the Registrant, as amended and restated. (Reference is made
         to Appendix C to the Registrant's Definitive Proxy Statement for the
         Annual Meeting of Stockholders filed with the Securities and Exchange
         Commission on May 18, 1999, Commission File No. 1-10581, which exhibit
         is incorporated herein by reference.)

3.3      Rights Agreement, dated as of December 22, 1999, between the Registrant
         and American Stock Transfer and Trust Company, as Rights Agent,
         including the form of Rights Certificate as Exhibit B thereto.
         (Reference is made to Exhibit 4.1 to the Registrant's Form 8-K, filed
         December 27, 1999, Commission File No. 1-10581, which exhibit is
         incorporated herein by reference.)

4.1      Registrant's Amended and Restated 1991 Stock Option Plan. (Reference is
         made to Appendix D to the Registrant's Definitive Proxy Statement for
         the Annual Meeting of Stockholders filed with the Securities and
         Exchange Commission on May 18, 1999, Commission File No. 1-10581, which
         exhibit is incorporated herein by reference.)

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

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

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


                                       68
<PAGE>

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

4.5      Warrant issued by the Registrant for the benefit of Hsu, dated February
         11, 1999. (Reference is made to exhibit 7.4 to the Registrant's Form
         8-K filed February 26, 1999, Commission File No. 1-10581, which exhibit
         is incorporated herein by reference.)

4.6      Registrant's 2001 Employee Stock Option Plan. (Reference is made to
         Appendix B to the Registrant's Definitive Proxy Statement for the
         Annual Meeting of Stockholders filed with the SEC on April 9, 2001,
         Commission File No. 1-10581, which exhibit is incorporated herein by
         reference.)

4.7      Registrant's 2001 Directors' Stock Option Plan. (Reference is made to
         Appendix C to the Registrant's Definitive Proxy Statement for the
         Annual Meeting of Stockholders filed with the SEC on April 9, 2001,
         Commission File No. 1-10581, which exhibit is incorporated herein by
         reference.)

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

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

4.10*    Amendment No. 1 to the Registrant's 2001 Employee Stock Option Plan.

4.11*    Amendment No. 2 to the Registrant's 2001 Employee Stock Option Plan.

4.12*    Amendment No. 1 to the Registrant's 2001 Directors' Stock Option Plan.

4.13*    Amendment No. 2 to the Registrant's 2001 Directors' Stock Option Plan.


----------

*        Filed herewith.


                                       69
<PAGE>

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

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

10.2*    Employment Agreement dated as of January 1, 2004 between the Registrant
         and Robert M. Stote, M.D.

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

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

10.5     Agreement between the Registrant and Hsu dated February 1, 1999,
         effective as of December 31, 1998. (Reference is made to Exhibit 7.1 to
         the Registrant's Form 8-K filed February 26, 1999, Commission File No.
         1-10581, which exhibit is incorporated herein by reference.)

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

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

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


----------

*        Filed herewith.


                                       70
<PAGE>

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

10.9     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.)

10.10    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.)

10.11    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.)

10.12*   Amendment dated October 14, 2003 to the Agreement between the
         Registrant and Pfizer Inc dated October 25, 2001.

21.1*    Subsidiaries of the Registrant.

23.1*    Independent Auditors' Consent.

31.1*    Certification of the Chief Executive Officer Pursuant to Section 302 of
         the Sarbanes-Oxley Act of 2002.

31.2*    Certification of the Chief Financial Officer Pursuant to Section 302 of
         the Sarbanes-Oxley Act of 2002.

32.1*    Certification of the Chief Executive Officer Pursuant to Section 906 of
         the Sarbanes-Oxley Act of 2002.

32.2*    Certification of the Chief Financial Officer Pursuant to Section 906 of
         the Sarbanes-Oxley Act of 2002.


----------

*        Filed herewith.


                                       71
<PAGE>


(b)      Reports on Form 8-K filed during the fiscal quarter ended December 31,
         2003:

         On October 29, 2003, a Report on Form 8-K was filed under Items 7 and
         12 which disclosed the press release dated October 29, 2003 reporting
         financial results of the Registrant for the three and nine months ended
         September 30, 2003.

                                       72
<PAGE>

                                   SIGNATURES

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

                                      BENTLEY PHARMACEUTICALS, INC.
                                      By: /s/ James R. Murphy
                                          --------------------------------------
                                          James R. Murphy
                                          Chairman, President and
                                          Chief Executive Officer
                                          Date:  March 4, 2004

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

<TABLE>
<CAPTION>
Signature                                   Title                                  Date
---------                                   -----                                  ----
<S>                                         <C>                                <C>
/s/ James R. Murphy                         Chairman, President,               March 4, 2004
-----------------------------------         Chief Executive Officer
James R. Murphy                             and Director (principal
                                            executive officer)


/s/ Michael McGovern                        Vice Chairman and Director         March 4, 2004
-----------------------------------
Michael McGovern

/s/ Robert M. Stote                         Senior Vice President,             March 4, 2004
-----------------------------------         Chief Science Officer and
Robert M. Stote, M.D.                       Director


/s/ Michael D. Price                        Vice-President,                    March 4, 2004
-----------------------------------         Chief Financial Officer,
Michael D. Price                            Treasurer, Secretary and
                                            Director (principal
                                            financial and accounting officer)


/s/ Robert J. Gyurik                        Vice President of                  March 4, 2004
-----------------------------------         Pharmaceutical Development
Robert J. Gyurik                            and Director


/s/ Charles L. Bolling                      Director                           March 4, 2004
-----------------------------------
Charles L. Bolling

/s/ Miguel Fernandez                        Director                           March 4, 2004
-----------------------------------
Miguel Fernandez

/s/ William A. Packer                       Director                           March 4, 2004
-----------------------------------
William A. Packer

/s/ John W. Spiegel                         Director                           March 4, 2004
-----------------------------------
John W. Spiegel
</TABLE>


<PAGE>

                      CONSOLIDATED FINANCIAL STATEMENTS OF
                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES


                                                                          Page
                                                                          ----

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

Consolidated Balance Sheets as of December 31, 2003 and 2002..............F-3

Consolidated Income Statements and Statements of Comprehensive
  Income for the years ended December 31, 2003, 2002 and 2001.............F-4

Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 2003, 2002 and 2001....................F-5

Consolidated Statements of Cash Flows for the years
  ended December 31, 2003, 2002 and 2001..................................F-6

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


                                       F-1

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Bentley
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 2003
and 2002, and the related consolidated income statements and statements of
comprehensive income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 4, 2004


                                       F-2

<PAGE>
                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(in thousands, except per share data)                          December 31,     December 31,
                                                                   2003             2002
                                                               ------------     ------------
<S>                                                            <C>              <C>
ASSETS
------
Current assets:
  Cash and cash equivalents                                    $  39,393        $  26,581
  Marketable securities                                            1,252              396
  Receivables, net                                                18,036           10,874
  Inventories, net                                                 7,106            5,133
  Deferred taxes                                                     213              123
  Prepaid expenses and other                                         899              865
                                                               ---------        ---------
    Total current assets                                          66,899           43,972
                                                               ---------        ---------
Non-current assets:
  Fixed assets, net                                               18,566            9,565
  Drug licenses and related costs, net                            13,818           10,975
  Restricted cash                                                  1,000                -
  Other                                                              180              180
                                                               ---------        ---------
    Total non-current assets                                      33,564           20,720
                                                               ---------        ---------
                                                               $ 100,463        $  64,692
                                                               =========        =========

LIABILITIES  AND  STOCKHOLDERS'  EQUITY
---------------------------------------
Current liabilities:
  Accounts payable                                             $  10,154        $   7,206
  Accrued expenses                                                 7,103            4,059
  Short-term borrowings                                            1,915            1,598
  Current portion of long-term debt                                   70              127
  Deferred income                                                  1,956              279
                                                               ---------        ---------
    Total current liabilities                                     21,198           13,269
                                                               ---------        ---------
Non-current liabilities:
  Deferred taxes                                                   2,555            2,141
  Long-term debt                                                     369              345
  Other                                                              176              186
                                                               ---------        ---------
    Total non-current liabilities                                  3,100            2,672
                                                               ---------        ---------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $1.00 par value, authorized 2,000 shares,
    issued and outstanding, none                                       -                -
  Common stock, $.02 par value, authorized 100,000 shares,
    issued and outstanding, 20,573 and 17,404 shares                 412              348
  Stock purchase warrants (to purchase 420 and 3,292
    shares of common stock)                                          333              431
  Additional paid-in capital                                     136,850          121,084
  Accumulated deficit                                            (66,599)         (72,696)
  Accumulated other comprehensive income (loss)                    5,169             (416)
                                                               ---------        ---------
    Total stockholders' equity                                    76,165           48,751
                                                               ---------        ---------
                                                               $ 100,463        $  64,692
                                                               =========        =========
</TABLE>


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

                                       F-3

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

<TABLE>
<CAPTION>
(in thousands, except per share data)                   For the Year Ended
                                                           December 31,
                                                --------------------------------
                                                   2003        2002       2001
                                                --------    --------    --------
<S>                                             <C>         <C>         <C>
Revenues:
   Net product sales                            $ 62,955    $ 38,718    $ 26,411
   Licensing and collaboration revenues            1,721         418           -
                                                --------    --------    --------
    Total revenues                                64,676      39,136      26,411

Cost of net product sales                         26,399      16,477      11,462
                                                --------    --------    --------

Gross profit                                      38,277      22,659      14,949
                                                --------    --------    --------

Operating expenses:
  Selling and marketing                           14,212      10,400       9,057
  General and administrative                       7,001       4,902       4,085
  Research and development                         4,295       2,960       2,084
  Depreciation and amortization                    1,340       1,015         911
                                                --------    --------    --------

    Total operating expenses                      26,848      19,277      16,137
                                                --------    --------    --------

Income (loss) from operations
  before sale of drug licenses                    11,429       3,382      (1,188)

Gain on sale of drug licenses                          -         650       5,050
                                                --------    --------    --------

Income from operations                            11,429       4,032       3,862
                                                --------    --------    --------

Other income (expenses):

  Interest income                                    332         279         168
  Interest expense                                  (228)       (209)       (244)
  Other, net                                         (13)         68          27
                                                --------    --------    --------

Income before income taxes                        11,520       4,170       3,813

Provision for income taxes                         5,423       2,534       2,452
                                                --------    --------    --------

Net income                                      $  6,097    $  1,636    $  1,361
                                                ========    ========    ========

Net income per common share:
  Basic                                         $   0.34    $   0.10    $   0.10
                                                ========    ========    ========
  Diluted                                       $   0.28    $   0.08    $   0.08
                                                ========    ========    ========

Weighted average common shares outstanding:
  Basic                                           17,997      16,569      14,196
                                                ========    ========    ========
  Diluted                                         21,637      19,798      16,147
                                                ========    ========    ========

Net income                                      $  6,097    $  1,636    $  1,361
Other comprehensive income (loss):
  Foreign currency translation gains (losses)      5,585       3,054        (842)
                                                --------    --------    --------
Comprehensive income                            $ 11,682    $  4,690    $    519
                                                ========    ========    ========
</TABLE>





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

                                       F-4

<PAGE>

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


<TABLE>
<CAPTION>
(in thousands, except per share data)              $.02 Par Value                                      Accumulated
                                                    Common Stock       Stock    Additional                Other
                                                -------------------   Purchase    Paid-In  Accumulated Comprehensive
                                                 Shares     Amount    Warrants    Capital    Deficit   Income (Loss)   Total
                                                --------   --------   --------  ----------   --------  ------------- --------
<S>                                               <C>      <C>        <C>         <C>        <C>         <C>         <C>
Balance at December 31, 2000                      13,914   $    278   $    632    $ 95,227   $(75,693)   $ (2,628)   $ 17,816
   Exercise of stock options and warrants            171          4          -         443          -           -         447
   Exercise of underwriter's Class A warrants        460          9       (199)      1,570          -           -       1,380
   Equity based compensation                          40          1          -         261          -           -         262
   Foreign currency translation adjustment             -          -          -           -          -        (842)       (842)
   Net income                                          -          -          -           -      1,361           -       1,361
                                                --------   --------   --------    --------   --------    --------    --------
Balance at December 31, 2001                      14,585        292        433      97,501    (74,332)     (3,470)     20,424
   Offering of common stock, net                   2,500         50          -      22,058          -           -      22,108
   Exercise of stock options and warrants            304          6         (2)      1,369          -           -       1,373
   Equity based compensation                          15          -          -         156          -           -         156
   Foreign currency translation adjustment             -          -          -           -          -       3,054       3,054
   Net income                                          -          -          -           -      1,636           -       1,636
                                                --------   --------   --------    --------   --------    --------    --------
Balance at December 31, 2002                      17,404        348        431     121,084    (72,696)       (416)     48,751
   Exercise of stock options and warrants          3,111         62        (98)     15,258          -           -      15,222
   Equity based compensation                          58          2          -         508          -           -         510
   Foreign currency translation adjustment             -          -          -           -          -       5,585       5,585
   Net income                                          -          -          -           -      6,097           -       6,097
                                                --------   --------   --------    --------   --------    --------    --------
Balance at December 31, 2003                      20,573   $    412   $    333    $136,850   $(66,599)   $  5,169    $ 76,165
                                                ========   ========   ========    ========   ========    ========    ========
</TABLE>


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

                                       F-5

<PAGE>

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

<TABLE>
<CAPTION>
(in thousands)                                                        For the Year Ended
                                                                         December 31,
                                                              -----------------------------------
                                                                 2003         2002         2001
                                                              ---------    ---------    ---------
<S>                                                           <C>          <C>          <C>
Cash flows from operating activities:
  Net income                                                  $   6,097    $   1,636    $   1,361
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Gain on sale of drug licenses                                     -         (650)      (5,050)
    Depreciation and amortization                                 2,479        1,584        1,235
    Foregiveness of related party loans                             302           98           98
    Equity-based compensation expense                               510          156          262
    Other non-cash items                                           (163)         597         (286)
    (Increase) decrease in assets and
      increase (decrease) in liabilities:
      Receivables                                                (3,673)      (1,949)      (2,060)
      Inventories                                                  (801)      (1,796)        (864)
      Deferred foreign taxes                                        (55)          45        1,629
      Prepaid expenses and other current assets                    (362)        (357)         100
      Other assets                                                  (18)          24          (11)
      Accounts payable and accrued expenses                       2,682        1,855        3,306
      Deferred income                                             1,180         (217)         496
      Other liabilities                                             (10)          23          (77)
                                                              ---------    ---------    ---------
        Net cash provided by operating activities                 8,168        1,049          139
                                                              ---------    ---------    ---------

Cash flows from investing activities:
  Proceeds from sale of investments                             225,750       56,190       31,645
  Purchase of investments                                      (226,219)     (56,314)     (31,567)
  Proceeds from sale of drug licenses                                 -          656        2,698
  Additions to fixed assets                                      (8,076)      (3,432)      (1,595)
  Additions to drug licenses and related costs                   (2,298)        (796)        (437)
                                                              ---------    ---------    ---------
        Net cash (used in) provided by investing activities     (10,843)      (3,696)         744
                                                              ---------    ---------    ---------
</TABLE>


                          (Continued on following page)



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

                                       F-6

<PAGE>

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

<TABLE>
<CAPTION>
(in thousands)                                                                      For the Year Ended
                                                                                        December 31,
                                                                              --------------------------------
                                                                                2003        2002        2001
                                                                              --------    --------    --------
<S>                                                                           <C>         <C>         <C>
Cash flows from financing activities:
  Proceeds from exercise of stock options/warrants                            $ 15,222    $  1,375    $  1,827
  Proceeds from offering of common stock, net                                        -      22,108           -
  Repayment of borrowings                                                       (3,577)     (3,039)     (4,219)
  Proceeds from borrowings                                                       3,556       2,841       2,514
  Increase in restricted cash                                                   (1,000)          -           -
                                                                              --------    --------    --------
        Net cash provided by financing activities                               14,201      23,285         122
                                                                              --------    --------    --------

Effect of exchange rate changes on cash                                          1,286         207         (85)
                                                                              --------    --------    --------

Net increase in cash and cash equivalents                                       12,812      20,845         920

Cash and cash equivalents at beginning of year                                  26,581       5,736       4,816
                                                                              --------    --------    --------

Cash and cash equivalents at end of year                                      $ 39,393    $ 26,581    $  5,736
                                                                              ========    ========    ========

Supplemental Disclosures of Cash Flow Information
The Company paid cash during the year for:
    Interest                                                                  $    203    $    202    $    247
                                                                              ========    ========    ========
    Taxes                                                                     $  4,862    $  2,164    $    317
                                                                              ========    ========    ========


Supplemental Disclosures of Non-Cash Financing and Investing Activities The
Company has issued or is obligated to issue Common Stock in
  exchange for services as follows:
    Shares                                                                          58          15          40
                                                                              ========    ========    ========
    Amount                                                                    $    505    $    151    $    233
                                                                              ========    ========    ========

Included in year-end accounts payable are fixed asset and
  drug license purchases totaling:                                            $  1,721    $    922    $    514
                                                                              ========    ========    ========
</TABLE>


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


                                       F-7
<PAGE>

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

NOTE 1 - HISTORY AND OPERATIONS

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

         In the pharmaceutical product sales segment based in Spain, the Company
manufactures and markets branded and generic pharmaceutical products within four
primary therapeutic areas: cardiovascular, gastrointestinal, infectious and
neurological diseases. In addition, the Company licenses the right to register
and market its pharmaceutical products in other foreign countries. The Company
also provides contract manufacturing services for pharmaceutical products to be
sold both within Spain and in other foreign countries in connection with its
international license agreements. The Company has also recently developed a
strategy to introduce certain of its generic pharmaceutical products into the
U.S. marketplace.

         The Company anticipated the opportunities that the emerging generic
drug market in Spain presented and began taking measures over four years ago to
enter the Spanish generic drug market. The Company created Laboratorios Davur
and Laboratorios Rimafar, wholly-owned subsidiaries of its Spanish entity,
Laboratorios Belmac, to register, market and distribute generic pharmaceutical
products in Spain and began aligning its business model to be competitive,
including hiring and training a new generic sales force, submission of
generic-equivalent products to the Spanish Ministry of Health for approval and a
marketing campaign designed to position its Spanish generic subsidiaries as
leaders in the Spanish generic drug market. In July 2000, the Company entered
into a strategic alliance with Teva Pharmaceutical Industries, Ltd. (Teva),
whereby the Company has received the right to register and market in Spain
certain of Teva's pharmaceutical products, representing more than 25 different
chemical entities. Teva also entered into a supply agreement with the Company
pursuant to which Teva will manufacture the products and supply them to the
Company for marketing and sale in Spain. Teva was also granted a right of first
refusal to acquire Laboratorios Davur in the event that the Company decides to
sell that subsidiary or its direct parent, Laboratorios Belmac. The Company also
granted Teva the right to bid for Laboratorios Belmac in the event the Company
intends to sell that subsidiary.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation and foreign currency translation

         The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries: Pharma de Espana, Inc. and its
wholly-owned subsidiary, Laboratorios Belmac S.A. and its wholly-owned
subsidiaries, Laboratorios Davur S.L. and Laboratorios Rimafar S.L.;


                                      F-8
<PAGE>

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


Bentley Park, L.L.C.; Bentley Healthcare Corporation and its wholly-owned
subsidiary, Belmac Hygiene, Inc.; Belmac Health Corporation; Belmac Holdings,
Inc. and its wholly-owned subsidiary, Belmac A.I., Inc.; B.O.G. International
Finance, Inc.; and Belmac Jamaica, Ltd. All inter-company balances have been
eliminated in consolidation. The financial position and results of operations of
the Company's foreign subsidiaries are measured using local currency as the
functional currency. Assets and liabilities of each foreign subsidiary are
translated at the rate of exchange in effect at the end of the period. Revenues
and expenses are translated at the average exchange rate for the period. Foreign
currency translation gains and losses are credited to or charged against other
comprehensive income (loss) in the Consolidated Balance Sheets. Foreign currency
translation gains and losses arising from cash transactions are credited to or
charged against current earnings.

Use of estimates

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

Cash and cash equivalents and restricted cash

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

         Included in cash and cash equivalents at December 31, 2003 and 2002 are
approximately $29,156,000 and $23,360,000, respectively, of short-term
investments considered to be cash equivalents, as the remaining maturity dates
of such investments were three months or less when purchased.

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

Marketable securities

         The Company has investments in securities, with maturities of greater
than three months when purchased, totaling $1,252,000, which are classified as
available-for-sale as of December 31, 2003, compared to $396,000 as of December
31, 2002. The Company's investments are carried at amortized cost which
approximates fair value due to the short-term nature of these investments.
Accordingly, no unrealized gains or losses have been recognized on these
investments. Should the fair values differ significantly from the amortized
costs, unrealized gains or losses would be included as a component of other
comprehensive income (loss).


                                      F-9
<PAGE>

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


Inventories

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

Fixed assets

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

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

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

Drug licenses and related costs

         Drug licenses and related costs incurred in connection with acquiring
licenses, patents, and other proprietary rights related to the Company's
commercially developed products are capitalized. Capitalized drug licenses and
related costs are amortized on a straight-line basis for periods not exceeding
fifteen years from the dates of acquisition. Carrying values of such assets are
reviewed at least annually by the Company, by comparing the carrying amounts to
their estimated undiscounted cash flows, and adjustments are made for any
diminution in value. In accordance with the guidelines in Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, the
Company determined it has one reporting unit. The Company performed a review for
diminution in value and has concluded that no diminution in value has occurred.
The Company has also reassessed the useful lives of its drug licenses and
related costs and determined the useful lives are appropriate in determining
amortization expense.

Fair value of financial instruments

         The carrying amounts of cash, cash equivalents, marketable securities,
receivables, accounts payable, accrued expenses and short-term borrowings
approximate fair value because of their short-term nature. The carrying amount
of the Company's long-term obligations approximates fair value given the amounts
outstanding at December 31, 2003 and 2002.

         The fair value information presented herein is based on information
available to management as of December 31, 2003. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore the current estimates
of fair value may differ significantly from the amounts presented herein.


                                      F-10
<PAGE>

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


Revenue recognition

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

         Revenue from service, research and development, and licensing and
supply agreements is recognized when the service procedures have been completed
or as revenue recognition criteria have been met for each separate unit of
accounting as defined in Emerging Issues Task Force ("EITF") Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. At December 31,
2003, the Company has deferred the recognition of approximately $634,000 in
royalties and $1,322,000 of licensing, collaboration or other revenues which
currently do not meet the requirements for revenue recognition.

Research and development

         Research and development costs are expensed when incurred.

Income taxes

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

Basic and diluted net income per common share

         Basic and diluted net income per common share is based on the weighted
average number of shares of Common Stock outstanding during each period. The
effect of the Company's outstanding stock options and stock purchase warrants
were considered in the diluted net income per share calculation for the years
ended December 31, 2003, 2002 and 2001.

         The following is a reconciliation between basic and diluted net income
per common share for the years ended December 31, 2003, 2002 and 2001. Dilutive
securities issuable for the years ended December 31, 2003, 2002 and 2001 include
approximately 1,441,000, 1,309,000 and 663,000 shares, respectively, issuable as
a result of Class B Warrants, and approximately 2,199,000, 1,920,000 and
1,288,000 shares, respectively, issuable as a result of various stock options
and warrants outstanding.



                                      F-11
<PAGE>

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

<TABLE>
<CAPTION>
         For The Year Ended December 31, 2003
         ------------------------------------
                                                                                               Effect of
                                                                                    Basic       Dilutive       Diluted
                                                                                     EPS       Securities        EPS
                                                                                   ------      ----------      -------
                                                                                  (In Thousands, Except Per Share Data)
<S>                                                                                <C>          <C>           <C>
Net income....................................................................     $  6,097     $      -      $  6,097
Weighted average common shares outstanding....................................       17,997        3,640        21,637
Net income per common share...................................................     $   0.34     $  (0.06)     $   0.28


         For The Year Ended December 31, 2002
         ------------------------------------
                                                                                               Effect of
                                                                                    Basic       Dilutive       Diluted
                                                                                     EPS       Securities        EPS
                                                                                   ------      ----------      -------
                                                                                  (In Thousands, Except Per Share Data)
Net income....................................................................     $  1,636     $      -      $  1,636
Weighted average common shares outstanding....................................       16,569        3,229        19,798
Net income per common share...................................................     $   0.10     $  (0.02)     $   0.08


         For The Year Ended December 31, 2001
         ------------------------------------
                                                                                               Effect of
                                                                                    Basic       Dilutive       Diluted
                                                                                     EPS       Securities        EPS
                                                                                   ------      ----------      -------
                                                                                  (In Thousands, Except Per Share Data)
Net income....................................................................     $  1,361     $      -      $  1,361
Weighted average common shares outstanding....................................       14,196        1,951        16,147
Net income per common share...................................................     $   0.10     $  (0.02)     $   0.08
</TABLE>


         For the years ended December 31, 2003, 2002 and 2001, warrants and
options to purchase 237,000, 324,000 and 467,000 shares of Common Stock,
respectively, were excluded from the diluted EPS presentation because their
exercise prices were greater than the average fair value of the Common Stock.

Comprehensive income

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

Stock-based compensation plans

         The Company has stock-based employee compensation plans that are
described more fully in Note 11. The Company accounts for these plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Options granted under
these plans have exercise prices equal to or greater than the market value of
the underlying


                                      F-12
<PAGE>

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


common stock on the dates of grant, which is generally the date on which
compensation is measured. In addition to these plans, the Company also sponsors
a 401(k) Plan for eligible employees and matches eligible contributions with
shares of the Company's Common Stock. From time to time, at the discretion of
the Corporate Governance and Compensation Committee of the Board of Directors
(the Compensation Committee), the Company grants shares of its Common Stock to
employees in lieu of cash compensation. Related stock-based employee
compensation costs are reflected in the Consolidated Income Statements and
Statements of Cash Flows.

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

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                               -----------------------
                                                                   2003               2002                 2001
                                                                   ----               ----                 ----
                                                                        (In Thousands, Except Per Share Data)
<S>                                                              <C>               <C>                 <C>
Net income, as reported.....................................     $  6,097          $   1,636           $    1,361

Add: Stock-based employee compensation expense included
  in reported net income....................................          510                156                  262

Deduct: Total stock-based employee compensation expense
  determined under fair value method for all awards.........       (3,232)            (3,829)              (2,302)
                                                                 --------          ----------          -----------
Pro forma net income (loss).................................     $  3,375          $  (2,037)          $     (679)
                                                                 ========          ==========          ===========

Net income (loss) per share:
    Basic - as reported.....................................     $   0.34          $    0.10           $     0.10
                                                                 ========          ==========          ===========
    Basic - pro forma.......................................     $   0.19          $   (0.12)          $    (0.05)
                                                                 ========          ==========          ===========

    Diluted - as reported...................................     $   0.28          $    0.08           $     0.08
                                                                 ========          ==========          ===========
    Diluted - pro forma.....................................     $   0.16          $   (0.12)          $    (0.05)
                                                                 ========          ==========          ===========
</TABLE>


                                      F-13
<PAGE>

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


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

                                                 Year Ended December 31,
                                                 -----------------------
                                              2003        2002         2001
                                              ----        ----         ----
                                           (In Thousands, Except Per Share Data)

      Risk free interest rate............     3.86%       5.08%        5.18%
      Dividend yield.....................     0.00%       0.00%        0.00%
      Expected life......................   5 years     5 years     10 years
      Volatility.........................    54.12%      57.61%      140.81%
      Fair value of options granted......     $5.03       $5.58        $3.72

         Stock or other equity-based compensation for non-employees is accounted
for under the fair value method as required by SFAS No. 123 and EITF Issue No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services and other
related interpretations.

Segments of an enterprise and related information

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

Recently issued accounting pronouncements

         In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
SFAS No. 148 amends SFAS No. 123, to provide alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure requirements of
SFAS No. 123 to require disclosure in the summary of significant accounting
policies, the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. The disclosure provision is required
for all companies with stock-based employee compensation, regardless of whether
the company utilizes the fair value method of accounting described in SFAS No.
123 or the intrinsic value method described in APB Opinion No. 25. SFAS No.
148's amendment of the transition and annual disclosure provisions of SFAS No.
123 were effective for fiscal years ending after December 15, 2002 and have been
incorporated in the Notes to the accompanying Consolidated Financial Statements.
The disclosure provisions for interim financial statements were effective for
interim periods beginning after December 15, 2002. We have chosen not to adopt
the fair value method of accounting for stock-based employee compensation at
this time. Accordingly, we continue to account for stock-based compensation
utilizing the intrinsic value method of accounting for stock-based employee
compensation described by APB Opinion No. 25.


                                      F-14
<PAGE>

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


         In November 2002, the EITF released Issue No. 00-21, which addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. EITF Issue No. 00-21
establishes three principles: revenue arrangements with multiple deliverables
should be divided into separate units of accounting; arrangement consideration
should be allocated among the separate units of accounting based on their
relative fair values; and revenue recognition criteria should be considered
individually for each separate unit of accounting. EITF Issue No. 00-21 is
effective for all revenue arrangements entered into in fiscal periods beginning
after June 15, 2003, with early adoption permitted. The adoption of EITF Issue
No. 00-21 in our third quarter of 2003 has not had a material effect on our
financial position, results of operations or cash flows for the year ended
December 31, 2003. However, the adoption of EITF Issue No. 00-21 may require the
deferral and recognition over extended periods, of certain up-front fees
associated with our multiple element collaboration and license agreements and of
our marketing, distribution and supply agreements.

Reclassifications

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

NOTE 3 - RECEIVABLES

<TABLE>
<CAPTION>
         Receivables consist of the following:
                                                                                                  December 31,
                                                                                            ----------------------
                                                                                               2003         2002
                                                                                            --------      --------
                                                                                                (In Thousands)
<S>                                                                                         <C>           <C>
Trade receivables (of which $1,914 and $1,340, respectively, collateralize short-term
  borrowings with Spanish financial institutions) ...................................       $ 16,233      $  9,829
VAT, income and social security taxes receivable ....................................            953         1,033
Royalties receivable ................................................................            884             -
Other ...............................................................................            126           112
                                                                                            --------      --------
                                                                                              18,196        10,974
Less-allowance for doubtful accounts ................................................           (160)         (100)
                                                                                            --------      --------
                                                                                            $ 18,036      $ 10,874
                                                                                            ========      ========
</TABLE>

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

<TABLE>
<CAPTION>
                                               Year Ended         Year Ended           Year Ended
                                           December 31, 2003   December 31, 2002   December 31, 2001
                                           -----------------   -----------------   -----------------
                                                                 (In Thousands)
                                               <C>                  <C>                  <C>
Balance at beginning of year ...........        $ 100                $  66                $  13
Provisions charged to costs and expenses          102                   64                   54
Write-offs reducing provisions .........          (64)                 (45)                   -
Effect of foreign currency .............           22                   15                   (1)
                                                -----                -----                -----
Balance at end of year .................        $ 160                $ 100                $  66
                                                =====                =====                =====
</TABLE>


                                      F-15
<PAGE>
                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 4 - INVENTORIES

         Inventories consist of the following:

                                                           December 31,
                                                        -----------------
                                                        2003         2002
                                                        ----         ----
                                                           (In Thousands)

Raw materials........................................ $ 5,351      $  3,518
Finished goods.......................................   1,829         1,677
                                                      -------      --------
                                                        7,180         5,195
Less-allowance for slow moving inventory.............     (74)          (62)
                                                      -------      --------
                                                      $ 7,106      $  5,133
                                                      =======      ========

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


<TABLE>
<CAPTION>
                                                                 Year Ended           Year Ended          Year Ended
                                                              December 31, 2003   December 31, 2002   December 31, 2001
                                                              -----------------   -----------------   -----------------
                                                                                   (In Thousands)
<S>                                                               <C>                  <C>                  <C>
Balance at beginning of year...............................       $   62               $   54               $   61
Provisions charged to costs and expenses...................            -                    -                    -
Write-offs reducing provisions.............................            -                   (1)                  (4)
Effect of foreign currency.................................           12                    9                   (3)
                                                                  ------               ------               ------
Balance at end of year.....................................       $   74               $   62               $   54
                                                                  ======               ======               ======
</TABLE>

NOTE 5 - FIXED ASSETS

         Fixed assets consist of the following:

                                                            December 31,
                                                         ------------------
                                                         2003          2002
                                                         ----          ----
                                                           (In Thousands)
Land...............................................  $     1,900   $       930
Buildings and improvements.........................        9,085         5,576
Equipment..........................................       10,953         5,197
Furniture and fixtures.............................        1,497         1,006
Leasehold improvements.............................           43            52
                                                     -----------   -----------
                                                          23,478        12,761
Less-accumulated depreciation......................       (4,912)       (3,196)
                                                     ------------  ------------
                                                     $    18,566   $     9,565
                                                     ===========   ===========

         In order to support the Company's growth in Europe, it is adding
additional capacity to its manufacturing facility through a series of
improvements. During the year ended December 31, 2003, the Company invested
approximately $1,239,000 renovating the facility and approximately $4,136,000
for machinery and equipment including new high speed manufacturing and packaging
equipment.

         The Company also purchased a 15,700 square foot commercial building
located on approximately 14 acres of land in Exeter, New Hampshire for
approximately $1,800,000 in January 2003. The purchase included furniture and
fixtures in the building and the purchase price was allocated to the following
components in accordance with their relative fair market values: land -
$786,000, buildings - $911,000, and furniture and fixtures - $103,000. The
Company moved its corporate headquarters into the purchased building in April
2003. As a result of the move, the Company abandoned its former office space.


                                      F-16
<PAGE>

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


The remaining lease costs and costs for the abandonment of leasehold
improvements totaling $44,000 were charged to general and administrative
expenses in the Consolidated Income Statements for the year ended December 31,
2003. The lease agreement for the former office space ended in February 2004.

         Depreciation expense of approximately $368,000, $212,000 and $139,000
has been charged to operations as a component of depreciation and amortization
expense in the Consolidated Income Statements for the years ended December 31,
2003, 2002 and 2001, respectively. The Company has included depreciation
totaling approximately $1,139,000, $569,000 and $324,000 in cost of net product
sales during the years ended December 31, 2003, 2002 and 2001, respectively.

NOTE 6 - DRUG LICENSES AND RELATED COSTS

         Drug licenses and related costs consist of the following:

                                                       December 31,
                                                    ------------------
                                                    2003          2002
                                                    ----          ----
                                                      (In Thousands)
Drug licenses and related costs................ $   18,102    $   13,908
Less-accumulated amortization..................     (4,284)       (2,933)
                                                ----------    ----------
                                                $   13,818    $   10,975
                                                ==========    ==========

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

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

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

         Amortization expense for drug licenses and related costs was
approximately $972,000, $803,000 and $772,000 for the years ended December 31,
2003, 2002 and 2001, respectively, and has been recorded in depreciation and
amortization expense in the accompanying Consolidated Income Statements.

         Amortization expense for existing drug licenses and related costs for
each of the five years ending December 31, 2008 and for all remaining years
thereafter is estimated to be approximately $1,047,000 and $8,583,000,
respectively.



                                      F-17
<PAGE>

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


NOTE 7 - RELATED PARTY NOTES

         There are no Related Party Receivables from executive officers or
directors at December 31, 2003. In March 2000, the Company provided loans to
each of Messrs. Murphy, Price and Gyurik, who are executive officers of the
Company, in the amounts of $250,000, $50,000 and $140,000, respectively, which
Messrs. Murphy, Price and Gyurik used to pay income taxes on equity-based
compensation received in the prior year. In December 2001, the Compensation
Committee of the Company's Board of Directors agreed to amend the loan
agreements resulting in the forgiveness of principal and accrued interest
totaling approximately $56,000, $11,000 and $31,000, due from Messrs. Murphy,
Price and Gyurik, respectively. The amounts forgiven were applied first to
unpaid accrued interest and then to principal. These amounts were recorded as
compensation expense during the year ended December 31, 2001 and treated as
taxable income to the respective executives.

         In January 2002, the Compensation Committee agreed to amend the loan
agreements, resulting in the forgiveness of principal and accrued interest
totaling approximately the same amounts as in December 2001 and the reduction in
the number of shares collateralizing the remaining loan amounts to 18,700, 4,000
and 10,700 shares of the Company's Common Stock owned by Messrs. Murphy, Price
and Gyurik, respectively. These amounts were recorded as compensation expense
during the year ended December 31, 2002 and treated as taxable income to the
respective executives.

         In March 2003, the Compensation Committee agreed to amend the loan
agreements, resulting in the forgiveness of the remaining aggregate principal of
$294,000 and accrued interest on the loan balances of $8,000. As of March 31,
2003, the balance outstanding related to these loans was reduced to zero. These
amounts were recorded as compensation expense during the year ended December 31,
2003 and treated as taxable income to the respective executives.

         Of the balances outstanding at December 31, 2002 approximately $301,000
was included in prepaid expenses and other current assets in the Consolidated
Balance Sheets. Accrued interest on such loans totaled approximately $7,000 at
December 31, 2002.

NOTE 8 - ACCRUED EXPENSES

         Accrued expenses consist of the following:

                                                        December 31,
                                                      ------------------
                                                      2003         2002
                                                      ----         ----
                                                        (In Thousands)
Foreign income taxes payable.......................  $  1,940   $  1,177
Allowance for sales returns........................       446        349
Accrued payroll....................................       952        756
Spanish pharmaceutical taxes payable...............     1,586        565
Other accrued expenses.............................     2,179      1,212
                                                     --------   --------
                                                     $  7,103   $  4,059
                                                     ========   ========

                                      F-18
<PAGE>

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


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

<TABLE>
<CAPTION>
                                                                 Year Ended           Year Ended          Year Ended
                                                              December 31, 2003   December 31, 2002   December 31, 2001
                                                              -----------------   -----------------   -----------------
                                                                                   (In Thousands)
<S>                                                               <C>                 <C>                 <C>
Balance at beginning of year...............................       $  349              $  402              $   56
Provisions charged to costs and expenses...................          640                 311                 351
Write-offs reducing provisions.............................         (615)               (423)                  -
Effect of foreign currency.................................           72                  59                  (5)
                                                                  ------              ------              ------
Balance at end of year.....................................       $  446              $  349              $  402
                                                                  ======              ======              ======

NOTE 9 - DEBT

         Short-term borrowings consist of the following:

<CAPTION>

                                                                                                          December 31,
                                                                                                      ------------------
                                                                                                      2003          2002
                                                                                                      ----          ----
                                                                                                        (In Thousands)
<S>                                                                                                   <C>         <C>
Trade receivables discounted with a Spanish financial institution, with recourse, effective
  interest rate is 3.9% and 5.2%, respectively...................................................     $  1,914    $  1,340
Revolving lines of credit payable to Spanish financial institutions, weighted average interest
  rate is 3.3% and 4.5%, respectively............................................................            1         258
                                                                                                     ---------    --------
                                                                                                      $  1,915    $  1,598
                                                                                                     =========    ========
</TABLE>

         The weighted average stated interest rate on short-term borrowings
outstanding at December 31, 2003 and 2002 was 3.8% and 5.1%, respectively.

         The Company has revolving lines of credit with Spanish financial
institutions, which entitle the Company to borrow up to $6,617,000 at December
31, 2003. The lines are scheduled to mature on various dates through November
30, 2004 and are renewable. At December 31, 2003, advances outstanding under the
lines of credit totaled approximately $1,000. The weighted average interest rate
at December 31, 2003 and 2002 was 3.3% and 4.5%, respectively, and interest is
payable quarterly.

         Long-term debt consists of the following:

                                                                   December 31,
                                                                 ---------------
                                                                 2003      2002
                                                                 ----      ----
                                                                 (In Thousands)

Loans payable to Spanish government, net of
 unamortized discount of $83 and $105, respectively.........    $ 369    $  282
Loans payable for equipment financing......................        70       190
                                                                -----    ------
                                                                  439       472
Less-current portion.......................................       (70)     (127)
                                                                 ----     -----
  Total long-term debt.....................................     $ 369    $  345
                                                                =====    ======

         In March 2002, the Company entered into a loan agreement to finance the
acquisition of manufacturing equipment. The terms of the loan require repayment
over a two-year period at an average interest rate of 2.9%. As of December 31,
2003, approximately $70,000 of the original balance remains outstanding.



                                      F-19
<PAGE>

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


         In November 2002, the Company entered into a loan agreement with the
Spanish government as part of a research-funding program. The loan is
non-interest bearing and is payable in equal annual installments of
approximately $17,000 beginning in 2006. Accordingly, the Company imputed
interest at the market rate in Spain (4.8%), recorded a discount on the
obligation of $33,000 and has classified the obligation at December 31, 2003 and
2002 as non-current. The discount is being amortized over the ten-year term of
the loan.

         In December 2001, the Company entered into a loan agreement with the
Spanish government as part of a research-funding program. The loan is
non-interest bearing and is payable in equal annual installments of
approximately $31,000 beginning in 2005. Accordingly, the Company imputed
interest at the market rate in Spain (6%), recorded a discount on the obligation
of $72,000 and has classified the obligation at December 31, 2003 and 2002 as
non-current. The discount is being amortized over the ten-year term of the loan.

NOTE 10 - PREFERRED STOCK

         The Company has 2,000,000 shares of $1.00 Preferred Stock authorized
for issuance. As of December 31, 2003 and 2002, no shares of Preferred Stock
were outstanding.

NOTE 11 - STOCKHOLDERS' EQUITY

         At December 31, 2003 the Company had the following Common Stock
reserved for issuance under various plans and agreements (in thousands):

                                                                  Common Shares
                                                                  -------------
For exercise of stock purchase warrants.........................        420
For exercise of outstanding stock options.......................      3,920
For future stock option grants..................................      1,578
                                                                      -----
                                                                      5,918
                                                                      =====

         The Company has never paid any dividends on its Common Stock. The
current policy of the Board of Directors is to retain earnings to finance the
operation of the Company's business. Accordingly, it is anticipated that no cash
dividends will be paid to the holders of the Common Stock in the foreseeable
future.

Common stock transactions

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

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

         During the year ended December 31, 2001, the Company issued
approximately 460,000 shares of Common Stock as a result of the exercise of
underwriter's Class A Warrants, approximately 4,200 shares of


                                      F-20
<PAGE>

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


Common Stock upon exercise of Class B Warrants, approximately 150,000 shares of
Common Stock upon exercise of 150,000 other stock purchase warrants,
approximately 16,900 shares of Common Stock upon exercise of stock purchase
options, and approximately 40,000 shares of Common Stock as equity-based
compensation in lieu of cash.

         General and administrative expenses for the years ended December 31,
2003, 2002 and 2001 include $248,000, $100,000 and $160,000, respectively, of
non-cash equity-based compensation. Research and development expenses for the
years ended December 31, 2003, 2002 and 2001 include $262,000, $56,000 and
$102,000, respectively, of non-cash equity-based compensation.

Stock purchase warrants

         At December 31, 2003, warrants to purchase an aggregate of
approximately 420,000 shares of Common Stock were outstanding, which were
exercisable at prices ranging from $1.50 to $20.00 per share, of which 400,000
warrants have an exercise price of $1.50 per share and 20,000 warrants have an
exercise price of $20.00 per share. The warrants expire on various dates from
June 2004 through February 2009.

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

         At December 31, 2002, warrants to purchase an aggregate of
approximately 3,292,000 shares of Common Stock were outstanding, which were
exercisable at prices ranging from $1.50 to $20.00 per share, of which 400,000
warrants had an exercise price of $1.50 per share, approximately 5,744,000 Class
B Warrants to purchase approximately 2,872,000 shares of common stock had an
exercise price of $5.00 per share and 20,000 warrants had an exercise price of
$20.00 per share.

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

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



                                      F-21
<PAGE>

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


         The table below summarizes warrant activity for the years ended
December 31, 2001, 2002 and 2003.

<TABLE>
<CAPTION>
                                                                                                         Weighted
                                                                                  Number of          Average Exercise
                                                                                Common Shares         Price Per Share
                                                                                -------------         ---------------
                                                                                (In Thousands, Except Per Share Data)
<S>                                                                                 <C>               <C>
Outstanding at December 31, 2000 .................................................   4,038               $   4.41
  Exercised ......................................................................    (614)              $   2.89
                                                                                     -----
Outstanding at December 31, 2001 .................................................   3,424               $   4.68
  Exercised ......................................................................    (132)              $   5.00
                                                                                     -----
Outstanding at December 31, 2002 .................................................   3,292               $   4.67
  Exercised ......................................................................  (2,870)              $   5.00
  Expired ........................................................................      (2)              $   5.00
                                                                                     -----
Outstanding at December 31, 2003 .................................................     420               $   2.38
                                                                                     =====
</TABLE>

Stock option plans

         The Company has in effect Stock Option Plans (the "Plans"), pursuant to
which directors, officers and employees of the Company are eligible to receive
grants of options for the Company's Common Stock. Approximately 5,498,000 shares
of Common Stock have been reserved for issuance under the Plans, of which
approximately 605,000 are outstanding under the 1991 Plan, approximately
1,881,000 are outstanding under the 2001 Employee and Director Plans and
1,434,000 are outstanding under the Executive Plan as of December 31, 2003.
Options may be granted for terms not exceeding ten years from the date of grant
except for incentive stock options which are granted to persons owning more than
10% of the total combined voting power of all classes of stock of the Company.
For these individuals, incentive stock options may be granted for terms not
exceeding five years from the date of grant. Options may not be granted at a
price that is less than 100% of the fair market value on the date the options
are granted (110% in the case of incentive stock options for persons owning more
than 10% of the total combined voting power of the Company). Options granted
under the Plans generally vest over one or two years. Options to purchase
240,500, 172,300 and 16,900 shares of Common Stock were exercised during the
years ended December 31, 2003, 2002 and 2001, respectively, resulting in net
cash proceeds to the Company of approximately $962,000, $715,000 and $51,000,
respectively.



                                      F-22
<PAGE>

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


         The table below summarizes activity in the Company's Plans for the
years ended December 31, 2001, 2002 and 2003.

                                            Number of        Weighted Average
                                          Common Shares       Exercise Price
                                        ---------------      ---------------
                                        (In  Thousands, Except Per Share Data)

Outstanding at December 31, 2000            2,457                $    4.87

   Granted ............................       553                     6.04
   Exercised ..........................       (17)                    3.00
   Canceled ...........................       (56)                    9.66
                                            -----

Outstanding at December 31, 2001            2,937                     5.00

   Granted ............................       699                    10.28
   Exercised ..........................      (172)                    4.15
   Canceled ...........................        (5)                   29.40
                                            -----

Outstanding at December 31, 2002            3,459                     6.07

   Granted ............................       731                     9.62
   Exercised ..........................      (240)                    4.00
   Canceled ...........................       (30)                   20.08
                                            -----
Outstanding at December 31, 2003            3,920                $    6.75
                                            =====

         The table below summarizes options outstanding and exercisable at
December 31, 2003 (number of options in thousands):

<TABLE>
<CAPTION>
                                                                                   Options Currently
                                                                                -----------------------
                              Options Outstanding                                    Exercisable
                              -------------------                                    -----------
                                           Weighted          Weighted                          Weighted
         Range of            Number         Average          Average            Number         Average
         Exercise             Of           Exercise       Remaining Life          Of           Exercise
         Prices             Options         Price            (Years)            Options         Price
         ------             -------        --------       --------------       --------       ---------
         <S>                  <C>         <C>                  <C>               <C>          <C>
          $2.00-2.89          476         $  2.86              2.5               476          $  2.86
           3.00-3.75          579            3.62              2.5               579             3.62
                4.73          500            4.73              2.3               500             4.73
           5.70-5.88          147            5.84              6.4               147             5.84
           6.00-6.38          410            6.01              7.3               410             6.01
           7.10-7.90          262            7.53              6.7               262             7.53
           8.00-8.93          311            8.16              7.9                52             8.50
           9.00-9.80          534            9.68              8.0               250             9.70
         10.04-10.75          385           10.10              9.2                30            10.73
         11.13-11.81          266           11.49              8.3               133            11.54
         13.48-15.83           50           14.03              9.8                 -                -
         -----------        -----         -------              ---             -----          -------
         $2.00-15.83        3,920         $  6.75              5.8             2,839          $  5.58
         ===========        =====         =======              ===             =====          =======
</TABLE>

         Options and warrants outstanding at December 31, 2003 include
approximately 420,000 warrants, all of which are exercisable, and approximately
3,920,000 options, of which approximately 2,839,000 are vested and exercisable
at December 31, 2003.

         Options and warrants outstanding at December 31, 2002 included warrants
to purchase approximately 3,292,000 shares of common stock, all of which were
exercisable, and approximately 3,459,000 options, of which approximately
2,710,000 were vested and exercisable at December 31, 2002.



                                      F-23
<PAGE>

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


         Subsequent to December 31, 2003, the Company granted options to certain
employees of the Company to purchase an aggregate of approximately 403,000
shares of Common Stock at a weighted average exercise price of $13.27, which
options are scheduled to expire on various dates between January 1, 2014 and
March 1, 2014.

401(k) Retirement Plan

         The Company sponsors a 401(k) retirement savings plan (the "401(k)
Plan") under which eligible employees may contribute, on a pre-tax basis, up to
100% of their respective total annual income from the Company, subject to a
maximum aggregate annual contribution imposed by the Internal Revenue Code of
1986, as amended. All employees who work for the Company in the U.S. are
eligible to participate in the 401(k) Plan. All employee contributions are
allocated to the employee's individual account and are invested in various
investment options as directed by the employee. Employees' cash contributions
are fully vested and nonforfeitable. The Company made matching contributions to
the 401(k) Plan during the years ended December 31, 2003, 2002 and 2001 in the
form of approximately 11,500, 9,300 and 13,700 shares, respectively, of the
Company's Common Stock valued at approximately $117,000, $92,000 and $83,000,
respectively. All Company matching contributions vest 25% each year for the
first four years of each employee's employment, in which the employee works for
the Company at least 1,000 hours.

Stockholder Rights Plan

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

NOTE 12 - PROVISION FOR INCOME TAXES

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



                                      F-24
<PAGE>

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


         The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                              ------------------------------------------
                                                                 2003            2002            2001
                                                                 ----            ----            ----
                                                                           (In Thousands)
<S>                                                            <C>             <C>              <C>
Current:
  State...................................................     $       -       $      -         $     -
  Federal.................................................             -              -               -
  Foreign.................................................         5,417          2,524           2,446

Deferred:
  State...................................................           (54)         1,477            (123)
  Federal.................................................          (329)         9,073            (757)
  Foreign.................................................             6              8               5

Effect of tax benefit from exercise of stock options:
  State...................................................           (61)             -              (3)
  Federal.................................................          (375)             -             (18)
                                                               ---------       --------         -------

Tax benefit from operating loss carryforwards:
  State...................................................          (158)          (144)           (133)
  Federal.................................................          (973)          (884)           (818)
  Foreign.................................................             -              -               -
Valuation allowance.......................................         1,950         (9,520)          1,852
                                                               ---------       --------         -------
Total provision for income taxes                               $   5,423       $  2,534         $ 2,451
                                                               =========       ========         =======

</TABLE>

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

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                                      --------------------------------
                                                                                      2003         2002           2001
                                                                                      ----         ----           ----
                                                                                              (In Thousands)
<S>                                                                                 <C>           <C>           <C>
      Statutory federal income tax........................................          $ 3,917       $ 1,418       $ 1,296
      Permanent differences from foreign subsidiary.......................              489           183           202
      Foreign withholding taxes...........................................             (331)            -             -
      Valuation allowance.................................................            1,348           933           954
                                                                                    -------       -------       -------
                                                                                    $ 5,423       $ 2,534       $ 2,452
                                                                                    =======       =======       =======
</TABLE>

         The components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                              -------------------------
                                                                                                   2003         2002
                                                                                                   ----         ----
                                                                                                    (In Thousands)
  <S>                                                                                         <C>            <C>
Deferred tax assets:
  NOL carryforwards.......................................................................... $  16,685      $  15,118
  Disposition of subsidiary..................................................................     6,912          6,912
  Foreign tax on deferred income.............................................................       213            123
  Tax credit carryforwards...................................................................       415            415
  Other, net.................................................................................     1,100            719
                                                                                              ----------     ----------
      Total deferred tax assets..............................................................    25,325         23,287
Deferred tax liabilities.....................................................................      (217)          (217)
Valuation allowance..........................................................................   (24,895)       (22,947)
                                                                                              ----------     ----------
Deferred tax asset, net...................................................................... $     213      $     123
                                                                                              ==========     ==========
</TABLE>


         The Company has established a valuation allowance equal to the full
amount of the domestic deferred tax asset, as future domestic operating profits
cannot be assured. The Company has a current deferred tax asset of $213,000 and
a non-current tax liability of $2,555,000 due to temporary differences arising
as a result of the Company's Spanish subsidiary recording the gain on the sale
of drug licenses and the corresponding taxes for Spanish statutory purposes
during the years ended December 31, 2001 and 2002. The deferred tax asset is a
result of taxes that related to deferred income and the tax liability results
from taxes that will be payable in Spain beginning in 2005.



                                      F-25
<PAGE>

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


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

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

         At December 31, 2003, the Company has NOL carryforwards of
approximately $42,331,000 available to offset U.S. taxable income. The NOL
carryforwards include the benefit of disqualifying dispositions of $1,156,000,
the tax effect of which $457,000 will be credited to additonal paid-in capital
if and when realized. The Company calculates that use of its NOLs may be limited
each year as a result of stock option and warrant issuances resulting in an
ownership change of more than 50% of the Company's outstanding equity. If not
offset against future taxable income, the NOL carryforwards will expire in tax
years 2007 through 2023. Capital loss carryforwards totaling approximately
$27,562,000 expired unused during the year ended December 31, 2002.

         The valuation allowance increased (decreased) by approximately
$1,950,000, ($9,520,000) and $1,852,000 for each of the years ended December 31,
2003, 2002 and 2001, respectively.

NOTE 13 - SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)

         The following tables contain condensed information from the Company's
income statements for each quarter of the years ended December 31, 2003, 2002
and 2001. The Company believes that the following information reflects all
normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are
not necessarily indicative of results for any future period.


                                      F-26
<PAGE>

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

<TABLE>
<CAPTION>
                                                     Fiscal 2003
                                     ---------------------------------------------
                                              For the Three Months Ended
                                    -----------------------------------------------
                                     3/31/2003   6/30/2003    9/30/2003  12/31/2003
                                     ----------------------------------------------
                                          (In Thousands, Except Per Share Data)
<S>                                   <C>         <C>         <C>         <C>
Total revenues                        $ 14,988    $ 16,754    $ 14,875    $ 18,059
Cost of sales                            6,121       6,819       5,744       7,715
                                      --------    --------    --------    --------
Gross profit                             8,867       9,935       9,131      10,344
Operating expenses                       6,213       6,619       6,290       7,726
Gain on sale of drug licenses                -           -           -           -
                                      --------    --------    --------    --------
Income from operations                   2,654       3,316       2,841       2,618
Other income/(expenses), net                29          18          20          24
Provision for income taxes               1,151       1,805       1,513         954
                                      --------    --------    --------    --------
Net income                            $  1,532    $  1,529    $  1,348    $  1,688
                                      ========    ========    ========    ========

Net income per common share:
  Basic                               $   0.09    $   0.09    $   0.08    $   0.09
                                      ========    ========    ========    ========
  Diluted                             $   0.08    $   0.07    $   0.06    $   0.08
                                      ========    ========    ========    ========

Weighted average common shares
  outstanding:
  Basic                                 17,455      17,534      17,911      19,071
                                      ========    ========    ========    ========
  Diluted                               20,350      20,878      22,228      22,418
                                      ========    ========    ========    ========


                                                     Fiscal 2002
                                    ------------------------------------------------
                                              For the Three Months Ended
                                    -------------------------------------------------
                                    3/31/2002(a) 6/30/2002(a) 9/30/2002(a) 12/31/2002
                                    -------------------------------------------------
                                          (In Thousands, Except Per Share Data)
Total revenues                        $  9,174     $  9,867    $  8,571    $ 11,524
Cost of sales                            3,776        4,249       3,579       4,873
                                      --------     --------    --------    --------
Gross profit                             5,398        5,618       4,992       6,651
Operating expenses                       4,715        4,743       4,300       5,519
Gain on sale of drug licenses               72          520           -          58
                                      --------     --------    --------    --------
Income from operations                     755        1,395         692       1,190
Other income/(expenses), net               (23)          10          67          84
Provision for income taxes                 597          886         468         583
                                      --------     --------    --------    --------
Net income                            $    135     $    519    $    291    $    691
                                      ========     ========    ========    ========

Net income per common share:
  Basic                               $   0.01     $   0.03    $   0.02    $   0.04
                                      ========     ========    ========    ========
  Diluted                             $   0.01     $   0.03    $   0.01    $   0.03
                                      ========     ========    ========    ========

Weighted average common shares
  outstanding:
  Basic                                 14,634       16,823      17,377      17,405
                                      ========     ========    ========    ========
  Diluted                               17,922       20,484      20,706      20,121
                                      ========     ========    ========    ========
</TABLE>

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


                                      F-27
<PAGE>

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

<TABLE>
<CAPTION>
                                                       Fiscal 2001
                                    -------------------------------------------------
                                              For the Three Months Ended
                                    -------------------------------------------------
                                    3/31/2001    6/30/2001    9/30/2001    12/31/2001
                                    -------------------------------------------------
                                          (In Thousands, Except Per Share Data)
<S>                                   <C>          <C>         <C>         <C>
Total revenues                        $  5,814     $  6,125    $  6,316    $  8,156
Cost of sales                            2,449        2,687       2,708       3,618
                                      --------     --------    --------    --------
Gross profit                             3,365        3,438       3,608       4,538
Operating expenses                       3,730        3,906       3,601       4,900
Gain on sale of drug licenses            4,977            -         113         (40)
                                      --------     --------    --------    --------
Income from operations                   4,612        (468)         120        (402)
Other income/(expenses), net               (11)         (7)         (24)         (7)
Provision for income taxes               1,959           94         245         154
                                      --------     --------    --------    --------
Net income                            $  2,642     $   (569)   $   (149)   $   (563)
                                      ========     ========    ========    ========

Net income per common share:
  Basic                               $   0.19     $  (0.04)   $  (0.01)   $  (0.04)
                                      ========     ========    ========    ========
  Diluted                             $   0.17     $  (0.04)   $  (0.01)   $  (0.04)
                                      ========     ========    ========    ========

Weighted average common shares
  outstanding:
  Basic                                 13,915       13,952      14,308      14,585
                                      ========     ========    ========    ========
  Diluted                               15,882       13,952      14,308      14,585
                                      ========     ========    ========    ========
</TABLE>


NOTE 14 - BUSINESS SEGMENT INFORMATION

         The Company is a U.S.-based international specialty pharmaceutical
company focused on advanced drug delivery technologies and pharmaceutical
products. The Company also has a commercial presence in Europe. The Company's
Spanish subsidiaries, Laboratorios Belmac, Laboratorios Davur and Laboratorios
Rimafar, develop, license and sell generic and branded pharmaceutical products
and manufacture pharmaceuticals for others. In the U.S., the Company's
activities consist primarily of licensing, product research and development,
business development activities, corporate management and administration.

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

         Set forth in the tables below is certain financial information with
respect to the Company's business and geographical segments for the years ended
December 31, 2003, 2002 and 2001. The segments use the same accounting policies
as those described in the summary of significant accounting policies in Note 2.


                                      F-28
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Year Ended December 31, 2003
                                                                                ----------------------------
                                                                                     (In thousands)
                                                                  Product                  R/D/
                                                                   Sales              Collaborations/
                                                                   Spain                   U.S.                Consolidated
                                                                   -----              ---------------          ------------
<S>                                                              <C>                       <C>                  <C>
Total revenues .........................................         $ 63,158                $ 1,518                $ 64,676
Interest income ........................................              136                    196                     332
Interest expense .......................................              215                     13                     228
Depreciation and amortization expense ..................              863                    477                   1,340
Income (loss) before income taxes ......................           15,091                 (3,571)                 11,520
Provision for income taxes .............................            5,092                    331                   5,423
Net income (loss) ......................................            9,999                 (3,902)                  6,097
Fixed assets ...........................................           16,428                  2,138                  18,566
Drug licenses and related costs ........................            9,441                  4,377                  13,818
Total assets ...........................................           62,564                 37,899                 100,463
Total liabilities ......................................           22,619                  1,679                  24,298
Expenditures for drug licenses/delivery technology......            1,075                  1,223                   2,298
Expenditures for fixed assets ..........................            5,970                  2,106                   8,076


                                                                                Year Ended December 31, 2002
                                                                                ----------------------------
                                                                                     (In thousands)
                                                                  Product                  R/D/
                                                                   Sales              Collaborations/
                                                                   Spain                   U.S.                Consolidated
                                                                   -----              ---------------          ------------
Total revenues .........................................         $ 38,718                $   418                $ 39,136
Interest income ........................................                -                    279                     279
Interest expense .......................................              200                      9                     209
Depreciation and amortization expense ..................              655                    360                   1,015
Income (loss) before income taxes ......................            6,913                 (2,743)                  4,170
Provision for income taxes .............................            2,534                      -                   2,534
Net income (loss) ......................................            4,379                 (2,743)                  1,636
Fixed assets ...........................................            9,417                    148                   9,565
Drug licenses and related costs ........................            7,463                  3,512                  10,975
Total assets ...........................................           38,199                 26,493                  64,692
Total liabilities ......................................           15,417                    524                  15,941
Expenditures for drug licenses/delivery technology......              615                    181                     796
Expenditures for fixed assets ..........................            3,408                     24                   3,432
</TABLE>


                                      F-29
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Year Ended December 31, 2001
                                                                                ----------------------------
                                                                                     (In thousands)
                                                                  Product                  R/D/
                                                                   Sales              Collaborations/
                                                                   Spain                   U.S.                Consolidated
                                                                   -----              ---------------          ------------
<S>                                                              <C>                <C>                         <C>
Total revenues .........................................         $ 26,411           $          -                $ 26,411
Interest income ........................................               27                    141                     168
Interest expense .......................................              244                      -                     244
Depreciation and amortization expense ..................              523                    388                     911
Income (loss) before income taxes ......................            6,618                 (2,805)                  3,813
Provision for income taxes .............................            2,452                      -                   2,452
Net income (loss) ......................................            4,166                 (2,805)                  1,361
Fixed assets ...........................................            5,427                    168                   5,595
Drug licenses and related costs ........................            6,663                  3,613                  10,276
Total assets ...........................................           24,890                  7,229                  32,119
Total liabilities ......................................           10,974                    721                  11,695
Expenditures for drug licenses/delivery technology......              412                     72                     484
Expenditures for fixed assets ..........................            2,029                     40                   2,069
</TABLE>

         Interest income and interest expense are based upon the actual results
of each operating segment's assets and borrowings. The principal component of
the inter-segment amounts is related to inter-segment advances.

         Revenues from one customer exceeded 10% of consolidated total revenues
during the year ended December 31, 2003, accounting for 14% of 2003 consolidated
total revenues and 16% of the consolidated accounts receivable balance at
December 31, 2003. Revenues from one customer exceeded 10% of consolidated total
revenues during the year ended December 31, 2002, accounting for 14% of 2002
consolidated total revenues and 8% of the consolidated receivables balance at
December 31, 2002. Revenues from one customer exceeded 10% of consolidated total
revenues during the year ended December 31, 2001, accounting for 15% of 2001
consolidated total revenues.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

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

         The Company has entered into various renewable, employment agreements
with its key executive officers, which agreements provide for salaries,
potential bonuses and other benefits in exchange for services provided by the
key executive officers. The employment agreements also provide for certain
compensation in the event of termination or change in control of the Company.
The Company is currently obligated to pay approximately $1,490,000 to its key
executives in 2004 and $350,000 in 2005 under such agreements, which are
scheduled to expire on December 31, 2004 and 2005

         The Company is currently undergoing a tax review of its Spanish
subsidiary, Laboratorios, Belmac, S.A., by the Spanish tax authorities. Certain
tax contingencies exist and when probable and reasonably estimable, are provided


                                      F-30
<PAGE>

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


for in the Consolidated Financial Statements. Accordingly, as of December 31,
2003, since these contingencies are not probable or reasonably estimable, no
amounts have been provided for related to these contingencies.

         The Company leases certain equipment and facilities under
non-cancelable operating leases, which expire through the year 2008. Total
charges to operations under operating leases were approximately $911,000,
$785,000 and $705,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. Future minimum lease payments under operating leases are as
follows:

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

2004.........................................             $ 708
2005.........................................               492
2006.........................................               175
2007.........................................                19
2008 and beyond..............................                11

         On February 4, 2002, the Company was notified that a legal proceeding
had been commenced against it by Merck & Co. Inc. and its Spanish subsidiary,
Merck Sharp & Dohme de Espana, S.A., alleging that the Company violates their
patents in its production of the product simvastatin and requesting an
injunction ordering the Company not to manufacture or market the product. The
case was brought against the Company's Spanish subsidiaries in the 39th First
Instance Court of the City of Madrid. After a hearing on February 18, 2002, the
court refused to grant the requested injunction and dismissed the case on
February 25, 2002, awarding court costs and legal fees to the Company. Merck has
appealed the award of fees. Merck re-instituted its claim against the Company in
another proceeding brought in the 19th First Instance Court of the City of
Madrid, of which the Company received notice on January 23, 2003. This case also
alleges violation of Merck's patents in the production of the product
simvastatin, requests an order that the Company cease manufacturing the product
and demands damages during the period of manufacture. A trial with respect to
this matter was held on February 19 and 20, 2004, and the Company is waiting for
the court's decision. The Company is vigorously opposing this claim as the
Company believes the claim is without merit. The Company's simvastatin product
line was launched in January 2002.

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

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

                                      F-31