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

                                    FORM 10-K

      FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
 X       ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
---      EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1999
                                                        -----------------
                                       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)
<TABLE>
<CAPTION>
<S>                                                                     <C>
                        Delaware                                                       No.59-1513162
--------------------------------------------------------------           ------------------------------------
(State or other jurisdiction of incorporation or organization)           (I.R.S. employer identification no.)
</TABLE>
      65 Lafayette Road, 3rd Floor, North Hampton, NH                 03862
      -----------------------------------------------         -----------------
     (Address of principal executive offices)                     (Zip Code)

       Registrant's telephone number, including area code: (603) 964-8006
                                                         -----------------
           Securities registered pursuant to section 12(b) of the Act:
<TABLE>
<CAPTION>
<S>                                                 <C>
            Title of each class                           Name of each exchange on which registered
            -------------------                           -----------------------------------------
Common Stock, $.02 par value                         American Stock Exchange and Pacific Exchange, Inc.
12% Convertible Senior Subordinated Debentures       American Stock Exchange and Pacific Exchange, Inc.
Class B Redeemable Warrants                          American Stock Exchange
</TABLE>
        Securities registered pursuant to section 12(g) of the Act: None

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES X  NO
                                             ---   ---
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

State the aggregate market value of the voting and non-voting common equity held
by  non-affiliates  of the  registrant.  The  aggregate  market  value  shall be
computed by reference to the price at which the common  equity was sold,  or the
average bid and asked  prices of such  common  equity,  as of a  specified  date
within 60 days prior to the date of filing.
<TABLE>
<CAPTION>
<S>                                    <C>                         <C>
       Title of Class                   Aggregate Market Value      As of Close of Business on
-----------------------------           ----------------------      --------------------------
Common Stock, $.02 par  value                $95,989,178                     March 9, 2000

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                  10,826,028                    March 9, 2000

</TABLE>
                       DOCUMENTS INCORPORATED BY REFERENCE
 Proxy Statement for the 2000 Annual Meeting of Stockholders - Incorporated by
                   Reference into Part III of this Form 10-K
<PAGE>

                                     PART I

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

         GENERAL

         Bentley  Pharmaceuticals,  Inc. (the "Registrant") is a U.S.-based drug
         delivery company specializing in the development of products based upon
         innovative  and  proprietary  drug delivery  systems,  which also has a
         commercial  presence  in Europe,  where it  manufactures,  markets  and
         distributes branded and generic pharmaceutical products. The Registrant
         owns  rights to certain  U.S.  and  international  patents  and related
         technology   covering  methods  to  enhance  the  absorption  of  drugs
         delivered to biological  tissues.  The  Registrant  is developing  this
         technology  and is targeting  U.S.,  European  and other  international
         markets  for  the  new  product  applications.  The  Registrant  is  in
         negotiations with larger pharmaceutical companies with the objective of
         collaborating  in the  development  and  marketing  of various  product
         applications,  including  the treatment of  onychomycosis,  delivery of
         insulin, hormone replacement therapies, vaccines and peptides.

         It  is  the  Generally  Recognized  as  Safe  ("GRAS")  status,  format
         independence,   and  lack  of  irritation  that  set  the  Registrant's
         technology apart from other related drug delivery systems. Studies have
         demonstrated that the excipients resulting from this technology enhance
         the  absorption  of  pharmaceutical  products,  whether  formulated  in
         creams, ointments, gels, solutions, lotions, or patches and have proven
         to be efficient in delivering both hydrophilic and lipophilic agents.

         The Registrant is currently  investigating  additional  patents in drug
         delivery,  both in the extension of its current  technology  and as new
         systems  applicable to pharmaceutical  patches,  peptides and vaccines.
         The  Registrant's  objective  is to enter into  several  new  licensing
         collaborations in the near future, utilizing its permeation enhancement
         technology.

         The Registrant relocated its corporate headquarters from Florida to New
         Hampshire in 1999, where it also opened a research  facility to develop
         and optimize enhanced formulations utilizing its permeation technology.
         Studies are performed in vitro utilizing  freshly excised human skin to
         demonstrate the permeation of drugs through the stratum corneum and are
         quantified in the epidermis, dermis and receptor fluid.

         In Spain, the Registrant  acquires,  licenses or develops and registers
         late stage products, and manufactures, packages and distributes its own
         products  and  products   under   contract  for  other   pharmaceutical
         companies. All of the Registrant's revenues for the year ended December
         31, 1999 are derived from its operating subsidiary, Laboratorios Belmac
         S.A., in Spain.

                                       2
<PAGE>

          The strategic  focus of the  Registrant has shifted in response to the
          evolution  of the  global  health  care  environment.  The  Registrant
          emphasizes  product  distribution  in Spain,  strategic  alliances and
          product  acquisitions.  Its overall  strategy has been expanded due to
          the 1999 acquisition of permeation enhancement technology,  which will
          require limited  development  expenditures while providing a multitude
          of opportunities for strategic  partnerships  and/or alliances,  which
          are anticipated to lead to milestone payments and royalty arrangements
          with the strategic partners bearing the majority of development costs.
          Since this technology is based on a series of GRAS compounds, products
          may be developed in a quicker and less costly fashion.  The technology
          facilitates the permeation of drugs administered  through skin, across
          mucosa  or   through   the   cornea  in  a  variety   of   independent
          pharmaceutical  formats.  The excipient most advanced in  facilitating
          absorption is referred to by the Registrant as CPE-215, although there
          are a number of other  related  compounds  under the same patents that
          have equally impressive enhancing characteristics.

         The Registrant was organized  under the laws of the State of Florida in
         February 1974 and operated as a Florida corporation until October 1999,
         when it changed its state of  incorporation  to Delaware by effecting a
         merger of the Registrant with and into Bentley Pharma, Inc., a Delaware
         corporation,  which was a  wholly-owned  subsidiary of the  Registrant.
         Bentley  Pharma,  Inc. was the  surviving  entity of the merger and its
         name was changed to Bentley  Pharmaceuticals,  Inc.,  the name that the
         Registrant uses to conduct its business.  The Registrant also adopted a
         certificate of incorporation and bylaws, which conform to Delaware law.

         In  December  1999,  the  Registrant's  Board of  Directors  adopted  a
         stockholder  rights plan designed to prevent a potential  acquirer from
         gaining control of the Registrant  without fairly  compensating  all of
         the  Registrant's  stockholders  and to  protect  the  Registrant  from
         coercive  takeover  attempts.  The  Board  of  Directors  approved  the
         declaration of the dividend of one right for each outstanding  share of
         the Registrant's  Common Stock on the record date of December 27, 1999.
         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  any  person  or  group  of
         affiliated  persons   beneficially   acquire(s)  15%  or  more  of  the
         Registrant's Common Stock. Under certain circumstances,  each holder of
         a right (other than the person or group who acquired 15% or more of the
         Registrant's  Common Stock) is entitled to purchase a defined number of
         shares of the  Registrant's  Common Stock at 50% of the market price of
         the Common Stock at the time that the right becomes exercisable.

         PRODUCT LINES

         The Registrant currently manufactures, markets and sells pharmaceutical
         products  in Spain and  exports  certain of those  products  to various
         countries.  The Registrant  discontinued  its disposable  linen product
         line during 1998.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>

                                                                         FOR THE YEAR ENDED DECEMBER 31,
                                                                         -------------------------------
         <S>                                                       <C>              <C>             <C>
                                                                      1999             1998             1997
                                                                      ----             ----             ----
         Pharmaceutical and Consumer Health Care Products            $20,249          $15,148          $14,520

         Disposable Linen Products                                         -               95              382
                                                                     -------          -------          -------
                             Total                                   $20,249          $15,243          $14,902
                                                                     =======          =======          =======
</TABLE>

         PHARMACEUTICAL MANUFACTURING AND MARKETING IN SPAIN

         Laboratorios Belmac, the Registrant's subsidiary in Spain, manufactures
         and markets  pharmaceutical  products  within four primary  therapeutic
         categories  of  cardiovascular,   gastrointestinal,  neurological,  and
         infectious  diseases.  The  Registrant  manufactures  or  distributes a
         variety of dosage forms of various pharmaceuticals in its manufacturing
         facility in Zaragoza,  Spain both for its own sales and under  contract
         for  others.  The  manufacturing  facility  was  renovated  in 1995 and
         brought into full  compliance  with European  Union Good  Manufacturing
         Practices  (GMPs)  for  solid  and  liquid  dosage  forms.   Additional
         renovations  were  completed  in 1998  and 1999  and  expansion  of the
         facility  is  underway   during  2000.   The  Registrant  has  budgeted
         approximately   $1,400,000  for  year  2000  capital  improvements  and
         equipment  purchases at its manufacturing  facility in Spain,  which it
         expects  to fund with cash flows from  operations.  Among the  products
         Laboratorios Belmac  manufactures and/or distributes,  each of which is
         registered with Spain's Ministry of Health, are:

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

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

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

                                       4
<PAGE>

                  Senioral(TM).  Senioral is a combination product useful in the
         treatment of congestive symptoms of the upper respiratory tract.

                  Arzimol(TM).  Arzimol, whose generic name is Cefprozil,  is an
         oral antibiotic in the  cephalosporin  class,  marketed in Spain by the
         Registrant under a distribution agreement with Bristol Myers Squibb.

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

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

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

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

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

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

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

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

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

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

                  Cimascal  and  Cimascal  D  Forte(R).  Cimascal  is a  calcium
         carbonate product useful in the prevention of osteoporosis.  It is also
         marketed in combination with Vitamin D.

                                       5
<PAGE>

                  Rimagrip  Complex(R).  Rimagrip  Complex is a product used for
         the treatment of cough, cold and flu symptoms.

                  Amantadine(R).  Amantadine  is an  anti-viral  product for the
         prevention  of  influenza   symptoms  and  symptoms   associated   with
         Parkinson's Disease.

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

         Controlvas and Belmazol,  together,  represent approximately 52% of the
         sales of Laboratorios Belmac.

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

         The  Registrant  maintains  an  internal  marketing  and sales staff of
         approximately  82 in Spain to market the  pharmaceuticals  it produces.
         The   Registrant's   sales  force   competes  by   emphasizing   highly
         individualized  customer  service in all major  cities,  provinces  and
         territorial islands of Spain.

         The Registrant  exports  pharmaceuticals  manufactured  by Laboratorios
         Belmac   outside  Spain  through   local   distributors   and  brokers,
         particularly in Eastern Europe,  Northern  Africa,  China,  Central and
         South America.

         CONTRACT  MANUFACTURING.  Since Laboratorios  Belmac currently utilizes
         less than 100% of its plant capacity to  manufacture  its own products,
         Laboratorios   Belmac  has   engaged  in  contract   manufacturing   of
         pharmaceuticals   owned  by  other  companies  such  as   Italpharmaco,
         Ratiopharm,  Juste, and Ethypharm.  The Registrant  manufactures  these
         pharmaceuticals  to its  customers'  specifications,  and packages them
         with the customers' labels. Occasionally,  to assure product uniformity
         and quality, employees of these customers will work at the Registrant's
         manufacturing  facility.  The  Registrant has  experienced  significant
         growth in sales of its own products in recent years; consequently,  the
         Registrant is currently  utilizing more of its  manufacturing  facility
         capacity to  manufacture  its own products  and expects  that  contract
         manufacturing  activities will decrease in the future as the Registrant
         continues to use more and more of its capacity to  manufacture  its own
         products.

                                       6
<PAGE>

         As a result of Spain's entry into the European Union, Spain implemented
         new  pharmaceutical  manufacturing  standards  and the  Registrant  was
         required  to modify its  facility  to comply  with  these  regulations.
         Laboratorios Belmac accomplished such renovations without  interruption
         of  sales  or  distribution.  After  an  inspection,  in July  1995 the
         operating  areas of the facility  were  determined  to be in compliance
         with   European  GMPs  by  Spain's   Ministry  of  Health.   Additional
         renovations  were  undertaken  in 1998 and 1999 to further  upgrade the
         Registrant's  manufacturing  facility and  inspection  in November 1999
         confirmed  continuing  compliance with European GMPs.  Expansion of the
         facility is underway in 2000.

         PRODUCTS UNDER DEVELOPMENT

         The  Registrant  acquired  patents and related  permeation  enhancement
         technology in February 1999 and plans to develop such  technology  into
         product  applications.  (See "--Research and Development").  Due to the
         expense and time commitment required to bring a pharmaceutical  product
         to market,  the  Registrant  is  seeking  co-marketing,  licensing  and
         promotional   arrangements   and  other   collaborations   with   other
         international   or  national   pharmaceutical   companies.   Generally,
         management believes that the Registrant can compete more effectively in
         certain markets through collaborative  arrangements with companies that
         have an  established  presence  in a  particular  geographic  area  and
         greater  resources  than  those  of  the  Registrant.  There  can be no
         assurance that the  Registrant  will have the resources to bring any of
         these products to market or, if such resources are available,  that the
         products can be successfully developed, manufactured or marketed.

         The Registrant was assigned  certain patents and hydrogel drug delivery
         technology during the year ended December 31, 1999 (See  "--Partnership
         Venture")  and  has  contacted  other  pharmaceutical   companies  with
         objective of licensing such patents and  technology for  co-development
         and  marketing  of  product  applications  that  may  result  from  the
         exploitation of this technology.

         Laboratorios   Belmac   purchased   dossiers   and/or   submitted   new
         registrations  for a number of new products  during 1998 and 1999, such
         as   Fluoxitine   (an   anti-depressant   product),   Diltiazem  SR  (a
         cardiovascular  product),  Pentoxyfiline SR (a peripheral vasodilator),
         Ibuprofen (a non-steroidal anti-inflammatory analgesic),  Selegilene (a
         product  for  treatment  of  Parkinson's  Disease),  Ciprofloxacin  (an
         antibiotic) and Doxazocin (a product for treatment of benign  prostatic
         hyperplasia (bph)). The Spanish registration process for these products
         could  span one to two  years  before  authorization  to  market  these
         products is received.

         PARTNERSHIP VENTURE

         In March 1994 a subsidiary of the Registrant  formed a partnership with
         a subsidiary of Maximed  Corporation,  headquartered  in New York,  and
         planned to market, through this partnership,  a range of hydrogel based
         feminine   health  care  products,   including  a   contraceptive,   an
         antiseptic,  an antifungal and an antibacterial.  In December 1994, the
         Registrant   commenced   litigation   against  its   partner   claiming
         interference in the management of the partnership and misrepresentation
         under the partnership agreement.  The Registrant was awarded a judgment
         in the amount of $7.68 million in

                                       7
<PAGE>

         1998,  which was affirmed by the U.S. Court of Appeals.  The Registrant
         attempted to collect the  judgment,  but was unable to obtain cash from
         its  partner to satisfy  the  judgment.  Consequently,  the  Registrant
         decided  to seek  assignment  of  partnership  technology  and  related
         patents  in an  effort  to  satisfy  the  judgment.  As a  result,  the
         technology  and patents were assigned to the Registrant in October 1999
         and the Registrant  recorded such assignment as a distribution from the
         partnership.  Although the Registrant  remains  responsible for funding
         activities of the partnership, the partnership is not currently engaged
         in business activities, nor does the Registrant anticipate that it will
         engage in any  business  activities  in the future.  The affairs of the
         partnership  are in the process of being  concluded and the  Registrant
         plans to dissolve the partnership.

         SOURCES AND AVAILABILITY OF RAW MATERIALS

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

         PATENTS, TRADEMARKS, LICENSES AND REGISTRATIONS

         Few of  the  products  currently  being  sold  by  the  Registrant  are
         protected by patents owned by the Registrant.  However, where possible,
         patents and trademarks will be sought and obtained in the United States
         and in all countries of principal marketing interest to the Registrant.
         The Registrant has filed or has rights to certain patent  applications,
         particularly with regard to its permeation  enhancement  technology and
         hydrogel technology. However, there can be no assurance that its rights
         will afford  adequate  protection to the Registrant.  In addition,  the
         Registrant  also relies on  unpatented  proprietary  technology  in the
         development  and  commercialization  of  its  products.   There  is  no
         assurance that others may not independently develop the same or similar
         technology.

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

         The  Registrant  acquired  patents and related  permeation  enhancement
         technology in February 1999 and plans to develop  alternative  delivery
         methods  for  currently  marketed  products,  thereby  extending  their
         marketing exclusivity.  The patent coverage includes the United States,
         Japan, Korea and most major European markets.

         Laboratorios Belmac owns approximately 50 trademarks for pharmaceutical
         products  and one  patent,  which were  granted  by  Spain's  Bureau of
         Patents,  and  Trademarks.  In Spain,  patents  expire  after 20 years.
         Trademarks expire after 10 years, but can be renewed.  All prescription
         pharmaceutical  products marketed by Laboratorios  Belmac in Spain have
         been  registered  with and approved by Spain's  Ministry of Health.  To
         register a pharmaceutical  with the Ministry requires the submission of

                                       8
<PAGE>

         a registration dossier,  which includes all pre-clinical,  clinical and
         manufacturing  information.  The registration  process  generally takes
         approximately  two  years or more.  There  can be no  assurance  that a
         competitor  has not or will not  submit  additional  registrations  for
         products  substantially  similar  to  those  marketed  by  Laboratorios
         Belmac.

         COMPETITION

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

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

         Laboratorios  Belmac competes with both large  multinational  companies
         and national Spanish companies, which produce most of the same products
         Laboratorios Belmac manufactures. For example, there are currently many
         companies, such as Astra Espana S.A., which market and sell omeprazole.
         Similarly, many companies currently sell enalapril, with Merck, Sharp &
         Dome de Espana,  S.A. being the product leader.  Others of the products
         sold by Laboratorios Belmac, such as Onico-Fitex,  are more unusual and
         have  fewer  competitors.   The  contract  manufacturing  performed  by
         Laboratorios Belmac has a number of competitors.

         CUSTOMERS

         The incidence of certain  infectious  diseases,  which occur at various
         times in  different  areas of the  world,  affects  the  demand for the
         Registrant's  antibiotic  products when they are marketed in each area.
         Orders for the Registrant's  products are generally filled on a current
         basis,  and no order backlog  existed at December 31, 1999. No material
         portion of the  Registrant's  business is subject to  renegotiation  of
         profits or termination of contracts at the election of any governmental
         authority.   With  the   exception  of  two   customers   (Cofares  and
         Antibioticos  Farma) whose  purchases  accounted for 13.0% and 12.6% of
         consolidated revenues,  respectively, there were no other customers who
         accounted  for  in  excess  of 10%  of  the  Registrant's  consolidated
         revenues  during  the  year  ended  December  31,  1999.  One  customer
         (Cofares) accounted for 11.5% of the Registrant's consolidated revenues
         during the year ended December 31, 1998;  however,  no other  customers
         accounted for sales in excess of 10% of consolidated  revenues in 1998.
         There were no  customers  during the year ended  December  31, 1997 who
         accounted  for  in  excess  of 10%  of  the  Registrant's  consolidated
         revenues.

                                       9
<PAGE>

         RESEARCH AND DEVELOPMENT

         The strategic  focus of the  Registrant  has shifted in response to the
         evolution of the global health care  environment.  The  Registrant  has
         moved from a research and development-oriented  pharmaceutical company,
         which  required  developing  products  from  the  chemistry  laboratory
         through   marketing,   to  a  company  seeking  to  acquire  late-stage
         development  compounds that can be marketed  within one or two years or
         currently marketed products.  The Registrant had decreased its research
         and  development  spending  over  the  past  few  years.  However,  the
         Registrant's  strategy  shifted due to the February 1999 acquisition of
         permeation   enhancement   technology,   which  will  require   limited
         developmental expenditures while providing a multitude of opportunities
         for strategic  partnerships  and/or alliances.  In conjunction with its
         relocation from Florida, the Registrant established a laboratory in New
         Hampshire  during  the year ended  December  31,  1999 for  formulation
         development  and  testing  of  potential  product   applications.   The
         Registrant is currently  pursuing  strategic  alliances with respect to
         this  technology,  which are anticipated to lead to milestone  payments
         and  royalty  arrangements  with the  strategic  partners  bearing  the
         majority of  development  costs.  This  technology is based on FDA GRAS
         (Generally  Recognized  As Safe)  compounds,  which  should  result  in
         significantly   reduced   pre-clinical   trials  (animal  testing)  and
         developmental costs.

         The Registrant spent $685,000, $153,000 and $324,000 in the years ended
         December  31,  1999,  1998 and  1997,  respectively,  on  research  and
         development  to  develop  new  products  and  processes  and to improve
         existing products and processes.  The Registrant intends to continue to
         carefully  manage its  research  and  development  activities  with the
         establishment  of priorities  based on both  technical  and  commercial
         criteria and to carefully  supervise such  expenditures  in view of its
         limited  resources.  Research and development  expenditures in 2000 are
         expected to be greater than in recent  years,  however,  due to planned
         development of the permeation enhancement technology described above.

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

         REGULATION

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

         United States. The steps required before a pharmaceutical  agent may be
         marketed in the United States  include (i)  preclinical  laboratory and
         animal tests, (ii) the submission to the FDA of an Investigational  New
         Drug  Application,  which must become  effective  before human clinical
         trials may commence,  (iii) adequate and well-controlled human clinical
         trials to  establish  the safety  and  efficacy  of the drug,  (iv) the
         submission  of a New Drug  Application  ("NDA") to the FDA, and (v)

                                       10
<PAGE>

         the FDA approval of the NDA prior to any commercial sale or shipment of
         the drug. In addition to obtaining FDA approval for each product,  each
         domestic  drug-manufacturing  establishment must be registered with the
         FDA.  Domestic  manufacturing  establishments  are  subject to biennial
         inspections by the FDA and must comply with current GMPs for drugs.  To
         supply  products for use in the United  States,  foreign  manufacturing
         establishments  must  comply  with  GMPs and are  subject  to  periodic
         inspection by the FDA or by regulatory  authorities  in such  countries
         under reciprocal agreements with the FDA.

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

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

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

         The  Registrant's  products  under  development,   including  potential
         products  arising  from  the  use of its  permeation  enhancement  drug
         delivery  technology  or its hydrogel  technology,  must go through the
         approval process  delineated above prior to gaining approval by the FDA
         for  commercialization.

                                       11
<PAGE>

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

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

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

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

         Although  the  Registrant  marketed  disposable  linen  products in the
         United States until December 1998,  all of the  Registrant's  sales are
         now  generated  from  Spain.  International  operations  are subject

                                       12
<PAGE>

         to certain additional risks inherent in conducting business outside the
         United States, including price and currency exchange controls,  changes
         in currency  exchange rates,  limitations on foreign  participation  in
         local   enterprise,    expropriation,    nationalization,   and   other
         governmental action.

         A  substantial  amount of the  Registrant's  business is  conducted  in
         Europe and is  therefore  influenced  by the extent to which  there are
         fluctuations   in  the  dollar's   value  against   other   currencies,
         specifically  the Euro and Peseta.  (See discussion of foreign currency
         in Item 7A.  "Quantitative  and  Qualitative  Disclosures  About Market
         Risk".)

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

         EMPLOYEES

         The Registrant and its subsidiaries employ  approximately 164 people, 7
         of whom are employed in the United States and 157 in Spain, as of March
         9, 2000. Of such employees, approximately 61 are principally engaged in
         manufacturing  activities,  82 in sales  and  marketing,  4 in  product
         development and 17 in management and  administration.  In general,  the
         Registrant considers its relations with its employees to be good.

         FINANCIAL   INFORMATION   RELATING  TO  GEOGRAPHIC  AREAS  AND  FOREIGN
         OPERATIONS

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

         RISK FACTORS

         RISKS ASSOCIATED WITH OUR PAST FINANCIAL RESULTS

         We could be required to cut back or stop operations if we are unable to
         -----------------------------------------------------------------------
         raise or obtain needed funding
         ------------------------------

         We have experienced  losses since  inception,  resulting in the need to
         fund our operations through outside  financing.  A 1996 Public Offering
         resulted in net proceeds of approximately $5,700,000, some of which was
         used to  repay  debt  incurred  in  1995  private  placements.  We also
         received  approximately  $9,800,000 in 1997, when  approximately 70% of
         our then outstanding  Class A Warrants were exercised and approximately
         $2,600,000 in 1999 upon the exercise of  approximately  859,000 Class A
         Warrants. The remaining 1,252,000 Class A Warrants expired unexercised.
         The Class A Warrants  originally  were sold as a component  of the 1996
         Public Offering.  Our future existence and profitability depends on our
         ability to fund and expand

                                       13
<PAGE>

         operations in an effort to achieve profits from  operations.  We cannot
         assure  you that  our  business  will  ultimately  generate  sufficient
         revenue to fund our operations on a continuing basis.
         Although we were founded in 1974, we have only  generated  revenue from
         product-related sales since August 1991. We have used cash from outside
         financing  to  fund  our  operations.  We  have  made  progress  toward
         commercialization  of specific products and have begun to commercialize
         others.  We are now  generating  revenues from sales of products by our
         subsidiary,  Laboratorios Belmac,  S.A., a pharmaceutical  manufacturer
         located in Spain.  We acquired  Laboratorios  Belmac in February  1992.
         Substantial  amounts of time and financial and other  resources will be
         required  to  complete  the  development  and  clinical  testing of our
         products currently under  development.  Due to our limited cash, we are
         seeking  strategic  partners for development and marketing of potential
         products  employing our  technology.  We cannot assure you that we will
         receive   additional   funding   necessary  to  continue  research  and
         development  activities,  that  we  will be  successful  in  attracting
         strategic  partners or that we will otherwise succeed in developing any
         additional products with commercially valuable applications.

         We believe  that with our  emphasis on product  distribution  in Spain,
         strategic  alliances  and product  acquisitions  together  with careful
         management  of our  research  and  development  activities  and the net
         proceeds from the 1996 Public Offering,  that we should have sufficient
         liquidity to enable us to conduct our existing  operations for the year
         2000 and  into  2001,  of which we  cannot  assure  you.  However,  our
         pharmaceutical  products being  developed,  and which may be developed,
         will require the investment of substantial  additional  time as well as
         financial  and  other   resources  in  order  to  become   commercially
         successful.   Following  the  development  period,  our  products  will
         generally  be  required  to go through  lengthy  governmental  approval
         processes,  including extensive clinical testing, followed by educating
         physicians, pharmacists and consumers about the benefits of our product
         and  developing a market for our product.  Revenues from our operations
         and  cash  may not be  sufficient  over  the  next  several  years  for
         commercializing  any  of the  products  we  are  currently  developing.
         Consequently,  we may require  additional  licensees or partners and/or
         additional  financing.  We cannot  assure you that we can conclude such
         commercial  arrangements  or obtain  additional  capital when needed on
         acceptable terms, if at all.

         At December 31, 1999,  we had net  operating  loss carry  forwards (the
         "NOLs") of  approximately  $30,900,000  available to offset future U.S.
         taxable income.  NOLs are losses reflected on tax returns that we could
         use to offset  future U.S.  taxable  income,  subject to various  legal
         restrictions.

         We have a history of losses and if we do not achieve  profitability  we
         -----------------------------------------------------------------------
         may not be able to continue our business in the future
         ------------------------------------------------------

         As of  December  31,  1999  we  have  accumulated  losses  (accumulated
         deficit) of approximately $74,948,000.  Although we reported profits in
         the fourth quarter of 1999, we may incur additional losses until we can
         successfully  market  and  distribute  our  products  and  develop  new
         technologies and commercially viable future products.  If we are unable
         to do so,  we will  continue  to have  losses  and might not be able to
         continue our operations.

                                       14
<PAGE>

         We have incurred the following losses since 1997:

         Fiscal year ended:

          o    December 31, 1997 ............... $3,815,000

          o    December 31, 1998 ............... $2,876,000

          o    December 31, 1999 ............... $1,090,000


         We may be restricted  from using our net operating  loss carry forwards
         -----------------------------------------------------------------------
         due to a change in equity ownership and a change in our tax year
         ----------------------------------------------------------------

         As of  December  31,  1999,  we had NOLs of  approximately  $30,900,000
         available to offset  future U.S.  taxable  income.  The use of the NOLs
         generated  through  December  31, 1997 may be limited to  approximately
         $1,000,000 each year as a result of stock, option and warrant issuances
         resulting  in an ownership  change of more than 50% of our  outstanding
         equity.  The NOL of approximately  $1,600,000 and $3,200,000  generated
         during the tax years ended  December  31, 1999 and 1998,  respectively,
         are  available to offset  future  taxable  income  without  limitation.
         Additionally,  approximately  $1,800,000  of the NOL  generated in 1995
         available  to offset  future  U.S.  taxable  income  will be limited to
         approximately  $300,000  per year  over the next six  years  due to the
         change in tax year end during 1995. We used  approximately  $14,000,000
         of NOLs to offset  taxable  income during 1997.  If not offset  against
         future taxable income,  the NOL carry forwards will expire in tax years
         2008 through 2019.

         RISKS ASSOCIATED WITH OUR BUSINESS

         Successful development of current and future products is uncertain
         ------------------------------------------------------------------

         We recently purchased  technology to enhance the penetration of certain
         pharmaceutical products through the dermal layers of the skin. Although
         several systems have been developed by various pharmaceutical companies
         to enhance  the  transdermal  delivery of  specific  drugs,  relatively
         limited  research has been  conducted in the  expansion of  transdermal
         delivery  systems  to  a  wider  range  of   pharmaceutical   products.
         Transdermal  delivery systems are currently marketed for only a limited
         number of products.  In addition,  transdermal delivery systems used to
         date have often  demonstrated  adverse side effects for users,  such as
         skin irritation and delivery difficulties.

         Our  proposed  products  are in the early  development  stage,  require
         significant further development,  testing and regulatory clearances and
         are  subject to the risks of failure  inherent  in the  development  of
         products  based  on  innovative   technologies.   Due  to  our  limited
         resources,  collaboration  will be  essential  in order to complete the
         development  of specific  products.  No assurance can be given that the
         necessary  collaboration  will be obtained.  Risks  during  development
         include the possibilities  that any or all of the proposed products may
         be found to be ineffective  or toxic,  or otherwise may fail to receive
         necessary regulatory clearances;  that the proposed products,  although
         effective,  may be  uneconomical  to market;  or that third parties may
         market superior or equivalent products. Due to

                                       15
<PAGE>

         the extended  testing and  regulatory  review process  required  before
         marketing  clearance  can be  obtained,  we do not expect to be able to
         realize royalty revenues from the sale of any drugs in the near term.

         Clinical  trial  results  may result in  failure  to obtain  regulatory
         -----------------------------------------------------------------------
         approval and inability to sell products
         ---------------------------------------

         Before approving a drug for commercial sale as treatment for a disease,
         the FDA and other  regulatory  authorities  generally  require that the
         safety  and  efficacy  of a drug  be  demonstrated  in  humans.  If our
         clinical  trials  do not  demonstrate  the  safety or  efficacy  of our
         products, or if we otherwise fail to obtain regulatory approval for our
         products,  we will not be able to generate revenues from the commercial
         sale of our products.  Any human pharmaceutical product developed by us
         would  require  clearance  by Spain's  Ministry  of Health for sales in
         Spain,  the U.S. Food and Drug  Administration  for sales in the United
         States  and  similar  agencies  in  other  countries.  The  process  of
         obtaining these approvals is costly and  time-consuming,  and there can
         be no assurance that such approvals will be granted. In general, only a
         small  percentage of new  pharmaceutical  products  achieve  commercial
         success.  Such  governmental  regulation  may prevent or  substantially
         delay the  marketing  of our  products  and may  cause us to  undertake
         costly  procedures  with respect to our research  and  development  and
         clinical testing  operations which may provide a competitive  advantage
         to more substantially capitalized companies which compete with Bentley.
         Even  if  we  receive   regulatory   approval,   these   agencies  may,
         nevertheless,  limit  the  uses of the  product.  In  addition,  we are
         required,  in  connection  with our  activities,  to  comply  with good
         manufacturing   practices   (GMPs)   and  local,   state  and   federal
         regulations.   Non-compliance  with  these  regulations  could  have  a
         material adverse effect on Bentley and/or prevent the commercialization
         of our products and can, among other things, result in:

          o    fines;
          o    suspended regulatory approvals;
          o    refusal to approve pending applications;
          o    refusal to permit exports from the United States;
          o    product recalls;
          o    seizure of products;
          o    injunctions;
          o    operating restrictions; and
          o    criminal prosecutions.

         Our  patent  position  is  uncertain  and our  success  depends  on our
         -----------------------------------------------------------------------
         proprietary rights
         ------------------

         We have filed  numerous  patent  applications  and have been granted or
         have acquired a number of patents.  However,  there can be no assurance
         that our pending  applications will be issued as patents or that any of
         our  issued  patents  will  afford  adequate  protection  to us or  our
         licensees.   Other   private  and  public   entities  have  also  filed
         applications  for, or have been  issued,  patents  and are  expected to
         obtain patents and other proprietary rights to technology, which may be
         harmful to the  commercialization of our products.  We cannot determine
         the ultimate  scope and  validity of patents

                                       16
<PAGE>

         which  are now  owned  by or may be  granted  to third  parties  in the
         future,  the  extent  to which we may wish or be  required  to  acquire
         rights under such patents,  or the cost or availability of such rights.
         In addition, we also rely on unpatented  proprietary  technology in the
         development  and  commercialization  of  our  products.   There  is  no
         assurance that others may not independently develop the same or similar
         technology   or   obtain   access   to  our   proprietary   technology.
         Additionally,  if our  technologies,  product  candidates,  methods  or
         processes  infringe  upon the  intellectual  property  rights  of other
         parties, we could incur substantial liability costs and we may have to:

          o    obtain  licenses  from the owners of such  intellectual  property
               rights;
          o    redesign   our  product   candidates   or   processes   to  avoid
               infringement;
          o    stop using the  subject  matter  claimed in the  patents  held by
               others;
          o    pay damages; or
          o    defend  litigation  or  administrative  proceedings  which may be
               costly whether we win or lose.

         We also rely upon trade secrets,  unpatented  proprietary  know-how and
         continuing   technological   innovations  to  develop  our  competitive
         position.   All  of  our  employees  with  access  to  our  proprietary
         information  have  entered  into  confidentiality  agreements  and have
         agreed to assign to us any inventions  relating to our business made by
         them  while in our  employ.  However,  there can be no  assurance  that
         others may not acquire or independently  develop similar technology or,
         if patents in all major  countries  are not issued with  respect to our
         products,  that we will be able to maintain  information  pertinent  to
         such research as proprietary technology or trade secrets.

         We may have to lower prices or spend more money to effectively  compete
         -----------------------------------------------------------------------
         against companies with greater resources than us, which could result in
         -----------------------------------------------------------------------
         lower revenues and/or profits
         -----------------------------

         We compete with other pharmaceutical companies, biotechnology firms and
         chemical companies, many of which have substantially greater financial,
         marketing and human resources than us (including  substantially greater
         experience   in  clinical   testing,   production   and   marketing  of
         pharmaceutical  products). We cannot assure you that we will be able to
         compete   successfully  given  these  factors.   For  example,  if  our
         competitors  offer lower  prices,  we could be forced to lower  prices,
         which would result in reduced margins and a decrease in revenues. If we
         do not lower  prices we could lose sales and  market  share.  In either
         case, if we are unable to compete  against  companies who can afford to
         cut  prices,  we would not be able to generate  sufficient  revenues to
         grow  Bentley or reverse  our  history  of losses.  We also  experience
         competition  in the  development  of our  products and  processes  from
         individual  scientists,  hospitals,  universities  and  other  research
         institutions  and, in some instances,  compete with others in acquiring
         technology from these sources.

         Rapid technological change may result in our products becoming obsolete
         -----------------------------------------------------------------------
         before we recoup a significant portion of related costs
         -------------------------------------------------------

         The  pharmaceutical   industry  has  undergone  rapid  and  significant
         technological  change.  We expect the technology to continue to develop
         rapidly,  and our success will depend  significantly  on our

                                       17
<PAGE>

         ability to maintain a competitive  position.  We have recently  shifted
         our strategic  focus so that we do not rely on research and development
         of pharmaceuticals from concept through marketing.  Instead, we seek to
         acquire  late-stage  development  compounds that can be marketed within
         approximately   one  year  and   currently-marketed   products.   Rapid
         technological development may result in actual and proposed products or
         processes  becoming obsolete before we recoup a significant  portion of
         related  research and  development,  acquisition and  commercialization
         costs.

         Pharmaceutical pricing is uncertain and may result in a negative effect
         -----------------------------------------------------------------------
         on our profitability
         --------------------

         Our levels of revenues and profitability may be negatively  affected by
         the  continuing  efforts  of  governmental  and third  party  payers to
         contain or reduce the costs of health care through  various means.  For
         example,  in  certain  foreign  markets,  including  Spain,  pricing or
         profitability of prescription  pharmaceuticals is subject to government
         control.  In the United  States,  there have been,  and we expect  that
         there will  continue to be, a number of federal and state  proposals to
         implement similar government  control.  While we cannot predict whether
         any such  legislative  or  regulatory  proposals  will be adopted,  the
         adoption of such proposals could have a material  adverse effect on our
         business, financial condition and profitability.  In addition, sales of
         prescription  pharmaceuticals are dependent in part on the availability
         of  reimbursement  to the  consumer  from third party  payers,  such as
         government  and  private  insurance  plans.   Third  party  payers  are
         increasingly  challenging  the prices charged for medical  products and
         services. If we succeed in bringing one or more products to the market,
         there can be no assurance that these  products will be considered  cost
         effective and that  reimbursement  to the consumer will be available or
         will be  sufficient  to allow us to sell our products on a  competitive
         basis.

         We depend on third parties for commercialization in the United States
         ---------------------------------------------------------------------

         We intend to sell our products in the United States and internationally
         in  collaboration  with  one  or  more  marketing  partners.  We do not
         presently  possess the resources or experience  necessary to market our
         products in the U.S. We presently  have no agreements for the licensing
         or marketing of our product  candidates,  and we cannot assure you that
         we will be able to enter into any such agreements in a timely manner or
         on commercially favorable terms, if at all. Development of an effective
         sales  force  requires  significant   financial  resources,   time  and
         expertise.  We cannot  assure  you that we will be able to  obtain  the
         financing  necessary or to establish  such a sales force in a timely or
         cost  effective  manner,  if at all, or that such a sales force will be
         capable of generating demand for our product candidates.

         As a  producer  of  "Orphan  Drugs"  we may  be  required  to  continue
         -----------------------------------------------------------------------
         producing the product regardless of its potential
         -------------------------------------------------

         An Orphan Drug is a product or products used to treat a rare disease or
         condition,  which,  as defined under United States law, is a disease or
         condition that affects populations of less than 200,000 individuals or,
         if  victims  of  a  disease  number  more  than  200,000,  the  sponsor
         establishes that it does not realistically anticipate its product sales
         will be sufficient to recover its costs.  If a product is

                                       18
<PAGE>

         designated  an Orphan  Drug,  then the  sponsor is  entitled to receive
         certain  incentives to undertake the  development  and marketing of the
         product.  In  Spain,  Orphan  Drugs  are  given  a  preference  in  the
         pharmaceutical  review process by Spain's  Ministry of Health if it can
         be shown that the product is an important  therapeutic  agent and there
         is unequivocal data supporting its efficacy. The Ministry of Health has
         the authority to require  pharmaceutical  manufacturers  to continue to
         produce products, which are Orphan Drugs regardless of their commercial
         potential.  As required by the Ministry of Health,  Laboratorios Belmac
         currently  manufactures  and  distributes  one Orphan Drug,  Anacalcit,
         which is used in the treatment of nephrolithiasis.  We do not currently
         market any Orphan Drugs in the United States.

         We depend on key  personnel and must continue to attract and retain key
         -----------------------------------------------------------------------
         employees
         ---------

         We believe  that we have been able to attract  skilled and  experienced
         management and  scientific  personnel.  We cannot assure you,  however,
         that we will continue to attract and retain  personnel of high caliber.
         While we believe that we have assembled an effective  management  team,
         the loss of several  individuals  who are  considered key management or
         scientific personnel could have an adverse impact on Bentley.

         We face product liability risks
         -------------------------------

         We face an inherent  business  risk of  exposure  to product  liability
         claims  in the  event  that the use of our  technology  or  prospective
         products is alleged to have resulted in adverse effects.  While we have
         taken,  and will  continue  to take,  what we believe  are  appropriate
         precautions,  there can be no assurance that we will avoid  significant
         liability  exposure.  We maintain  product  liability  insurance in the
         amount of $5 million.  However, we cannot assure you that this coverage
         will be  adequate  in terms and scope to  protect  us in the event of a
         product  liability  claim.  In  connection  with our  clinical  testing
         activities,  we may, in the ordinary course of business,  be subject to
         substantial  claims by, and liability to,  subjects who  participate in
         our studies.

         We face risks when doing business outside of the United States
         --------------------------------------------------------------

         Nearly all of our  revenues  during the three years ended  December 31,
         1999 have been generated outside the United States, from our subsidiary
         in Spain.  There are risks in  operations  outside  the United  States,
         including,  among others,  the difficulty of  administering  businesses
         abroad,  exposure to foreign currency  fluctuations and devaluations or
         restrictions  on money  supplies,  foreign and domestic  export law and
         regulations,  taxation,  tariffs,  import quotas and  restrictions  and
         other  political and economic  events  beyond our control.  We have not
         experienced  any  material  effects of these  risks as of yet;  however
         there can be no assurance that they will not have such an effect in the
         future.

                                       19
<PAGE>

         Our computer systems may fail which may disrupt our business
         ------------------------------------------------------------

         We recognized the need to ensure that our business operations would not
         be adversely impacted by the Year 2000 issue. As a result, we completed
         an  assessment  of how we might be impacted by the Year 2000 issue.  We
         engaged  information  system  consultants  to evaluate  our systems and
         technology. Our assessment process included a review of our information
         as well as non-information  technology  systems. We also considered the
         potential impact on our operations and business model in the event that
         third  parties  with  whom we have  material  relationships  failed  to
         resolve their own Year 2000 issues. The results of our assessment phase
         indicated that certain  information  technology  systems  (hardware and
         software) needed upgrading or replacing.  Our management also conducted
         a review of our  non-information  technology systems and concluded that
         it was not  materially  exposed to  non-information  technology  system
         risks. We polled our significant suppliers, service providers and other
         third parties with whom we have material relationships to determine the
         extent to which we were vulnerable to a failure of any such third party
         to adequately address its own Year 2000 issue.

         We modified,  where needed,  our computer  applications  to ensure that
         they will function  properly  beyond 1999. We replaced  certain systems
         and  applications  with the  assistance  of  external  consultants.  We
         believe that the  modifications to existing software and conversions to
         new software applications, which are year 2000 compliant, mitigated the
         year  2000  issue.  We have  determined  that we  have no  exposure  to
         contingencies  related to the Year 2000 issue for the  products we have
         sold or anticipate selling in the future.

         Now that we have  entered  the Year 2000,  testing  of our  information
         systems has been  continued,  and to date, we have not  experienced any
         material Year 2000 disruptions or failures of our systems,  nor have we
         been notified of any  disruptions  or failures of the systems of any of
         the  third  parties  with  whom we do  business.  However,  there is an
         ongoing risk that Year 2000 related  problems  could still occur and we
         will  continue  to  monitor  Year  2000  issues  as they  relate to our
         internal computer systems and third party computer systems with whom we
         interact.  We cannot provide  assurance  that our Year 2000  compliance
         program, or similar programs by third parties with whom we do business,
         will be  successful.  We may incur  significant  costs in resolving any
         Year 2000 issues that may arise in the future.  If not resolved,  these
         issues  could  have a  significant  adverse  impact  on  our  business,
         operating results and financial position.

         RISKS ASSOCIATED WITH OUR SECURITIES

         Your percentage of ownership,  voting power and price of Bentley common
         -----------------------------------------------------------------------
         stock may decrease as a result of events,  which increase the number of
         -----------------------------------------------------------------------
         shares of our outstanding common stock
         --------------------------------------

          As of December 31, 1999, we had the following capital structure:

                                       20
<PAGE>
<TABLE>
<CAPTION>

         <S>                                                                         <C>
          Common stock outstanding:                                          10,230,000

          Common stock issuable upon:

                   Exercise of Class B warrants:                              2,876,000
                   Exercise of underwriter warrants:                            690,000
                   Conversion of Debentures:                                  2,902,000
                   Exercise of other warrants:                                1,240,000
                   Exercise of options:                                       1,927,000
                   Other Shares issuable:                                         3,000
                                                                              ---------

          Total Common stock outstanding assuming conversion/                19,868,000
          exercise of all outstanding securities:                            ==========

</TABLE>


          On March 9,  2000,  our Board of  Directors  agreed to redeem  our 12%
          Convertible Senior  Subordinated  Debentures.  Written notice is being
          provided to all holders of the Debentures,  which provides that if the
          Debentures  are not converted into shares of our Common Stock by April
          12, 2000,  then the  remaining  Debentures  will be redeemed by us for
          105% of the  principal  amount plus accrued  interest,  or $1,050 plus
          accrued  interest of $4 per  Debenture.  Each Debenture is convertible
          into 400 shares of Common Stock until April 12,  2000.  As of March 9,
          2000, there are 6,985 Debentures  outstanding,  which if all converted
          into shares of Common Stock,  will result in the issuance of 2,794,000
          shares of Common Stock,  reducing  interest  expense by  approximately
          $1,000,000 per year.

          However,  if the holders of all 6,985 Debentures  outstanding on March
          9, 2000  decided  not to convert  such  Debentures  into shares of our
          Common Stock, but decided instead to receive cash of $1,054 (including
          accrued interest) for each outstanding Debenture, we would have to pay
          an aggregate of  $7,362,000 to redeem the  Debentures.  As long as the
          market price of the Common Stock remains  above $2.625 per share,  the
          holders of the Debentures  would receive Common Stock upon conversion,
          which is worth more than the cash they would receive upon redemption.

          If all of the outstanding warrants and options, which are exercisable,
          were  exercised,  Bentley  would  receive  proceeds  of  approximately
          $30,600,000.  In addition,  we may conduct additional future offerings
          of our common  stock or other  securities  with  rights to convert the
          securities into shares of our common stock.  Conversion or exercise of
          our  outstanding  convertible  securities,  options and warrants  into
          common stock may  significantly and negatively affect the market price
          for the common stock as well as decrease your  percentage of ownership
          and voting power of the common stock.

          The market price of our shares has been volatile. In July 1995 Bentley
          effected  a  one-for-ten   reverse   stock  split.   Factors  such  as
          announcements of technological  innovations or new commercial products
          by our  competitors,  the  results  of  clinical  testing,  patent  or
          proprietary rights,

                                       21
<PAGE>

         developments,  general  market  conditions  or other matters may have a
         significant impact on the market price of the common stock.

         Obligations  in  connection  with  warrants  and options may hinder our
         -----------------------------------------------------------------------
         ability to obtain future financing
         ----------------------------------

         As of December 31, 1999,  we have  outstanding  options and warrants to
         purchase  6,733,000  shares of Common Stock at exercise  prices ranging
         from $1.50 to  $177.50.  The  holders of the  warrants  and options are
         likely to exercise or convert them at a time when we are able to obtain
         additional  equity  capital on terms more favorable than those provided
         by such warrants and options.  Certain  warrants and options also grant
         to the holders  certain  demand  registration  rights and "piggy  back"
         registration rights. These obligations may hinder our ability to obtain
         future financing.

         Your  interest in Bentley may be diluted by the  issuance of  preferred
         -----------------------------------------------------------------------
         stock with greater rights than the common stock,  which we can sell, or
         -----------------------------------------------------------------------
         issue at any time
         -----------------

         The sale or issuance of any shares of  preferred  stock  having  rights
         superior  to those of the common  stock may result in a decrease in the
         value or market  price of the common  stock.  The issuance of preferred
         stock could have the effect of  delaying,  deferring  or  preventing  a
         change of ownership  without further vote or action by the stockholders
         and may adversely  affect the voting and other rights of the holders of
         common stock.

         Our board of directors is authorized to issue up to 2,000,000 shares of
         preferred  stock.  The board has the power to  establish  the  dividend
         rates,  preferential  payments  on  our  liquidation,   voting  rights,
         redemption  and  conversion  terms  and  privileges  for any  series of
         preferred stock.

         We have not paid dividends on our common stock and do not intend to pay
         -----------------------------------------------------------------------
         dividends in the foreseeable future
         -----------------------------------

         We have not paid  dividends on our common stock since our inception and
         do  not  intend  to  pay  any  dividends  on our  common  stock  in the
         foreseeable future. However, at our annual meeting of stockholders held
         on June 30, 1999,  our  stockholders  approved a proposal to change our
         state  of  incorporation  from  Florida  to  Delaware  and to  adopt  a
         certificate of incorporation and bylaws, which conform to Delaware law,
         which was  completed in October  1999.  Delaware  law  provides  that a
         corporation may pay dividends out of surplus,  out of the corporation's
         net profits for the preceding fiscal year, or both, provided that there
         remains in the stated capital  account an amount equal to the par value
         represented  by  all  shares  of  the  corporation's   stock  having  a
         distribution preference.

         Certain laws and  provisions in our  certificate of  incorporation  and
         -----------------------------------------------------------------------
         bylaws may make it more  difficult  or  discourage  third  parties from
         -----------------------------------------------------------------------
         attempting to control Bentley
         -----------------------------

         We are subject to Section 203 of the Delaware General Corporate Law, as
         amended, which is a

                                       22
<PAGE>

         statutory provision intended to discourage certain takeover attempts of
         Delaware corporations which 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 director, unless:

          o    prior to such date,  our Board of Directors  approved  either the
               business  combination  or the  transaction  that  resulted in the
               stockholder becoming an interested stockholder;

          o    upon  conclusion  of  the   transaction   that  resulted  in  the
               stockholder  becoming an interested  stockholder,  the interested
               stockholder owned at least 85% of our voting stock outstanding at
               the time the  transaction  commenced,  excluding  for purposes of
               determining the number of shares  outstanding  those shares owned
               (1) by persons who are  directors  and also  officers  and (2) by
               employee stock plans in which employee  participants  do not have
               the right to determine confidentially whether shares held subject
               to the plan will be tendered in a tender or exchange offer; or

          o    on or  subsequent  to such  date,  the  business  combination  is
               approved by the Board of Directors and authorized at a meeting of
               stockholders, and not by written consent, by the affirmative vote
               of at least  two-thirds of the  outstanding  voting stock that is
               not owned by the interested stockholder.

         Section 203 of the Delaware  General  Corporation Law defines  business
         combinations to include:

          o    any merger or consolidation  involving Bentley and any interested
               stockholder;

          o    any sale, transfer, pledge or other disposition of 10% or more of
               the assets of Bentley to an interested stockholder;

          o    any  transaction  that  results in the  issuance  or  transfer by
               Bentley of any of our stock to an interested stockholder;

          o    any  transaction   involving  Bentley  that  has  the  effect  of
               increasing the proportionate  share of any class or series of our
               stock beneficially owned by an interested stockholder; or

          o    any receipt by an  interested  stockholder  of the benefit of any
               loans, advances,  guarantees, pledges or other financial benefits
               provided by or through Bentley.

          In  general,  Section  203 of the  Delaware  General  Corporation  Law
          defines an interested stockholder as any entity or person beneficially
          owning 15% or more of our  outstanding  voting stock and any entity or
          person  affiliated  with,  controlling or controlled by such entity or
          person.

          Our certificate of  incorporation  and bylaws include  provisions that
          may have the effect of  discouraging,  delaying or preventing a change
          in  control  of us or  an  unsolicited  acquisition

                                       23
<PAGE>

          proposal that a stockholder  might consider  favorable.  Our Board of
          Directors,  without a  stockholder  vote,  can  adjust  the number of
          members on the Board of Directors between one and thirteen. Vacancies
          on the Board of  Directors  and newly  created  directorships  may be
          filled  solely by a majority of the remaining  directors.  A director
          may only be removed for cause by the  holders of at least  two-thirds
          of the  voting  power  of  Bentley.  The  positive  vote of at  least
          two-thirds  of the voting  power of Bentley is  required to approve a
          merger,  a sale or lease  of all or most of the  assets  of  Bentley,
          certain other business combinations or the dissolution or liquidation
          of Bentley, and a "fair price" requirement also exists in each of the
          foregoing transactions. Finally, an affirmative vote of two-thirds is
          required to amend any provision in the  certificate of  incorporation
          relating  to  directors  and  officers  of  Bentley  or to amend  any
          provision in the  certificate  which  requires  the positive  vote of
          two-thirds of the voting power of Bentley.

          Additionally,  our certificate of incorporation  authorizes a class of
          Preferred Stock commonly known as "blank check"  Preferred  Stock. The
          Preferred Stock may be issued from time to time in one or more series,
          and  the  Board  of  Directors,   without  further   approval  of  our
          stockholders,   is   authorized   to  fix  the  relative   rights  and
          restrictions  applicable  to  each  series  of  Preferred  Stock.  Any
          Preferred  Stock that is issued may have  rights  superior to those of
          the Common Stock.  In the event of any  issuances of Preferred  Stock,
          the holders of Bentley  stock will not have any  preemptive or similar
          rights to  acquire  any  Preferred  Stock or any of our other  capital
          stock.  The potential  issuance of Preferred Stock may have the effect
          of delaying or preventing a change in control of Bentley, may restrict
          dividends  on our Common  Stock,  may  discourage  bids for our Common
          Stock at a premium  over the  market  price of our Common  Stock,  may
          impair the  liquidation  rights of the Common Stock and may  adversely
          affect  the market  price of,  and the voting and other  rights of the
          holders of, Common Stock.

          Section 203 and our  "anti-takeover"  provisions could have the effect
          of lessening the possibility  that our  stockholders  would be able to
          receive a premium  above market value for their shares in the event of
          a takeover.  These provisions could also have an adverse effect on the
          market value of our shares of Common  Stock.  To the extent that these
          provisions  may restrict or  discourage  takeover  attempts,  they may
          render less likely a takeover  opposed by the Board of  Directors  and
          may make  removal  of the  Board or  management  less  likely as well.
          Additionally,  the existence of these provisions could limit the price
          that  investors  might be  willing  to pay in the future for shares of
          Common Stock.

          In December 1999, our Board of Directors adopted a stockholder  rights
          plan designed to prevent a potential  acquirer from gaining control of
          Bentley without fairly  compensating  all of our  stockholders  and to
          protect  Bentley  from  coercive  takeover  attempts.   The  Board  of
          Directors  approved the  declaration  of the dividend of one right for
          each  outstanding  share of our  Common  Stock on the  record  date of
          December  27,  1999.  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 any person
          or group of affiliated persons beneficially  acquire(s) 15% or more of
          our Common Stock. Under certain circumstances,  each holder of a right
          (other than the person or group

                                       24
<PAGE>

          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 the market
          price  of the  Common  Stock  at  the  time  that  the  right  becomes
          exercisable.

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

          UNITED STATES

          The Registrant's  corporate  headquarters are presently  located at 65
          Lafayette Road, 3rd Floor,  North Hampton,  NH 03862 and include 3,200
          square feet,  which are occupied in accordance with a lease agreement,
          which expires in March 2004.

          SPAIN

          Manufacturing is performed at the Registrant's facilities in Zaragoza,
          Spain.  These  facilities  were  renovated  in 1995 to comply with the
          requirements  for European GMPs and further  renovated during 1998 and
          1999.   Expansion  of  the  facilities  is  presently  underway.   The
          facilities,   which  are   owned  by  the   Registrant,   consist   of
          approximately  55,000 square feet located in a prime  industrial  park
          and  seated  on  sufficient   acreage  that  would  allow  for  future
          expansion. The manufacturing facility is capable of producing tablets,
          capsules,  suppositories,  creams,  ointments,  lotions,  liquids  and
          sachets,  as well as microgranulated and  microencapsulated  products.
          The facility also includes analytical  chemistry,  quality control and
          quality  assurance  laboratories.  The GMPs  certification  allows the
          Registrant  to  undertake  contract  manufacturing  for  a  number  of
          international   pharmaceutical   companies   either   engaged   in  or
          contemplating  emergence  into the Spanish  market or for export.  The
          Registrant's  administrative offices in Spain are located in Madrid in
          approximately  5,500 square feet of renovated,  leased offices,  which
          leases  expire in 2000.  The  Registrant  plans to renew such  leases,
          prior to expiration, for an additional two-year term.

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

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

          In March 1994 a  wholly-owned  subsidiary  of the  Registrant,  Belmac
          Healthcare Corporation,  formed a partnership through its wholly-owned
          subsidiary,  Belmac Hygiene,  Inc., with a wholly-owned  subsidiary of
          Maximed Corporation, headquartered in New York, and planned to market,
          through this  partnership,  a range of hydrogel based feminine  health
          care products, including a contraceptive, an antiseptic, an antifungal
          and an  antibacterial.  In December  1994,  the  Registrant  commenced
          litigation against its partner in the United States District Court for
          the  Southern  District  of  New  York  claiming  interference  in the
          management  of  the  partnership  and   misrepresentation   under  the
          partnership  agreement.  The  Registrant was awarded a judgment in the
          amount of $7.68 million in 1998,  which was affirmed by the U.S. Court
          of Appeals. The Registrant attempted to

                                       25
<PAGE>

          collect the  judgment,  but was unable to obtain cash from its partner
          to satisfy the judgment.  Consequently, the Registrant decided to seek
          assignment of partnership  technology and related patents in an effort
          to satisfy the judgment.  As a result, the technology and patents were
          assigned to the Registrant in October 1999 and the Registrant recorded
          such assignment as a distribution from the partnership.

          The Registrant was awarded a judgment of  approximately  $2,130,000 in
          the  Circuit  Court  of the  Thirteenth  Judicial  Circuit,  State  of
          Florida,  Hillsborough  County  Civil  Division  during the year ended
          December 31, 1998,  relating to the Registrant's claims of civil theft
          and breach of employment  agreement filed against its former President
          and Chief  Executive  Officer,  Michael M.  Harshbarger.  The judgment
          included treble damages  totaling  $418,000 related to its civil theft
          claim and  $1,712,000  related to its breach of  employment  agreement
          claim.  Harshbarger  originally  filed suit against the  Registrant in
          November 1993, alleging wrongful termination, seeking monetary damages
          in excess of $1,400,000.  In addition to  establishing a receivable on
          its books,  the  Registrant  has  established  a reserve  equal to the
          receivable,  as the Registrant is of the opinion that Harshbarger does
          not have the financial resources to satisfy the judgment.  Harshbarger
          filed a Motion for Relief From  Judgment in September  1999,  alleging
          among other things that he was not  provided  notice of the August 24,
          1998 jury trial.  Discovery is ongoing and a hearing is expected to be
          held to determine the merits of Harshbarger's  claims.  In the opinion
          of management,  the outcome is expected to have no material  effect on
          the  financial  position,  results of  operations or cash flows of the
          Registrant.

          In November 1999, Creative Technologies, Inc. ("Creative") commenced a
          lawsuit against the Registrant and others in the Superior Court of New
          Jersey,  Essex  County,  asserting  that  the  Registrant  breached  a
          brokerage or finder's fee contract  with  Creative  regarding its 1999
          acquisition  of  permeation  enhancement  technology.   Creative  also
          asserts  claims for breach of the  implied  covenant of good faith and
          fair  dealing  and  for  tortious  interference  with  contract.   The
          Registrant  has made a motion to dismiss the  complaint and each count
          therein  for  failure  to  state a cause  of  action  and for  lack of
          personal   jurisdiction  over  the  Registrant.   In  the  opinion  of
          management,  the  claims  are  without  merit and the  outcome  is not
          expected  to have a  material  effect  on the  financial  position  or
          results of operations of the Registrant.


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

          Not applicable.


                                       26
<PAGE>




                                     PART II

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

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

         Quarter Ended                High Sales Price          Low Sales Price
         -------------                ----------------          ---------------
         March 31, 1998                     $3.38                   $2.13

         June 30, 1998                       3.06                    2.19

         September 30, 1998                  2.38                     .81

         December 31, 1998                   1.69                     .81



         March 31, 1999                     $1.94                   $1.38

         June 30, 1999                       3.50                    1.44

         September 30, 1999                  3.31                    2.75

         December 31, 1999                   6.44                    2.75

         As of  March  9,  2000  there  were  1,865  holders  of  record  of the
         Registrant's  Common Stock,  which does not reflect  stockholders whose
         shares are held in street name. No dividends have ever been declared or
         paid on the  Registrant's  Common  Stock  and the  Registrant  does not
         anticipate paying any dividends in the foreseeable future.

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

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

                                       27
<PAGE>

<TABLE>
<CAPTION>

SUMMARY OF OPERATIONS


                                                                     FISCAL YEAR ENDED

                                                                         DECEMBER 31,
                                                                         ------------
(IN THOUSANDS  EXCEPT PER SHARE DATA)               1999(1)            1998(2)           1997(3)       1996(4)          1995(4)
                                                    -------            -------           -------       -------          -------
<S>                                               <C>                <C>               <C>           <C>               <C>
Sales                                               $20,249           $15,243           $14,902        $23,133          $31,437

Cost of sales                                         8,445             6,601             8,010         15,638           25,586
                                                     ------            ------             -----          -----            -----

Gross margin                                         11,804             8,642             6,892          7,495            5,851

Operating expenses                                   11,226            10,710             8,438          8,794            8,198
                                                     ------            ------             -----          -----            -----

Other (income) expense                                1,668               808             2,269          1,174              (21)
                                                     ------            ------             -----          -----            -----

Loss before extraordinary item (4)                    1,090            (2,876)           (3,815)        (2,473)          (2,326)
                                                     ------            ------             -----          -----            -----

Net loss                                            $(1,090)          $(2,876)          $(3,815)       $(2,919)         $(2,326)
                                                     ======            ======            ======         ======           ======

Loss per Common Share before extraordinary
item                                                  $(.12)            $(.35)            $(.97)         $(.79)           $(.83)
                                                     ======            ======            ======         ======           ======
Basic  and  diluted  net loss per  Common
Share                                                 $(.12)            $(.35)            $(.97)         $(.92)           $(.83)
                                                     ======            ======            ======         ======           ======
Weighted  average number of Common Shares
outstanding                                           9,147             8,431             4,072          3,334            2,999
                                                     ======            ======            ======         ======           ======

</TABLE>

BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                         ------------
<S>                                                 <C>              <C>            <C>                 <C>               <C>
(IN THOUSANDS)                                       1999(1)          1998(2)        1997(3)             1996(4)           1995(4)
                                                     -------          -------        -------             -------           -------
Working capital                                       $1,130           $6,835        $10,758              $4,265            $3,113

Non-current assets                                    10,548            7,857          6,034               6,746             6,523

Total assets                                          22,237           20,318         21,043              16,558            16,290

Non-current liabilities                                  104            5,700          5,549               5,513             2,252

Redeemable Preferred Stock                               -0-              -0-          2,338               2,203             2,068

Stockholders' Equity                                  11,574            8,992          8,905               3,295             5,316
</TABLE>


     (1)  The Registrant classified its 12% Debentures as a current liability at
          December  31,  1999 as a result of issuing a Notice of  Redemption  in
          March 2000, reducing working capital by $5,362,000. The Debentures are
          each convertible into 400 shares of Common Stock or are redeemable for
          $1,054 (see Note 15).

     (2)  Operating  expenses in 1998 include  charges of $1,176,000  related to
          costs of  abandoned  acquisitions,  which  resulted  from  attempts to
          acquire  certain  assets from Schwarz  Pharma as well as certain other
          acquisitions.

                                       28
<PAGE>

          All of the  Registrants'  outstanding  Redeemable  Preferred Stock was
          converted into Common Stock in October 1998.

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

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

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

         GENERAL

         The Registrant is a U.S.-based  drug delivery  company  specializing in
         the development of products based upon innovative and proprietary  drug
         delivery systems, which also has a commercial presence in Europe, where
         it   manufactures,   markets  and   distributes   branded  and  generic
         pharmaceutical  products.  Historically  most of its revenues have come
         from its operations in Europe.

         The  Registrant  incurred  a net  loss of  $1,090,000  on  revenues  of
         $20,249,000  for the year  ended  December  31,  1999.  The  Registrant
         intends to continue to focus its efforts on business  activities  which
         management  believes should result in operating  profits in the future,
         of which  there  can be no  assurance.  To  improve  its  results,  the
         Registrant's   management   focuses   on   increasing   higher   margin
         pharmaceutical   product   sales,   controlling   expenses,   carefully
         allocating  resources  to  limited  product  development  projects  and
         potentially  acquiring marketable products or profitable  businesses in
         the United States or Europe that are compatible  with the  Registrant's
         strategy for growth.  (See  "--Liquidity and Capital  Resources").  For
         business segment information on the Registrant's operations outside the
         United  States,  see  Note  12  of  Notes  to  Consolidated   Financial
         Statements.

         The Registrant sold its French subsidiary, Chimos/LBF S.A. (referred to
         herein as Chimos/LBF) in June 1997, whose activities,  until such time,
         consisted of the low margin  brokerage of fine  chemicals,  sourcing of
         raw materials and pharmaceutical intermediaries and the distribution of
         biotechnology or orphan drugs. The Registrant also marketed  disposable
         linens and other related  products in the United States until  December
         1998,  when it  discontinued  such  activities in order to

                                       29
<PAGE>

         focus on the acquisition and development of its permeation enhancement
         technology and potential product applications.

         During  1998,  the  Registrant  negotiated  to acquire a  manufacturing
         facility in the United  States and a portfolio of products from Schwarz
         Pharma.  The Registrant decided to abandon this effort in May 1998 and,
         consequently,  recorded a charge of $1,176,000 in the second quarter of
         1998, representing costs of abandoned acquisitions.

         RESULTS OF OPERATIONS

         FISCAL YEAR ENDED  DECEMBER 31, 1999 VERSUS FISCAL YEAR ENDED  DECEMBER
         -----------------------------------------------------------------------
         31, 1998
         --------

         The  Registrant  reported  revenues  of  $20,249,000  and a net loss of
         $1,090,000  or $.12 per basic and diluted  common  share for the fiscal
         year ended December 31, 1999 compared to revenues of $15,243,000  and a
         net loss of $2,876,000  or $.35 per basic and diluted  common share for
         the year ended  December  31,  1998.  Excluding  the effect of the 1998
         charge of $1,176,000, representing the costs of abandoned acquisitions,
         the  Registrant's  net loss for the fiscal year ended December 31, 1998
         would have been $1,700,000 or $.21 per basic and diluted common share.

         The 33%  increase in revenues is  primarily  attributable  to increased
         sales by the Registrant's Spanish subsidiary, Laboratorios Belmac S.A.,
         which reported an increase in revenues of 41% in local currency for the
         fiscal year ended December 31, 1999 compared to the year ended December
         31, 1998;  however,  fluctuations  in foreign  currency  exchange rates
         negatively  impacted  revenues by  $1,183,000,  resulted in revenues of
         $20,249,000 when expressed in U.S. dollars.

         Gross  margins for the fiscal year ended  December  31, 1999  increased
         slightly  to 58%  compared  to gross  margins of 57% in the prior year,
         primarily as manufacturing  efficiencies  associated with higher levels
         of production  during the fiscal year ended  December 31, 1999 compared
         to the fiscal year ended December 31, 1998.

         Selling,  general  and  administrative  expenses  increased  by 10%, or
         $904,000,  to  $9,982,000  for the fiscal year ended  December 31, 1999
         compared to $9,078,000 for the prior year.  However,  selling,  general
         and administrative  expenses, as a percentage of revenues, were reduced
         from 60% of 1998  revenues  to 49% of 1999  revenues as a result of the
         Registrant's  33%  increase  in  revenues  and its  efforts  to control
         general and  administrative  expenses.  A  significant  portion (62% or
         $6,166,000) of these expenses are marketing and selling expenses, which
         are necessary for the Registrant's  growth in sales and market share in
         Spain.  Selling and marketing expenses increased by $1,205,000,  or 24%
         over the prior year, however, as a percent of revenues,  decreased from
         33% in  1998  to 30%  in  1999.  General  and  administrative  expenses
         decreased by 7% from  $4,117,000  in 1998 to  $3,816,000  in 1999,  and
         decreased from 27% of 1998 revenues to 19% of 1999  revenues.  Selling,
         general and  administrative  expenses in 1999  included  bonuses in the
         form of Common  Stock valued at  $225,000,  in lieu of cash,  issued to
         executive  officers  of the  Registrant  in the first  quarter.  To the
         extent  practical,  however,  the  Registrant  intends to continue  its
         efforts to control general and administrative expenses in its effort to
         achieve and maintain profitability.

                                       30
<PAGE>

         Research and  development  expenses  were  $685,000 for the fiscal year
         ended  December 31, 1999  compared to $153,000 for the prior year.  The
         increase in research and  development  expenses is primarily the result
         of establishing a laboratory in the Registrant's new U.S. headquarters,
         located  in  New  Hampshire.  This  laboratory  is  being  used  by the
         Registrant to develop potential product  applications from its recently
         acquired permeation enhancement technology. The limited expenditures in
         research and development reflect the Registrant's continued de-emphasis
         of basic  research and  redirection  of its resources to  developmental
         expenses necessary for expansion of its portfolio of marketed products.
         The Registrant intends to continue to carefully manage its research and
         development  expenditures  in order  to  ensure  that  its  development
         programs are efficient and cost effective.

         Depreciation and amortization  expenses totaled $559,000 for the fiscal
         year ended December 31, 1999,  compared to $303,000 for the prior year.
         The  increase was  primarily  due to higher  depreciation  charges with
         respect  to   renovations   and   improvements   at  the   Registrant's
         manufacturing  facility;  renovations  and  purchase  of  equipment  to
         establish  its U.S.  laboratory  and higher  amortization  charges with
         respect to recently acquired drug licenses and technologies.

         Included in operating  expenses for the fiscal year ended  December 31,
         1998 is a charge of  $1,176,000,  which  represents  costs of abandoned
         Schwarz Pharma and other related acquisitions. These costs were charged
         during the second quarter of 1998 after  negotiations  ended during May
         1998.

         Interest expense, which primarily reflects interest on the Registrant's
         Debentures,  totaled  $1,168,000 for the fiscal year ended December 31,
         1999  compared to  $1,076,000  for the prior year as a result of higher
         average  outstanding  short  term  debt  balances  used  for  operating
         purposes in Spain.  Interest  income was  $244,000  for the fiscal year
         ended  December  31,  1999  compared  to  $499,000  for the prior  year
         primarily as a result of lower short-term  interest bearing  investment
         balances during the fiscal year ended December 31, 1999 than in 1998.

         The  Registrant  recorded a provision for foreign income taxes totaling
         $781,000  for the fiscal  year ended  December  31, 1999 as a result of
         taxable  income earned in Spain compared to $236,000 in the prior year,
         which includes a benefit from a refundable  amount of U.S. income taxes
         in the amount of $280,000.  The prior year  provision  for income taxes
         would have totaled $516,000, if not for the U.S. income tax benefit.

         The  Registrant  reported  income from  operations  of $578,000 for the
         fiscal year ended December 31, 1999 compared to a loss of $2,068,000 in
         the  prior  year.  Excluding  the  effect  of the  costs  of  abandoned
         acquisitions, the Registrant's loss from operations for the fiscal year
         ended  December  31,  1998  would  have been  $892,000.  The  effect of
         combining   non-operating   items,   primarily   interest   expense  of
         $1,168,000,  interest income of $244,000 and provision for income taxes
         of $781,000 resulted in a net loss of $1,090,000, or $.12 per basic and
         diluted  common  share for the fiscal  year ended  December  31,  1999,
         compared to the net loss in the prior year, of $2,876,000,  or

                                       31
<PAGE>

         $.35 per basic and diluted common share.  Excluding the 1998 charge for
         costs of abandoned acquisitions, the prior year net loss for the fiscal
         year ended  December  31, 1998 would have been  $1,700,000  or $.21 per
         basic and diluted common share.

         FISCAL YEAR ENDED  DECEMBER 31, 1998 VERSUS FISCAL YEAR ENDED  DECEMBER
         -----------------------------------------------------------------------
         31, 1997
         --------

         The  Registrant  reported  revenues  of  $15,243,000  and a net loss of
         $2,876,000  or $.35 per common  share for the year ended  December  31,
         1998 compared to revenues of  $14,902,000  and a net loss of $3,815,000
         or $.97 per common  share for the prior year.  Excluding  the effect of
         the charge of $1,176,000, representing costs of abandoned acquisitions,
         the Registrant's net loss would have been $1,700,000 or $.21 per common
         share for the year ended December 31, 1998.

         The 2% increase in revenues is primarily the result of the Registrant's
         Spanish subsidiary,  Laboratorios Belmac S.A., reporting an increase in
         revenues of 23% in local  currency in the year ended  December 31, 1998
         compared to the prior year;  however,  fluctuations in foreign currency
         exchange  rates reduced the increase by $221,000 to 21%, or $2,657,000,
         when expressed in U.S. dollars. This was partially offset by the effect
         of the June 1997  divestiture of the  Registrant's  French  subsidiary,
         Chimos/LBF,  which generated  approximately  $2,029,000 during the year
         ended December 31, 1997, compared to no revenue in 1998.

         Gross  margins for the year ended  December  31,  1998  improved to 57%
         compared  to gross  margins of 46% in the prior  year,  primarily  as a
         result of: (i)  improvement  in  Laboratorios  Belmac's  average  gross
         margin from 51% to 57% and (ii) the low gross margins  associated  with
         Chimos/LBF, which was divested in June 1997.

         Selling, general and administrative expenses increased by $1,259,000 or
         16% to  $9,078,000  for the year ended  December  31, 1998  compared to
         $7,819,000   for  the  prior  year.  A  significant   portion  (55%  or
         $4,961,000)  of these  expenses were  marketing  and selling  expenses,
         which were necessary for the  Registrant's  plans to increase sales and
         market  share in Spain.  Selling and  marketing  expenses  increased by
         $773,000,  or 18% over the prior year and as a percentage  of revenues,
         increased from 28% of 1997 revenues to 33% of revenues in 1998. General
         and administrative expenses increased by 13% from $3,631,000 in 1997 to
         $4,117,000 in 1998,  and increased  from 24% of 1997 revenues to 27% of
         1998 revenues.

         Research  and  development  expenses  were  $153,000 for the year ended
         December 31, 1998 compared to $324,000 for the prior year.  The minimal
         expenditures  in research  and  development  reflect  the  Registrant's
         recent historical  de-emphasis of basic research and redirection of its
         resources to  developmental  expenses  necessary  for  expansion of its
         portfolio of marketed  products.  The Registrant intends to continue to
         carefully  manage its research and development  expenditures;  however,
         1999  expenditures  will be greater than in 1998 due to planned limited
         development   expenditures  related  to  recently  acquired  permeation
         enhancement technology.

         Included in operating expenses for the year ended December 31, 1998 was
         a  charge  of  $1,176,000,  which  represents  costs  specific  to  the
         abandoned  Schwarz Pharma and other related  acquisitions.


                                       32
<PAGE>

         These  costs  were  charged  during  the  second  quarter of 1998 after
         negotiations ended in May 1998.

         Interest  expense  totaled  $1,076,000  for the year ended December 31,
         1998 compared to  $1,086,000  for the prior year.  Interest  income was
         $499,000 for the year ended  December 31, 1998 compared to $123,000 for
         the prior year.  The increase  was with  respect to interest  earned on
         higher short-term  interest bearing investment balances during the year
         ended  December  31,  1998,  which  resulted  from the  proceeds of the
         exercise of approximately  4,900,000 Class A Warrants during the fourth
         quarter of 1997.

         As a  result  of the  June  1997  sale of  Chimos/LBF,  the  Registrant
         recorded a  provision  for loss on  disposition  of  subsidiary,  which
         totaled $591,000,  including realized exchange loss of $386,000,  and a
         loss of  $205,000  during  the six  months  ended  June 30,  1997.  The
         Registrant  recorded a provision for income taxes totaling $236,000 for
         the year ended December 31, 1998,  including  $516,000 of foreign taxes
         as a result of  taxable  income  earned in Spain,  which was  partially
         offset by a U.S. income tax benefit for a refundable  amount in 1998 of
         $280,000, which resulted from use of foreign tax credits.

         The  Registrant  reported a loss from  operations of $2,068,000 for the
         year ended  December 31, 1998 compared to $1,546,000 in the prior year,
         primarily  due to the 1998  charge  of  $1,176,000  representing  costs
         specific   to  the   abandoned   Schwarz   Pharma  and  other   related
         acquisitions.   Excluding   the  effect  of  the  costs  of   abandoned
         acquisitions,  the Registrant's loss from operations for the year ended
         December  31, 1998 would have been  $892,000.  The effect of  combining
         non-operating items, primarily interest expense of $1,076,000, interest
         income of $499,000 and provision for income taxes of $236,000  resulted
         in a net loss of  $2,876,000,  or $.35 per  common  share  for the year
         ended  December  31, 1998,  compared to the net loss in the  comparable
         prior year,  of  $3,815,000,  or $.97 per common  share.  Excluding the
         charge  for costs of  abandoned  acquisitions,  the net loss would have
         been  $1,700,000  or $.21 per common share for the year ended  December
         31, 1998.

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

         Total  assets  increased  from  $20,318,000  at  December  31,  1998 to
         $22,237,000 at December 31, 1999, while Stockholders'  Equity increased
         from  $8,992,000  at December 31, 1998 to  $11,574,000  at December 31,
         1999.  The increase in  Stockholders'  Equity  reflects  primarily  the
         Registrant's  issuance of approximately  585,000 shares of Common Stock
         and 450,000  stock  purchase  warrants as a result of the February 1999
         acquisition  of  permeation  enhancement  technology,  the  issuance of
         150,000 shares of Common Stock to executive  officers of the Registrant
         during the first  quarter of 1999,  which shares  represent  bonuses in
         lieu of cash,  the exercise of  approximately  859,000 Class A Warrants
         during the third  quarter of 1999,  the issuance  during 1999 of 66,000
         shares of Common Stock to a consultant for services  performed prior to
         1999,  the  conversion  of  193  of the  Registrant's  12%  Convertible
         Debentures  into  approximately  77,000  shares of Common Stock and the
         exercise of stock purchase warrants to purchase 50,000 shares of Common
         Stock,  partially offset by the loss incurred by the Registrant for the
         year ended December 31, 1999 and the negative impact of the fluctuation
         of the Spanish  peseta (and related euro)  exchange rate on the foreign
         currency  translation.  The Registrant's working capital decreased from
         $6,835,000  at December  31, 1998 to  $1,130,000  at

                                       33
<PAGE>

         December 31, 1999,  primarily as a result of classifying  $5,362,000 of
         Debentures as a current liability as of December 31, as a result of the
         Registrant's  decision in March 2000 to redeem any Debentures which are
         not converted into shares of Common Stock and remain outstanding on the
         date fixed for  redemption,  which is April 12, 2000, the loss incurred
         by the Registrant  during the year and use of cash for the  acquisition
         of permeation  enhancement technology in the U.S. and for manufacturing
         facility  renovations  in Spain and the  development of a laboratory in
         the United States,  partially  offset by cash proceeds of approximately
         $2,600,000 received from the exercise of approximately  859,000 Class A
         Warrants during the third quarter of 1999.

         Cash and cash  equivalents  decreased  from  $6,703,000 at December 31,
         1998 to $4,422,000 at December 31, 1999, primarily as a result of using
         cash for  operating  activities,  purchase  of  permeation  enhancement
         technology,  renovation  of the  manufacturing  facility  in Spain  and
         establishing  a laboratory in the U.S.,  which was partially  offset by
         cash proceeds of approximately $2,600,000 received from the exercise of
         approximately  859,000 Class A Warrants, a portion of which was used to
         purchase marketable  securities,  which are classified as available for
         sale.  Included in cash and cash  equivalents  at December 31, 1999 are
         approximately  $3,569,000  of short-term  investments  considered to be
         cash equivalents. There are also approximately $1,893,000 of marketable
         securities (six-month  maturities)  classified as available for sale at
         December 31, 1999.

         Accounts  receivable  increased from $3,228,000 at December 31, 1998 to
         $4,016,000  at  December  31,  1999  as a  result  of the  Registrant's
         increase  in  revenues  in  the  fourth   quarter  of  1999  offset  by
         fluctuation in foreign currency  exchange rates. The Registrant has not
         experienced any material delinquent accounts.  Inventories decreased to
         $965,000 at December 31, 1999  compared to  $1,208,000  at December 31,
         1998 primarily due to fluctuation in foreign  currency  exchange rates.
         Prepaid  expenses and other current assets decreased from $1,322,000 at
         December  31, 1998 to $393,000 at December  31,  1999,  primarily  as a
         result of transferring  capitalized  costs associated with acquisitions
         of drug  licenses to drug  licenses and related  costs,  net, when such
         assets were placed in service,  recurring  amortization charges and the
         effect of fluctuations in foreign currency exchange rates.

         The combined total of accounts payable and accrued  expenses  decreased
         from  $4,398,000  at December  31, 1998 to  $4,240,000  at December 31,
         1999,  primarily as a result of payment of liabilities and fluctuations
         in  foreign  currency  exchange  rates,  offset by an  increase  in the
         accrual for foreign  income taxes  payable on profits  earned in Spain.
         Short-term borrowings decreased from $1,223,000 at December 31, 1998 to
         $952,000  at  December  31,  1999,  as a result  of  lower  outstanding
         balances  on lines of credit used for  operating  purposes in Spain and
         the effect of fluctuations in foreign currency exchange rates.

         Fixed  assets,  net increased  from  $3,551,000 at December 31, 1998 to
         $3,684,000 at December 31, 1999,  due primarily to  renovations  at the
         Spanish  manufacturing  facility and  establishing  a laboratory in the
         U.S., partially offset by recurring depreciation charges and the effect
         of fluctuations in foreign currency exchange rates.

                                       34
<PAGE>

         Drug  licenses and related  costs,  net  increased  from  $2,433,000 at
         December 31, 1998 to $5,807,000 at December 31, 1999,  primarily due to
         the February 1999 acquisition of permeation  enhancement  technology in
         the U.S., which was purchased for a combination of cash,  shares of the
         Registrant's  Common Stock and issuance of stock purchase warrant,  the
         acquisition of drug licenses in Spain, and the distribution in the form
         of   assignment   of  patents   and  related   technology,   valued  at
         approximately $550,000, from its joint venture partner in settlement of
         a judgment that the  Registrant  had obtained  against its partner (See
         additional  discussion  below),  partially  offset  by  the  effect  of
         fluctuations   in  foreign   currency   exchange  rates  and  recurring
         amortization charges.

         Other non-current assets decreased from $1,873,000 at December 31, 1998
         to $1,057,000  at December 31, 1999,  primarily due to the reduction of
         the net carrying value of its investment in its partnership  venture of
         $553,000,  upon receiving a  distribution  in the form of assignment of
         patents and  technology  from its partner as settlement of the judgment
         that the  Registrant  obtained  against  its  partner  (See  discussion
         above),  and the effect of  fluctuations in foreign  currency  exchange
         rates and recurring amortization charges.

         Long-term  debt of  $5,410,000  at  December  31,  1998 was  reduced to
         $5,362,000 at December 31, 1999 and  classified as a current  liability
         as a result of the  Registrant's  decision  to redeem  such  Debentures
         which the holders thereof do not convert into shares of Common Stock by
         April 12, 2000, which is the date fixed for redemption.  The conversion
         of 193 Debentures into approximately  77,000 shares of Common Stock was
         partially offset by accretion  recorded on the Debentures issued in the
         Registrant's   February  1996  public   offering.   Other   non-current
         liabilities decreased from $290,000 at December 31, 1998 to $104,000 at
         December  31,   1999,   primarily  as  a  result  of  the  issuance  of
         approximately  66,000  shares of Common Stock to satisfy a liability of
         approximately $188,000 to a consultant for fees earned prior to 1999.

         Investing  activities,  primarily  the  acquisition  of  drug  delivery
         technology  and  other  drug  licenses,  capital  improvements  to  the
         manufacturing facility in Spain,  establishing a laboratory in the U.S.
         and the purchase of marketable  securities  used net cash of $4,637,000
         during  the  year  ended  December  31,  1999.  Financing   activities,
         primarily  the  exercise  of  approximately  859,000  Class A Warrants,
         partially  offset by repayment of  short-term  borrowings  for the year
         ended December 31, 1999,  provided net cash of $2,519,000 and operating
         activities  for the  year  ended  December  31,  1999  used net cash of
         $63,000.

         Seasonality.  In the past, the  Registrant  has  experienced a positive
         fluctuation in the fourth quarter due to seasonality. As the Registrant
         markets  more   pharmaceutical   products  whose  sales  are  seasonal,
         seasonality of sales may become more significant.

         Effect of inflation and changing prices. Neither inflation nor changing
         prices has  materially  impacted the  Registrant's  net sales or income
         from continuing operations for the three years ended December 31, 1999.

                                       35
<PAGE>

         Financings.  An aggregate of 6,900 Units (the  "Units")  were sold in a
         February 1996 Public  Offering.  Each Unit  consisted of a One Thousand
         Dollars ($1,000) Principal Amount 12% Convertible  Senior  Subordinated
         Debenture  due February 13, 2006 (the  "Debentures")  and 1,000 Class A
         Redeemable Warrants, each to purchase one share of Common Stock and one
         Class B Redeemable  Warrant.  Two Class B Redeemable Warrants entitle a
         holder to purchase one share of Common Stock.  The Debentures and Class
         A Redeemable Warrants initially traded only as a Unit but began trading
         separately  on May 29,  1996.  Interest  on the  Debentures  is payable
         quarterly.  The Debentures are convertible  into shares of Common Stock
         at any time prior to the redemption date, which is April 12, 2000, at a
         conversion  price  per share of $2.50.  Gross and net  proceeds  (after
         deducting  underwriting  commissions  and  the  other  expenses  of the
         offering) were approximately $6,900,000 and $5,700,000, respectively, a
         portion of which were used to retire  $1,770,000  principal  balance of
         debt incurred in previous private placements.

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

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

         Holders of the Registrant's  Class A Warrants  exercised  approximately
         70% of the  outstanding  Class  A  Redeemable Warrants  (approximately
         4,900,000 Class A Warrants) during 1997, which generated  approximately
         $9,800,000 in proceeds to the  Registrant.  The exercise of the Class A
         Warrants  during 1997 resulted in issuance of  approximately  4,900,000
         shares of Common Stock and approximately 4,900,000 Class B Warrants.

         The exercise price of the Registrant's Class B Redeemable  Warrants was
         also  temporarily  lowered  by  $2.00,  to $3.00 as to each two Class B
         Warrants  effective  September 16, 1997 through January 13, 1998. After
         January 13, 1998,  the Class B Warrants  reverted  back to the original
         exercise  price of $5.00 per share until their  expiration  on February
         14, 2001.  Holders of the Registrant's Class B Warrants exercised 5,000
         Class B Warrants in January 1998, generating proceeds to the Registrant
         of $7,500,  which  resulted in the  issuance of 2,500  shares of Common
         Stock in 1998.

         Approximately  859,000  Class A Warrants  were  exercised  in the third
         quarter prior to their  expiration on August 16, 1999,  generating cash
         proceeds of approximately  $2,600,000.  Such

                                       36
<PAGE>

         exercises  resulted in the issuance of approximately  859,000 shares of
         Common Stock and  approximately  859,000 Class B Warrants  during 1999.
         The remaining  1,252,000 Class A Warrants that were not exercised as of
         August16, 1999 expired unexercised.

         As of March 9, 2000,  the  Registrant had received net cash proceeds of
         $1,894,500  from  the  exercise  of  various  warrants  (including  460
         Underwriter's  warrants) in exchange for the issuance of 460 Debentures
         and 460,000  stock  purchase  warrants to the  Underwriter  of its 1996
         public  offering  and 488,500  shares of Common  Stock,  subsequent  to
         December 31, 1999.  Also on March 9, 2000,  the  Registrant's  Board of
         Directors  decided  to  redeem  the  Registrant's  Debentures.  If such
         Debentures  are not converted  into shares of the  Registrant's  Common
         Stock by April 12, 2000, such remaining  Debentures will be redeemed by
         the Registrant for 105% of the principal amount plus accrued  interest,
         or $1,050 plus accrued interest of $4 per Debenture.  Each Debenture is
         convertible  into 400 shares of the  Registrant's  Common  Stock  until
         April 12, 2000. As of March 9, 2000, 269 of the Registrant's Debentures
         have been voluntarily converted into 107,600 shares of the Registrant's
         Common  Stock  subsequent  to December  31,  1999 and 6,985  Debentures
         remain  outstanding  as of March  9,  2000.  Conversion  of 100% of the
         remaining  6,985  Debentures  would result in the issuance of 2,794,000
         shares of Common Stock.

         As long as the market price of the  Registrant's  Common Stock  remains
         above $2.625 per share, holders,  upon conversion,  will receive Common
         Stock having a greater  market value  ($4,725 as of March 9, 2000) than
         the cash ($1,054) they would receive upon redemption of each Debenture.
         The  conversion/redemption of the Debentures will eliminate essentially
         all of the  Registrant's  long-term debt and will result in a reduction
         of interest expense of approximately $1,000,000 per year. Management of
         the Registrant expects the majority,  if not all, of the holders of its
         Debentures  to convert  such  Debentures  into shares of Common  Stock;
         consequently,  the Registrant expects that redemption,  while possible,
         is  unlikely  to  require  the use of a  significant  amount  of  cash.
         However, if the holders of all 6,985 Debentures outstanding on March 9,
         2000  decided  not to convert  such  Debentures  into  shares of Common
         Stock, but decided instead to receive cash of $1,054 (including accrued
         interest) for each outstanding Debenture,  the Registrant would have to
         pay an aggregate of $7,362,000 to redeem the  Debentures.  Although the
         Registrant expects the majority,  if not all, of the holders to convert
         the Debentures  into shares of Common Stock,  management  believes that
         its cash, cash equivalents,  marketable  securities and lines of credit
         will be  sufficient to purchase any  Debentures  that are not converted
         and presented for redemption.

         Given  the  Registrant's   current  liquidity  and  cash  balances  and
         considering  its  future  strategic  plans  (including  its  year  2000
         budgeted  capital  improvements  and  planned  equipment  purchases  of
         approximately  $1,400,000),   the  Registrant  should  have  sufficient
         liquidity to fund  operations for the year 2000 and into the year 2001,
         which should be a sufficient  time frame for the  Registrant to advance
         its strategic objectives and generate revenues and cash flow to support
         the Registrant's cash flow needs.  There can be no assurance,  however,
         that  changes in the  Registrant's  research and  development  plans or
         other events affecting the Registrant's  revenues or operating expenses
         will not result in the earlier depletion of the Registrant's funds. The
         Registrant,  however,  continues  to explore  alternative  sources  for
         financing its business activities. In appropriate situations, that will
         be

                                       37
<PAGE>

         strategically determined,  the Registrant may seek financial assistance
         from other sources,  including contribution by others to joint ventures
         and other collaborative or licensing  arrangements for the development,
         testing,  manufacturing and marketing of products under development.

         IMPACT OF THE YEAR 2000 ISSUE

         The Year 2000 Issue came about because many existing  computer programs
         were  originally  designed  to use  only the  last  two  digits  of any
         particular  year,  rather than all four digits,  to identify that year.
         These computer programs were not able to properly  distinguish  between
         the years 1900 and 2000 or 1901 and 2001,  for  example.  The Year 2000
         Issue affected information technology ("IT") as well as non-IT systems.
         In fact, many non-IT systems typically include imbedded technology such
         as micro controllers.

         The  Registrant  recognized  the  need  to  ensure  that  its  business
         operations would not be adversely impacted by the Year 2000 Issue. As a
         result, the Registrant assessed how it may be impacted by the Year 2000
         Issue.  Consequently,   the  Registrant  modified,  where  needed,  its
         computer applications to ensure that they will function properly beyond
         1999. The Registrant replaced certain systems and applications with the
         assistance of external  consultants.  The Registrant  believes that the
         modifications  to existing  software  and  conversions  to new software
         applications,  which are Year 2000  Compliant,  mitigated the Year 2000
         Issue.

         The Registrant  polled its significant  suppliers and service providers
         to determine the extent to which it was  vulnerable to a failure of any
         such  third  party  to  adequately  address  its own Year  2000  Issue.
         However, there can be no guarantee that the failure of systems of other
         companies  on  which  the  Registrant's  systems  rely  will not have a
         material adverse effect on the Registrant in the future. The Registrant
         has determined it has no exposure to contingencies  related to the Year
         2000 Issue for the products it has sold or  anticipates  selling in the
         future.

         The  Registrant  completed  the Year 2000 project prior to December 31,
         1999. Of the total project cost of $75,000,  approximately  $15,000 was
         attributable to the purchase of new software, which was capitalized. To
         date, the Registrant  has incurred and expensed  approximately  $60,000
         related to the assessment of its Year 2000 project and the  development
         and implementation of a remediation plan.

         Now that the  Registrant  has  entered  the Year  2000,  testing of its
         information  systems  has  been  continued,  and to  date,  it has  not
         experienced  any  material  Year 2000  disruptions  or  failures of its
         systems, nor has it been notified of any disruptions or failures of the
         systems  of any of its  third  parties  with  whom  it  does  business.
         However, there is an ongoing risk that Year 2000 related problems could
         still  occur and the  Registrant  will  continue  to monitor  Year 2000
         issues as they relate to its internal  computer systems and third party
         computer systems with whom it interacts.  The Registrant cannot provide
         assurance that its Year 2000 compliance program, or similar programs by
         third  parties  with whom it does  business,  will be  successful.  The
         Registrant  may  incur  significant  costs in  resolving  any Year 2000
         issues  that may arise in the future.  If not  resolved,  these  issues
         could have a

                                       38
<PAGE>

         significant  adverse  impact on the  Registrant's  business,  operating
         results and financial position.

         DERIVATIVE INSTRUMENTS AND HEDGING

         Statement  of  Financial  Accounting  Standards  No. 133 (SFAS No. 133)
         "Accounting  for Derivative  Instruments  and Hedging  Activities"  was
         issued in June 1998 and establishes  accounting and reporting standards
         for derivative  instruments,  including certain derivative  instruments
         embedded in other contracts  (collectively  referred to as derivatives)
         and for hedging  activities.  It requires that an entity  recognize all
         derivatives  as either assets or  liabilities  in the balance sheet and
         measure these  instruments at fair value. The accounting for changes in
         the fair value of a derivative (that is, gains and losses) depends upon
         the intended use of the derivative and resulting designation if used as
         a hedge. SFAS No. 133, as amended, is effective for all fiscal quarters
         of fiscal years  beginning  after June 15, 2000, and is not intended to
         be applied retroactively. The Registrant plans to adopt SFAS No. 133 on
         January 1, 2001.  Management does not believe that the adoption of SFAS
         No. 133 will have a significant impact on the Registrant's consolidated
         financial statements.

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

         The  statements  contained in or  incorporated  by reference  into this
         Annual  Report on Form  10-K  which are not  historical  facts  contain
         forward  looking  information  with  respect to plans,  projections  or
         future  performance of the Registrant,  the occurrence of which involve
         certain  risks and  uncertainties  that  could  cause the  Registrant's
         actual  results  to  differ  materially  from  those  expected  by  the
         Registrant.  (See certain risk  factors  listed in Item 1.  "Business -
         Risk Factors".)

         ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                  ----------------------------------------------------------

         FOREIGN CURRENCY.

         A  substantial  amount of the  Registrant's  business is  conducted  in
         Europe and is  therefore  influenced  by the extent to which  there are
         fluctuations   in  the  dollar's   value  against   other   currencies,
         specifically  the euro and the  peseta.  On January  1, 1999,  the euro
         became the official  currency of 11 European  Union (EU) member  states
         with a fixed  conversion  rate against their national  currencies.  The
         value  of the  euro  against  the  dollar  and  all  other  currencies,
         including those of the four EU member states that are not participating
         in the euro  zone,  will  fluctuate  according  to  market  conditions.
         Although  euro notes and coins will not appear  until  January 1, 2002,
         the new currency can be used by  consumers,  retailers,  companies  and
         public  administrations  after January 1, 1999, in the form of "written
         money," i.e. by means of checks,  traveler's  checks,  bank  transfers,
         credit card transactions, etc. The permanent value of one euro in Spain
         is fixed at 166.39 pesetas.  The exchange rate at December 31, 1999 and
         1998 was 165.23 and 141.97 pesetas per U.S. dollar,  respectively.  The
         weighted  average  exchange rate for the years ended  December 31, 1999
         and 1998 was 156.16 and 149.40 pesetas per U.S.  dollar,  respectively.
         The effect of foreign  currency  fluctuations  on long lived assets for
         the year ended  December  31, 1999 was an decrease of $737,000  and the
         cumulative historical effect was a decrease of $2,339,000, as reflected
         in the Registrant's Consolidated Balance

                                       39
<PAGE>

         Sheets in the "Liabilities and Stockholders' Equity" section.  Although
         exchange  rates  fluctuated  significantly  in  recent  years,  and  in
         particular,  the  continuing  weakening  of the euro in relation to the
         U.S.  dollar in 1999 and year to date  2000,  the  Registrant  does not
         believe that the effect of foreign currency  fluctuation is material to
         the Registrant's  results of operations as the expenses related to much
         of the Registrant's  foreign currency revenues are in the same currency
         as such  revenues.  However,  the carrying value of assets and reported
         values can be materially impacted by foreign currency  translation,  as
         can the translated amounts of revenues and expenses.  Nonetheless,  the
         Registrant  does  not  plan  to  modify  its  business  practices.  The
         Registrant has relied  primarily upon financing  activities to fund the
         operations of the  Registrant in the United  States.  In the event that
         the  Registrant  is required to fund United  States  operations or cash
         needs with funds generated in Spain,  currency rate fluctuations in the
         future could have a significant impact on the Registrant.  However,  at
         the present  time,  the  Registrant  does not  anticipate  altering its
         business  plans  and  practices  to  compensate  for  future   currency
         fluctuations.

         The  weighted  average  interest  rate on the  Registrant's  short-term
         borrowings  is 5.3%  and the  balance  outstanding  is  $952,000  as of
         December  31, 1999.  The effect of an increase in the interest  rate of
         one hundred  basis points (to 6.3%) would have the effect of increasing
         interest  expense by  approximately  $9,500.  The  Registrant  also has
         $6,794,000  principal amount of 12% Debentures  outstanding at December
         31, 1999 with a fixed rate of interest. Such Debentures are convertible
         into shares of the  Registrant's  Common  Stock and the market value of
         such  Debentures is influenced  by the value of the  underlying  Common
         Stock.  A $1.00  increase in the market value of the Common Stock would
         increase  the  market  value of the  6,794  Debentures  outstanding  at
         December 31, 1999 by  approximately  $2,718,000,  from  $16,628,000  to
         $19,346,000.

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

         See Item 14 of this Form 10-K.

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

         Not applicable.

                                       40
<PAGE>

                                    PART III

         ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
                  --------------------------------------------------

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

<TABLE>
<CAPTION>

                                                              Position of the                                      Year First
                                                              Registrant                         Class of           Became
         Name                                Age              Presently Held                     Director           Director
         ----                                ---              --------------                     --------           --------
        <S>                                <C>               <C>                                <C>                <C>
         James R. Murphy                     50               Chairman, President,               III                1993
                                                              Chief Executive Officer
                                                              and Director (1)

         Michael McGovern                    56               Vice Chairman and                  I                  1997
                                                              Director (1),(3)

         Robert M. Stote                     60               Senior Vice President,             III                1993
                                                              Chief Science Officer
                                                              And Director

         Michael D. Price                    42               Vice President,                    I                  1995
                                                              Chief Financial Officer,
                                                              Treasurer, Secretary and
                                                              Director

         Robert J. Gyurik                    53               Vice President of                  II                 1998
                                                              Pharmaceutical
                                                              Development and
                                                              Director

         Charles L. Bolling                  76               Director (2), (3)                  II                 1991

         Russell Cleveland                   61               Director (1)                       I                  1999

         Miguel Fernandez                    69               Director (1), (2),(3)              III                1999

         William A. Packer                   65               Director (1),(2),(3)               II                 1999
</TABLE>

(1)      Member of the Strategic Planning Committee.
(2)      Member of the Audit Committee.
(3)      Member of the Compensation Committee.

                                       41
<PAGE>

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

         MICHAEL  MCGOVERN was named Vice Chairman of the  Registrant in October
         1999 and serves as  President  of McGovern  Enterprises,  a provider of
         corporate and financial consulting services,  which he founded in 1975.
         Mr. McGovern is Chairman of the Board of Specialty Surgicenters,  Inc.,
         and is a Director on the corporate  boards of North Fulton  Bancshares,
         Suburban Lodges of America Inc.,  Career  Publishing  Network,  L.L.C.,
         Training  Solutions  Interactive  Inc.,  and the  Reynolds  Development
         Company.  Mr.  McGovern  received a B.S. and M.S. in accounting and his
         Juris  Doctor  from the  University  of  Illinois.  Mr.  McGovern  is a
         Certified  Public  Accountant  and a member of the State Bar of Georgia
         and the American Bar Association.

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

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



                                       42
<PAGE>



         from  Florida  State  University.  Mr.  Price  is  a  Certified  Public
         Accountant in the State of Florida.

         ROBERT J. GYURIK became Vice President of Pharmaceutical Development of
         the Registrant in March 1999. Mr. Gyurik was Manager of Development and
         Quality Control at Macrochem Corporation,  a position he held from 1993
         to  February  1999.  From 1971 to 1993 Mr.  Gyurik  worked  in  various
         positions  at  SmithKline   Beecham   ranging  from  Associate   Senior
         Investigator in the  Nutrition/Production  Enhancer  Research Group and
         Pharmaceutical  Development  Group to  Senior  Medical  Chemist  in the
         Parasitology  Research  Group.  Prior  thereto,  Mr.  Gyurik  worked at
         Schering as a Medicinal Chemist. Mr. Gyurik attended Rutgers University
         and 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  and
         holds a  number  of  patents  in the  areas of drug  delivery  systems,
         medical devices and new drug discoveries.

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

         RUSSELL CLEVELAND is the principal founder and the majority stockholder
         of  Renaissance  Capital  Group,  Inc.   ("Renaissance").   Renaissance
         provides capital to emerging  publicly owned  companies.  For more than
         the past five years, Mr. Cleveland has served as President and Managing
         General Partner of Renaissance  Capital  Partners,  Ltd.  President and
         Director of  Renaissance  Capital Growth & Income Fund III, Inc., and a
         Director  of  Renaissance   U.S.  Growth  and  Income  Trust  PLC.  Mr.
         Cleveland's  background includes executive positions with various major
         southwest regional brokerage firms. Mr. Cleveland also currently serves
         as a director of Danzer Corp.  (formerly Global  Environmental  Corp.),
         Feminique,  Inc. (formerly  Biopharmaceutics,  Inc.),  Tutogen Medical,
         Inc.  and  Technology  Research,  Inc.  Mr.  Cleveland  is a  Chartered
         Financial  Analyst and a graduate of the  University  of  Pennsylvania,
         Wharton School of Finance and Commerce.

         MIGUEL FERNANDEZ has been retired since 1996. Mr. Fernandez served from
         1980 to 1996 as President of the  International  Division and corporate
         Vice President at  Carter-Wallace,  Inc.,  where he was responsible for
         all product  lines outside of the United  States.  Prior  thereto,  Mr.
         Fernandez  was employed  for  approximately  eight years by  SmithKline
         Beecham,  where his last position was Vice President for Latin America.
         Before SmithKline Beecham, 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 received
         a Bachelors of commerce degree from the University of British  Columbia
         and an MBA  from the Ivey  School  of  Business  at the  University  of
         Western in Ontario, Canada.

         WILLIAM A.  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  ("SmithKline"),  a
         major pharmaceutical  company,  where

                                       43
<PAGE>

         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.

         The Registrant's  Articles of  Incorporation  and By-Laws provide for a
         classified Board of Directors. The Board is divided into three classes,
         designated  Class I, Class II and Class III. The directors  included in
         Class I above  will  hold  office  until  the 2000  Annual  Meeting  of
         Stockholders, the directors included in Class II above will hold office
         until  the 2001  Annual  Meeting  of  Stockholders,  and the  directors
         included  in Class III above  will hold  office  until the 2002  Annual
         Meeting of Stockholders.

         SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section  16(a) of the  Securities  Exchange  Act of 1934,  as  amended,
         requires the  Registrant's  executive  officers and directors,  and any
         persons who own more than 10% of any class of the  Registrant's  equity
         securities, to file certain reports relating to their ownership of such
         securities  and  changes  in such  ownership  with the  Securities  and
         Exchange  Commission and the American Stock Exchange and to furnish the
         Registrant with copies of such reports.  To the Registrant's  knowledge
         during the year ended  December  31,  1999,  all Section  16(a)  filing
         requirements have been satisfied.

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

         The information called for by this item is incorporated by reference to
         the Registrant's definitive Proxy Statement for the 2000 Annual Meeting
         of Stockholders to be filed pursuant to Regulation 14A.

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

         The information called for by this item is incorporated by reference to
         the Registrant's definitive Proxy Statement for the 2000 Annual Meeting
         of Stockholders to be filed pursuant to Regulation 14A.

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

         The information called for by this item is incorporated by reference to
         the Registrant's definitive Proxy Statement for the 2000 Annual Meeting
         of Stockholders to be filed pursuant to Regulation 14A.



                                       44
<PAGE>


                                     PART IV

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

<TABLE>
<CAPTION>

                                                                                           Page Herein
                                                                                           -----------
<S>                                                                                       <C>
(a)       The following documents are filed as a part of this report:

          (1)  Financial Statements:

          Independent Auditors' Report                                                            F-1

          Consolidated Balance Sheets as of December 31, 1999 and 1998                            F-2

          Consolidated Statements of Operations and of Comprehensive Loss
          for the years ended December 31, 1999, 1998 and 1997                                    F-3

          Consolidated  Statements  of Changes in  Stockholders' Equity for the
          years ended December 31, 1999, 1998 and 1997                                            F-4

          Consolidated Statements of Cash Flows for the years ended
          December 31, 1999, 1998 and 1997                                                        F-5 to F-6

          Notes to Consolidated Financial Statements                                              F-7 to F-29

          (2)  Financial Statement Schedule:

          Independent Auditors' Report on Financial Statement Schedule                            F-30

          Schedule II - Valuation and qualifying accounts and reserves                            F-31
</TABLE>

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


                                       45
<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 Annual Meeting of Stockholders
                  filed with the Securities  and Exchange  Commission on May 18,
                  1999, 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 Annual  Meeting of  Stockholders  filed with the
                  Securities  and Exchange  Commission  on May 18,  1999,  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  (date of
                  earliest event reported  December 22, 1999),  Commission  File
                  No.   1-10581,   which  exhibit  is  hereby   incorporated  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 Annual Meeting of Stockholders
                  filed with the Securities  and Exchange  Commission on May 18,
                  1999, 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  dated  June 30,
                  1992,   Commission   File  No.   1-10581,   which  exhibit  is
                  incorporated herein by reference.)

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

4.4               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.)





                                       46
<PAGE>


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

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

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

4.7               Subscription  Agreement between the Registrant and Yungtai Hsu
                  ("Hsu"),  dated  February  11,  1999.  (Reference  is  made to
                  Exhibit 7.2 to the  Registrant's  Form 8-K filed  February 26,
                  1999,   Commission   File  No.   1-10581,   which  exhibit  is
                  incorporated herein by reference.)

4.8               Registration  Rights Agreement between the Registrant and Hsu,
                  dated February 11, 1999.  (Reference is made to exhibit 7.3 to
                  the Registrant's Form 8-K filed February 26, 1999,  Commission
                  File No.  1-10581,  which  exhibit is  incorporated  herein by
                  reference.)

4.9               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.)

4.10              Subscription  Agreement  between  the  Registrant  and  Conrex
                  Pharmaceutical  Corporation  ("Conrex"),  dated  February  11,
                  1999.  (Reference  is made to exhibit 7.5 to the  Registrant's
                  Form 8-K filed February 26, 1999, Commission File No. 1-10581,
                  which exhibit is incorporated herein by reference.)

4.11              Registration  Rights  Agreement  between  the  Registrant  and
                  Conrex, dated February 11, 1999. (Reference is made to exhibit
                  7.6 to the  Registrant's  Form 8-K filed  February  26,  1999,
                  Commission  File No.  1-10581,  which exhibit is  incorporated
                  herein by reference.)

10.1              Employment  Agreement  dated as of July 1,  1998  between  the
                  Registrant and James R. Murphy.  (Reference is made to exhibit
                  10.1 to the  Registrant's  Form 10-K  filed  March  31,  1999,
                  Commission File No. 1-10581,  which is incorporated  herein by
                  reference.)




                                       47
<PAGE>

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

10.2              Employment  Agreement  dated as of August 31, 1998 between the
                  Registrant  and Robert M. Stote,  M.D.  (Reference  is made to
                  exhibit  10.2 to the  Registrant's  Form 10-K filed  March 31,
                  1999,  Commission  File No.  1-10581,  which  is  incorporated
                  herein by reference.)

10.3              Employment  Agreement  dated as of July 1,  1998  between  the
                  Registrant and Michael D. Price. (Reference is made to exhibit
                  10.3 to the  Registrant's  Form 10-K  filed  March  31,  1999,
                  Commission File No. 1-10581,  which is incorporated  herein by
                  reference.)

10.4*             Employment  Agreement  dated as of March 9, 1999  between  the
                  Registrant and Robert J. Gyurik.

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.)

21.1*             Subsidiaries of the Registrant.

23.1*             Consent of Deloitte & Touche LLP.

27.1*             Financial Data Schedule.
---------------
*                 Filed herewith.

(b)               Reports  on Form 8-K filed  during the  fiscal  quarter  ended
                  December 31, 1999:

                           Report on Form 8-K filed  December  27, 1999 (date of
                           earliest event reported  December 22, 1999) regarding
                           adoption of a Stockholder  Rights Plan.  (Items 5 and
                           7).

                  Subsequent  to December 31,  1999,  the  Registrant  filed the
                  following Report on Form 8-K:

                           None.

                                       48
<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 24, 2000

                  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 24, 2000
------------------------------------        Chief Executive Officer
James R. Murphy                             and Director (principal
                                            executive officer)

/s/Michael McGovern                         Vice Chairman and Director                  March 24, 2000
------------------------------------
Michael McGovern

/s/ Robert M. Stote                         Senior Vice President,                      March 24, 2000
------------------------------------        Chief Science Officer and
Robert M. Stote, M.D.                       Director


/s/ Michael D. Price                        Vice-President,                             March 24, 2000
------------------------------------        Chief Financial Officer,
Michael D. Price                            Treasurer, Secretary and
                                            Director (principal
                                            financial and accounting officer)

/s/Robert J. Gyurik                         Vice President of                           March 24, 2000
------------------------------------        Pharmaceutical Development
Robert J. Gyurik                            and Director


/s/Charles L. Bolling                       Director                                    March 24, 2000
------------------------------------
Charles L. Bolling

/s/Russell Cleveland                        Director                                    March 24, 2000
------------------------------------
Russell Cleveland

/s/Miguel Fernandez                         Director                                    March 24, 2000
------------------------------------
Miguel Fernandez

/s/William A. Packer                        Director                                    March 24, 2000
------------------------------------
William A. Packer

</TABLE>

                                       49
<PAGE>



INDEPENDENT AUDITORS' REPORT


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

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Bentley
Pharmaceuticals,  Inc. and subsidiaries  (the "Company") as of December 31, 1999
and  1998,  and  the  related  consolidated  statements  of  operations  and  of
comprehensive loss, changes in stockholders'  equity, and cash flows for each of
the  three  years  in the  period  ended  December  31,  1999.  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, 1999
and 1998,  and the results of its  operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity  with accounting
principles generally accepted in the United States of America.



/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 10, 2000


                                  F-1
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

(in thousands)
<TABLE>
<CAPTION>

                                                                                                   DECEMBER 31,
                                                                                                   ------------
                                                                                         1999                       1998
                                                                                         ----                       ----
ASSETS
------
<S>                                                                                   <C>                      <C>
Current assets:
 Cash and cash equivalents                                                              $4,422                    $6,703
 Marketable Securities                                                                   1,893                         -
 Receivables, net                                                                        4,016                     3,228
 Inventories, net                                                                          965                     1,208
 Prepaid expenses and other                                                                393                     1,322
                                                                                        ------                    ------
  Total current assets                                                                  11,689                    12,461
                                                                                        ------                    ------
Fixed assets, net                                                                        3,684                     3,551
Drug licenses and related costs, net                                                     5,807                     2,433
Other non-current assets, net                                                            1,057                     1,873
                                                                                        ------                    ------
                                                                                       $22,237                   $20,318
                                                                                       =======                   =======

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

Current Liabilities:
  Accounts payable                                                                      $2,702                    $2,835
  Accrued expenses                                                                       1,538                     1,563
  Short term borrowings                                                                    952                     1,223
  Current portion of long term debt                                                          5                         5
  Debentures called for redemption (Note 15)                                             5,362                         -
                                                                                        ------                    ------
    Total current liabilities                                                           10,559                     5,626
                                                                                        ------                    ------
Long term debt, net                                                                          -                     5,410
                                                                                        ------                    ------
Other non-current liabilities                                                              104                       290
                                                                                        ------                    ------

Commitments and contingencies

Stockholders' Equity:
  Preferred stock, $1.00 par value, authorized 2,000 shares,
     issued and outstanding, zero shares                                                     -                         -
 Common  stock,$.02  par value,  authorized  35,000  shares,
     issued and outstanding, 10,230 and 8,443 shares                                       204                       168
 Stock purchase warrants (to purchase 4,806 and 5,928
     shares of common stock)                                                               799                       556
 Additional paid-in capital                                                             87,858                    83,728
 Accumulated deficit                                                                   (74,948)                  (73,858)
 Accumulated other comprehensive loss                                                   (2,339)                   (1,602)
                                                                                       -------                   -------
                                                                                        11,574                     8,992
                                                                                       -------                   -------
                                                                                       $22,237                   $20,318
                                                                                       =======                   =======
</TABLE>
           The accompanying Notes to Consolidated Financial Statements
               are an integral part of these financial statements.

                                      F-2

<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                            AND OF COMPREHENSIVE LOSS

<TABLE>
<CAPTION>

(in thousands except per share data)                                         For the Year Ended
                                                                                 December 31,
                                                                                 ------------

                                                                      1999           1998           1997
                                                                      ----           ----           ----
<S>                                                                <C>            <C>            <C>
Sales                                                               $20,249        $15,243        $14,902
Cost of sales                                                         8,445          6,601          8,010
                                                                    -------        -------        -------
Gross margin                                                         11,804          8,642          6,892
Operating expenses:
 Selling, general and administrative                                  9,982          9,078          7,819
 Research and development                                               685            153            324
 Depreciation and amortization                                          559            303            295
 Costs of abandoned acquisitions                                          -          1,176              -
                                                                    -------        -------        -------
   Total operating expenses                                          11,226         10,710          8,438
                                                                    -------        -------        -------
Income (loss) from operations                                           578         (2,068)        (1,546)
Other (income) expenses:
  Interest expense                                                    1,168          1,076          1,086
  Interest income                                                      (244)          (499)          (123)
  Other (income) expense, net                                           (37)            (5)           685
                                                                    -------        -------        -------
Loss before income taxes                                               (309)        (2,640)        (3,194)
Provision (benefit) for income taxes:
   Domestic                                                               -           (280)           280
   Foreign                                                              781            516            341
                                                                    -------        -------        -------
Net loss                                                            ($1,090)       ($2,876)       ($3,815)
                                                                    ========      ========        ========
Other comprehensive (income) loss:
 Foreign currency translation losses (gains)                            737           (253)           388
                                                                    -------        -------        -------
Comprehensive loss                                                  ($1,827)       ($2,623)       ($4,203)
                                                                    ========      ========        ========
Basic and diluted net loss per common share                          ($0.12)        ($0.35)        ($0.97)
                                                                    ========      ========        ========
Weighted average common shares outstanding                            9,147          8,431          4,072
                                                                    ========      ========        ========
</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 STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

(in thousands)
--------------                                     $.02 Par Value                               Accumulated
                                                    Common Stock     Additional                    Other       Other
                                               --------------------   Paid-In   Accumulated    Comprehensive  Equity
                                               Shares        Amount   Capital      Deficit        Loss     Transactions      Total
                                               ------        ------   -------      -------        ----     ------------      -----
<S>                                            <C>          <C>      <C>       <C>             <C>        <C>             <C>
Balance at December 31, 1996                    3,345         $67     $71,146    ($67,167)     ($1,081)          $330        $3,295

 Exercise of Class A Redeemable Warrants        4,899          98       9,902           -            -           (202)        9,798

 Exercise of other stock options/warrants         172           3         570           -            -           (150)          423

 Exercise of underwriter warrants                   -           -          30           -            -              7            37

 Conversion of Debentures                           9           -          23           -            -              -            23

 Issuance of stock options/warrants                 -           -         (51)          -            -            102            51

 Common stock issued as compensation                1           -           2           -            -              -             2

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

 Stock subscription receivable cancellation         -           -        (105)          -            -            105             -

 Foreign currency translation adjustment            -           -           -           -         (774)             -          (774)

 Net loss                                           -           -           -      (3,815)           -              -        (3,815)
                                              -------      --------  ---------   --------     -------         -------       -------
Balance at December 31, 1997                    8,426         168      81,382     (70,982)      (1,855)           192         8,905

 Exercise of Class B Redeemable Warrants            2           -           8           -            -              -             8

 Issuance of warrants                               -           -           -           -            -            364           364

 Accrual of dividends - preferred stock             -           -        (101)          -            -              -          (101)

 Conversion of redeemable preferred stock          15           -       2,439           -            -              -         2,439

 Foreign currency translation adjustment            -           -           -           -          253              -           253

 Net loss                                          -            -           -      (2,876)           -              -        (2,876)
                                              -------      --------  ---------   --------     --------        -------       -------
Balance at December 31, 1998                    8,443         168      83,728     (73,858)      (1,602)           556         8,992

 Exercise of Class A Redeemable Warrants          859          18       2,584           -            -            (39)        2,563

 Exercise of other stock warrants                  50           1         116           -            -            (42)           75

 Conversion of Debentures                          77           1         132           -            -              -           133

 Issuance of warrants to acquire technology         -           -           -           -            -            375           375

 Common stock issued to acquire technology        585          12         838           -            -              -           850

 Common stock issued as compensation              150           3         222           -                           -           225

 Common stock issued to consultants                66           1         187           -            -              -           188

 Expiration of unexercised warrants                 -           -          51           -            -            (51)            -

 Foreign currency translation adjustment            -           -           -           -         (737)             -          (737)

 Net Loss                                           -           -           -      (1,090)           -              -        (1,090)
                                              --------     -------   --------    --------      -------         -------      --------
Balance at December 31, 1999                   10,230        $204     $87,858    ($74,948)     ($2,339)          $799       $11,574
                                              ========     =======   ========    ========      =======         =======      ========
</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 CASH FLOWS


<TABLE>
<CAPTION>
                                                                                          For the Year Ended
                                                                                              December 31,


(in thousands)                                                                      1999          1998           1997
                                                                                    ----          ----           ----
Cash flows from operating activities:
<S>                                                                              <C>            <C>            <C>
 Net loss                                                                         ($1,090)       ($2,876)       ($3,815)

 Adjustments to reconcile net loss to

  net cash used in operating activities:

 Depreciation and amortization                                                       559            303            295

  Non-cash costs of abandoned acquisitions                                              -            158              -

  Loss on disposition of subsidiary                                                     -              -            591

  Equity-based compensation expense                                                   225              -              2

  Other non-cash items                                                                904            501            265

(Increase) decrease in assets and

increase (decrease) in liabilities:

   Receivables                                                                     (1,495)          (599)          (137)

   Inventories                                                                         85           (412)          (229)

   Prepaid expenses and other current assets                                          504           (544)          (340)

   Other assets                                                                       109            (72)          (649)

   Accounts payable and accrued expenses                                              163            907            257

   Other liabilities                                                                  (27)            70           (222)
                                                                                  -------        -------         -------
   Net cash used in operating activities                                              (63)        (2,564)        (3,982)
                                                                                  -------        -------         -------
Cash flows from investing activities:

Acquisition of drug delivery technology/drug licenses                              (1,775)        (1,559)           (40)

Purchase of marketable securities                                                  (1,893)             -              -

Additions to fixed assets, net                                                       (969)          (559)          (108)

Capitalized acquisition costs                                                           -            448              -

Net proceeds from disposition of subsidiary                                             -              -            378

Proceeds from sale of investments                                                       -              -            166
                                                                                  -------        -------        -------
    Net cash (used in) provided by investing activities                            (4,637)        (1,670)           396
                                                                                  -------        -------        -------
</TABLE>


                          (continued on following page)


           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
                                   (CONCLUDED)
<TABLE>
<CAPTION>

(in thousands)                                                                             For the Year Ended
--------------                                                                                December 31,
                                                                                      -------------------------

                                                                                       1999          1998      1997
                                                                                       ----          ----      ----
Cash flows from financing activities:
<S>                                                                                 <C>         <C>         <C>
Proceeds from exercise of stock options/warrants, net                                $2,639           $8      $10,353

Net (decrease) increase in short term borrowings                                       (115)           -          363

Payments on capital leases                                                               (5)          (5)          (5)
                                                                                   --------      -------     --------
    Net cash provided by financing activities                                         2,519            3       10,711
                                                                                   --------      -------     --------

Effect of exchange rate changes on cash                                                (100)        (183)        (433)
                                                                                   --------      -------     --------
Net (decrease) increase in cash and cash equivalents                                 (2,281)      (4,414)       6,692

Cash and cash equivalents at beginning of year                                        6,703       11,117        4,425
                                                                                   --------      -------     --------

Cash and cash equivalents at end of year                                             $4,422       $6,703      $11,117
                                                                                   ========      =======      =======

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

 Interest                                                                            $1,003         $972         $965
                                                                                   ========      =======      =======
 Taxes                                                                                 $980         $884          $12
                                                                                   ========      =======      =======


SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Company has issued Common  Stock  in  exchange  for  services  and the
purchase  of drug delivery technology as follows (in thousands):

 Shares issued                                                                          801            -            1
                                                                                   ========      =======      =======
 Amount                                                                              $1,263            -           $2
                                                                                   ========      =======      =======
</TABLE>

During the year ended December 31, 1999, the Company issued Warrants to purchase
450,000 shares of Common Stock as partial consideration for the purchase of drug
delivery  technology  of which,  50,000  were  exercised  during  the year ended
December 31, 1999. During the year ended December 31, 1999, 193 of the Company's
12%  Convertible  Debentures  were converted into 77,200 shares of Common Stock.
The Company  recorded the assignment of partnership  patents and technology with
an estimated value of $553,000 as a distribution from the partnership during the
year ended December 31, 1999.

During the year ended December 31, 1998, the Company issued Warrants to purchase
425,000  shares of Common  Stock in exchange  for  services.  The holders of the
Company's  Series A Preferred  Stock  converted the  remaining  60,000 shares of
Redeemable  Preferred  Stock into  approximately  15,000  shares of Common Stock
during the year ended December 31, 1998.

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

                                      F-6
<PAGE>


                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1--HISTORY AND OPERATIONS

Bentley  Pharmaceuticals,  Inc. (the  "Company")  is a U.S.-based  drug delivery
company  specializing  in the  development of products based upon innovative and
proprietary  drug  delivery  systems,  which also has a  commercial  presence in
Europe,  where it  manufactures,  markets  and  distributes  branded and generic
pharmaceutical   products.   The  Company   owns  rights  to  certain  U.S.  and
international  patents and related  technology  covering  methods to enhance the
absorption of drugs delivered to biological  tissues.  The Company is developing
this technology and has targeted U.S., European and other international  markets
for the new product  applications.  The Company was organized  under the laws of
the State of Florida in  February  1974 and  operated  as a Florida  corporation
until October 1999,  when it changed its state of  incorporation  to Delaware by
effecting a merger with and into Bentley Pharma,  Inc., a Delaware  corporation,
which was a wholly-owned subsidiary of the Company. Bentley Pharma, Inc. was the
surviving   entity  of  the  merger   and  its  name  was   changed  to  Bentley
Pharmaceuticals,  Inc. The Company also adopted a certificate  of  incorporation
and bylaws, which conform to Delaware law.

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

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

In order to fund operations,  the Company  primarily has issued Common Stock and
other  securities.  In February 1996, the Company completed a public offering of
its securities,  which  generated net proceeds of  approximately  $5,700,000,  a
portion  of which  was  used to  retire  $1,770,000  principal  balance  of debt
incurred in previous private placements (see Notes 8 and 15). The balance of the
net  proceeds  was  used  for  working  capital  needs,   limited  research  and
development  activities,  and search for possible  acquisitions of complementary
products,  technologies  and/or  businesses.  During the year ended December 31,
1997,  the Company  temporarily  lowered the  exercise  price on its Class A and
Class  B  Redeemable  Warrants.  Approximately  70% of the  outstanding  Class A
Warrants  (approximately  4,900,000 Class A Warrants) were exercised during this
period,  which  generated  approximately  $9,800,000  in

                                      F-7

<PAGE>

proceeds to the Company during 1997. The exercise of the Class A Warrants during
1997 resulted in issuance of approximately  4,900,000 shares of Common Stock and
4,900,000 Class B Warrants. The exercise price of the Company's Class B Warrants
was also  temporarily  lowered and 5,000 Class B Warrants were exercised  during
the first quarter of 1998. The terms of the Class A Warrants were again modified
in February 1999 by extending  their  expiration  date by 183 days to August 16,
1999.  Approximately  859,000  Class A  Warrants  were  exercised  during  1999,
generating cash proceeds of approximately  $2,600,000.  The remaining  1,252,000
Class A Warrants  that were not  exercised  by August  16,  1999,  expired.  The
proceeds from the Class A Warrant  exercises are being used for working  capital
needs.  Given the Company's  current liquidity and cash balances and considering
its future  strategic  plans,  management  believes  that it now has  sufficient
resources to fund operations for the year 2000 and into the year 2001.  However,
there can be no assurance that changes in the Company's research and development
plans or other events  affecting  the Company's  revenues or operating  expenses
will not result in the earlier depletion of the Company's funds. The Company has
also called for the redemption of its 12% Debentures  subsequent to year end and
although  the Company  expects  most,  if not all, of the  Debenture  holders to
convert  such  Debentures  into  shares  of  the  Company's  Common  Stock,  the
possibility does exist for some Debenture holders to choose  redemption  instead
of conversion.  As long as the price of the Company's Common Stock remains above
$2.625 per share,  holders,  upon conversion,  would receive Common Stock with a
market  value  greater  than  the  cash  they  would  receive  upon  redemption.
Management  believes  it has the liquid  resources  to purchase  any  Debentures
presented for redemption using cash and cash equivalents, proceeds from the sale
of marketable securities and/or lines of credit.

The Company had  considered  and  negotiated  for the  purchase of domestic  and
international  rights  to a  portfolio  of  branded  drugs  and a  manufacturing
facility  located in Mequon,  Wisconsin from Schwarz Pharma and whereby  Schwarz
Pharma was to acquire control of the Company's Spanish subsidiary,  Laboratorios
Belmac,  S.A. came to an end in May 1998 without  consummation  of an agreement.
Consequently,  the Company  recorded a charge  during the quarter ended June 30,
1998 for all  previously  capitalized  costs  specific to this and other related
abandoned acquisitions totaling approximately $1,176,000,  including $158,000 of
non-cash items.

The  strategic  focus of the Company has shifted in response to the evolution of
the global  health care  environment.  The Company has moved from a research and
development-oriented  pharmaceutical company, which required developing products
from the chemistry laboratory through marketing, to a company seeking to acquire
late-stage development compounds that can be marketed within one to two years or
currently  marketed  products.  As a result of this transition,  the Company has
decreased its research and development  expenses  dramatically over the past few
years as well as  implemented  cost-cutting  measures  throughout the Company's'
operations.  However,  with  the  1999  acquisition  of  permeation  enhancement
technology (see Note 6), limited development expenditures will be required prior
to  entering  into  formal  collaboration  with  other  companies.  The  Company
emphasizes  product  distribution  in Spain,  strategic  alliances  and  product
acquisitions,   which  management  of  the  Company  expects  should  result  in
profitability in the near future.

                                      F-8

<PAGE>

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION

The consolidated  financial  statements  include the accounts of the Company and
its  wholly-owned  subsidiaries:  Pharma de Espana,  Inc.  and its  wholly-owned
subsidiary,  Laboratorios  Belmac S.A. and, until its  divestiture in June 1997,
Chimos/LBF S.A.; 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. Belmac Hygiene,  Inc. entered into a 50/50 partnership
with  Maximed   Corporation  of  New  York  in  March  1994.   Belmac  Hygiene's
participation in the partnership was accounted for using the equity method until
October 1999, when the Company wrote off its investment after agreeing to accept
an assignment of the patents and technology  from its partner in settlement of a
judgment.  The Company has decided to dissolve the partnership.  All significant
intercompany  balances  have been  eliminated  in  consolidation.  The financial
position and results of  operations of the Company's  foreign  subsidiaries  are
measured using local currency as the functional currency. Assets and liabilities
of each foreign  subsidiary  are translated at the rate of exchange in effect at
the end of the period.  Revenues  and  expenses  are  translated  at the average
exchange rate for the period.  Foreign currency translation gains and losses not
impacting cash flows are credited to or charged  against  Stockholders'  Equity.
Foreign currency translation gains and losses arising from cash transactions are
credited to or charged against current earnings.

CASH AND CASH EQUIVALENTS

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

MARKETABLE SECURITIES

The Company has  classified its  marketable  securities as  "available-for-sale"
and,  accordingly,  carries such securities at aggregate fair value.  Fair value
has been  determined  based on quoted market  prices.  Marketable  securities at
December 31, 1999 included $605,000 of Spanish government  Treasury Bills, which
mature in May 2000 and  $1,288,000  of Federal  Home Loan  Mortgage  Corporation
Notes that mature in March 2000.

INVENTORIES

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

                                      F-9
<PAGE>

FIXED ASSETS

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

                                                              YEARS
                                                              -----
Buildings                                                        30
Equipment                                                     3 - 7
Furniture and fixtures                                        5 - 7
Other                                                             5

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

DRUG LICENSES AND RELATED COSTS

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

INVESTMENT IN PARTNERSHIP

Belmac Hygiene,  Inc., a wholly owned subsidiary of the Company,  entered into a
50/50 partnership in March 1994 with Maximed Corporation  ("Maximed") to develop
and market feminine health care products. Maximed contributed the hydrogel-based
technology  and  the  Company,  through  its  subsidiary,  was  responsible  for
providing  financing and funding of the  partnership's  activities.  In December
1994,  the Company  commenced  litigation  against its partner and was awarded a
judgment in the amount of $7.68 million in 1998,  which was affirmed by the U.S.
Court of Appeals. The Company attempted to collect the judgment,  but was unable
to obtain  cash from its  partner to satisfy  the  judgment.  Consequently,  the
Company  decided to seek  assignment of the technology and related patents in an
effort to satisfy the judgment.  As a result,  the  technology  and patents were
assigned to the Company in October 1999 and the Company  treated such assignment
as a distribution  from the partnership.  The Company has estimated the value of
the patents and technology to be  approximately  $550,000 and has recorded these
assets as Drug Licenses and Related  Costs,  Net during the year ended  December
31, 1999.  Management has determined  that no reserve for impairment in value is
necessary at December

                                      F-10
<PAGE>

31, 1999.  Although the Company is  responsible  for funding  activities  of the
partnership,  the partnership is not currently  engaged in business  activities,
nor does the Company  anticipate that it will engage in any business  activities
in the future (see Note 5).

RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred.

USE OF ESTIMATES

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

ORIGINAL ISSUE DISCOUNT/DEBT ISSUANCE COSTS

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

Subsequent to December 31, 1999 the Company called its 12% Debentures, which are
convertible  into shares of the Company's  Common  Stock,  for  redemption.  The
Company  expects  most,  if not all, of the  Debenture  holders to convert  such
Debentures into shares of Common Stock. Upon conversion,  the net carrying value
of the  Debentures  will be  recorded  as Common  Stock and  additional  paid-in
capital in  Stockholders'  Equity.  If a  Debenture  holder  chooses  redemption
instead of conversion,  the difference between the redemption amount and the net
carrying value of the Debentures will be expensed.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting Standards No. 107 (SFAS No. 107) "Disclosures
about Fair Value of Financial  Instruments" requires disclosure of the estimated
fair values of certain financial  instruments.  The estimated fair value amounts
have been determined  using available  market  information or other  appropriate
valuation  methodologies  that  require  considerable  judgment in  interpreting
market data and  developing  estimates.  Accordingly,  the  estimates  presented
herein are not  necessarily  indicative  of the amounts  that the Company  could
realize in a current market exchange.  The use of different  market  assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. Long-term debt is estimated to have a fair value of approximately
$16,628,000 and $7,406,000 as of December 31, 1999 and 1998, respectively (based
upon market prices on such respective dates). The

                                      F-11
<PAGE>

carrying amounts of other financial instruments approximate their estimated fair
values.  The fair value  information  presented  herein is based on  information
available to  management  as of December 31, 1999.  Although  management  is not
aware of any factors that would  significantly  affect the estimated  fair value
amounts,  such  amounts have not been  comprehensively  revalued for purposes of
these financial  statements since that date and, therefore the current estimates
of fair value may differ significantly from the amounts presented herein.

STOCK-BASED COMPENSATION PLANS

The Company applies  Accounting  Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees"  and related  interpretations  in accounting  for its
stock-based compensation plans.

REVENUE RECOGNITION

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

INCOME TAXES

The Company  accounts  for income taxes under SFAS 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.

BASIC AND DILUTED NET LOSS PER COMMON SHARE

Basic  net loss per  common  share is based on the  weighted  average  number of
shares of common stock  outstanding  during the period.  Diluted loss per common
share is not presented as it is antidilutive.  Stock options, stock warrants and
convertible  debentures  are the only  securities  issued  which would have been
included in the diluted loss per share  calculation.  Common  Stock  Equivalents
totaling  3,025,000,  2,861,000  and  3,015,000,   representing  the  effect  of
potential  exercises  of  options  and  warrants  and the  effect  of  potential
conversion of Debentures into shares of Common Stock for each of the years ended
December  31,  1999,  1998 and  1997,  respectively,  were not  included  in the
computation  of diluted loss per common share because the effect would have been
antidilutive.

COMPREHENSIVE INCOME

The difference between net loss as reported and comprehensive loss is the effect
of foreign currency translation losses (gains) totaling $737,000, ($253,000) and
$388,000 for years ended December 31,1999, 1998 and 1997, respectively.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

SFAS 131 "Disclosures  About Segments of an Enterprise and Related  Information"
was issued in June 1997 and redefines how operating  segments are determined and
requires  disclosure of

                                      F-12
<PAGE>

certain  financial  and  descriptive  information  about a  company's  operating
segments. The Company operated in two business segments until the divestiture of
its French  subsidiary  in June 1997.  The Company now  operates in one business
segment.  SFAS No. 131 was  adopted by the  Company on January 1, 1998 (see Note
12).

DERIVATIVE INSTRUMENTS AND HEDGING

SFAS No. 133 "Accounting for Derivative  Instruments and Hedging Activities" was
issued in June 1998 and  establishes  accounting  and  reporting  standards  for
derivative  instruments,  including certain derivative  instruments  embedded in
other  contracts  (collectively  referred  to as  derivatives)  and for  hedging
activities.  It requires  that an entity  recognize  all  derivatives  as either
assets or liabilities in the balance sheet and measure these instruments at fair
value.  The accounting  for changes in the fair value of a derivative  (that is,
gains and losses)  depends upon the intended use of the derivative and resulting
designation  if used as a  hedge.  SFAS  No.  133 is  effective  for all  fiscal
quarters of fiscal years  beginning  after June 15, 2000, and is not intended to
be applied  retroactively.  The Company plans to adopt SFAS No. 133, as amended,
on January 1, 2001.  Management  does not believe  that the adoption of SFAS No.
133 will have a  significant  impact  on the  Company's  consolidated  financial
statements.

RECLASSIFICATIONS

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

NOTE 3--RECEIVABLES

Receivables consist of the following (in thousands):


                                                       DECEMBER 31,
                                                       ------------
                                                  1999            1998
                                                  ----            ----
Trade receivables                               $3,815          $2,972
Other                                              215             273
                                                 -----           -----
                                                 4,030           3,245
Less-allowance for doubtful accounts               (14)            (17)
                                                 -----           -----
                                                $4,016          $3,228
                                                ======          ======



                                      F-13
<PAGE>


NOTE 4--INVENTORIES

Inventories consist of the following (in thousands):


                                                          DECEMBER 31,
                                                          ------------
                                                       1999            1998
                                                       ----            -----
Raw materials                                          $436           $ 505

Finished goods                                          599             811
                                                      -----           -----
                                                      1,035           1,316

Less allowance for slow moving inventory                (70)           (108)
                                                      -----           -----

                                                      $ 965          $1,208
                                                      =====          ======

NOTE 5--FIXED ASSETS

Fixed assets consist of the following (in thousands):

                                                            DECEMBER 31,
                                                            ------------
                                                         1999             1998
                                                         -----            ----
Land                                                    $  893          $1,040

Buildings                                                2,789           2,782

Equipment                                                  955             754

Furniture and fixtures                                     584             539

Leasehold improvements                                      41               -

Equipment under capital lease                               27              27
                                                         -----           -----
                                                         5,289           5,142

Less-accumulated depreciation                           (1,605)         (1,591)
                                                         -----           -----

                                                        $3,684          $3,551
                                                        ======          ======

Depreciation  expense was  $283,000,  $165,000  and $185,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.

Net book value of equipment  under  capital lease was  approximately  $7,000 and
$12,000 at December 31, 1999 and 1998, respectively.


                                      F-14
<PAGE>


NOTE 6--DRUG LICENSES AND RELATED COSTS, NET

Drug licenses and related costs consist of the following (in thousands):

                                                         DECEMBER 31,
                                                   1999            1998
                                                   ----            ----
Drug licenses and related costs                   $6,802           $3,144

Less-accumulated amortization                       (995)            (711)
                                                   -----            -----
                                                  $5,807           $2,433
                                                  ======           ======

On  February  11,  1999,  the  Company  acquired  rights  to  certain  U.S.  and
international  patents and related technology (the "Assets") covering methods to
enhance the absorption of drugs delivered to biological  tissues.  Consideration
for the Assets was paid to Yungtai  Hsu,  an  individual,  in the form of a cash
payment of approximately  $1.1 million,  approximately  226,000 shares of Common
Stock and  ten-year  warrants to purchase  450,000  shares of common  stock.  In
addition,  approximately  359,000 shares of Common Stock were conveyed to Conrex
Pharmaceutical  Corporation.  The total of all consideration paid for the Assets
were approximately $2.6 million. Furthermore,  terms of this transaction provide
for certain  royalty  payments  upon  commercialization  of  products  using the
technologies.

The Company  has  accepted  assignment  of patents and  hydrogel  drug  delivery
technology as settlement of a judgment against its partner and has estimated the
value  of the  patents  and  technology  to be  approximately  $550,000  and has
recorded  these assets as Drug Licenses and Related  Costs,  Net during the year
ended  December  31,  1999.  Management  has  determined  that  no  reserve  for
impairment in value is necessary at December 31, 1999.

The Company purchased the product Senioral from Sanofi-Winthrop  during the year
ended December 31, 1998 for approximately $1,400,000.  Senioral is a combination
product useful in the treatment of congestive  symptoms of the upper respiratory
tract.  The  Company's  Spanish  subsidiary,  Laboratorios  Belmac S. A. started
marketing Senioral in October 1998.

Amortization  expense  for drug  licenses  and related  costs was  approximately
$385,000,  $138,000 and $110,000 for the years ended December 31, 1999, 1998 and
1997, respectively.

                                      F-15
<PAGE>

NOTE 7--ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):
                                                            DECEMBER 31,
                                                            ------------
                                                       1999              1998
                                                       ----              ----
Miscellaneous                                         $ 337             $ 315
Foreign income taxes payable                            264               242
Other foreign taxes payable                             581               562
Accrued payroll                                         356               444
                                                     ------            ------
                                                      1,538            $1,563
                                                     ======            ======

NOTE 8--DEBT

Short-term borrowings consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                                          DECEMBER 31,
                                                                                          ------------
                                                                                      1999              1998
                                                                                      ----              ----
<S>                                                                                <C>               <C>
Trade  receivables  discounted  (with a  Spanish  financial
institution),  with recourse, effective interest rate on the note
is 5.3% and 5.9%, respectively.                                                       $949             $ 633

Revolving lines of credit (with Spanish  financial  institutions),
average interest rate is 4.8% and 5.6%, respectively.                                    3               590
                                                                                    ------            ------
                                                                                      $952            $1,223
                                                                                    ======            ======
</TABLE>

The weighted average stated interest rate on short-term  borrowings  outstanding
at December 31, 1999 and 1998 was 5.3% and 5.7%, respectively.

The Company has revolving lines of credit with Spanish  financial  institutions,
which lines total  $3,268,000  at  December  31,  1999.  At December  31,  1999,
advances  outstanding under the lines of credit were  approximately  $3,000. The
weighted  average  interest  rate at December  31, 1999 was 4.8% and interest is
payable quarterly.


                                      F-16
<PAGE>

Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>

                                                                                                   DECEMBER 31,
                                                                                                   ------------
                                                                                                 1999        1998
                                                                                                 ----        ----
<S>                                                                                           <C>           <C>
Debentures,  maturing  February  13,  2006,  stated rate of
interest 12% (net of $1,432 and $1,584 discount,
respectively)                                                                                  $5,362        $5,403

Capitalized lease obligations, relating to equipment used
by the Company                                                                                      5            12
                                                                                                -----         -----
                                                                                                5,367         5,415

Less current portion                                                                           (5,367)           (5)
                                                                                                -----         -----
     Total long term debt                                                                      $  -0-        $5,410
                                                                                               ======        ======
</TABLE>

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

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

On May 29, 1996, the  Debentures  and Class A Redeemable  Warrants began trading
separately.  The  characteristics  of the  Debentures  and  Class  A  Redeemable
Warrants  are  consistent  with their  description  as a component  of the Units
except that the  expiration  date of the Class A Warrants was extended to August
16, 1999.

During the year ended December 31, 1997, the  Underwriter of the Public Offering
exercised 110 Underwriter Warrants, acquiring 110 12% Convertible Debentures and
110,000 Class A Warrants.  Twenty-three of the 12%  Convertible  Debentures were
voluntarily converted into approximately 9,000 shares of Common Stock during the
year ended  December  31, 1997 and 193 of the 12%  Convertible  Debentures  were
converted into approximately 77,000 shares of Common Stock during the year ended
December 31, 1999. As of December 31, 1999, 1998 and

                                      F-17
<PAGE>


1997, there were $6,794,000,  $6,987,000 and $6,987,000  principal amount of the
12% Convertible Debentures outstanding, respectively.

For financial  reporting  purposes,  the $1,000  purchase price of each Unit was
allocated as follows:  $722 to the Debenture,  $224 to the  conversion  discount
feature of the Debenture and $54 to the 1,000 Class A Warrants. None of the Unit
purchase price was allocated to the Class B Warrants.  Such allocation was based
upon the relative  fair value of each  security on the date of  issuance.  Such
allocation  resulted in recording a discount on the Debentures of  approximately
$1,900,000. The original issue discount and the costs related to the issuance of
the  Debentures  are being  amortized to interest  expense  using the  effective
interest method over the lives of the related Debentures. The effective interest
rate on the Debentures is 18.1%.

The Debentures are convertible  into shares of Common Stock at any time prior to
the redemption date at a conversion price per share of $2.50 (see Note 15). As a
result of the Company's decision in March 2000 to redeem the Debentures that are
not converted  into shares of Common Stock by the  redemption  date of April 12,
2000, such Debentures have been classified as a current liability as of December
31, 1999.

NOTE 9--REDEEMABLE PREFERRED STOCK

During  1991,  the  Company  issued  290,000  shares  of $1 par  value  Series A
Convertible  Exchangeable  Preferred Stock (the "Series A Preferred  Stock") and
340,000 shares of $1 par value Series B Convertible Exchangeable Preferred Stock
(the "Series B Preferred  Stock") at $25 per share. The issuance of these shares
provided  aggregate  proceeds to the Company of $15,750,000.  Since the Series A
and B Preferred  Stock met the  definition of Mandatorily  Redeemable  Preferred
Stock, it was excluded from the Stockholders' Equity section of the Consolidated
Balance  Sheets.  As of December  31, 1998,  all 290,000  shares of the Series A
Preferred  Stock had been  converted  into 66,700 shares of Common Stock and all
340,000  shares of the Series B Preferred  Stock had been  converted into 56,100
shares of Common Stock.

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


                                                      SERIES A
                                                      --------
                                                 SHARES       AMOUNT
                                                 ------       ------
Balance at December 31, 1997                      60         $2,338
     Accrual of 9% dividends                       -            101
     Conversion                                  (60)        (2,439)
                                                ------        ------
Balance at December 31, 1998 and 1999              -         $    -
                                                ======        ======

                                      F-18
<PAGE>


NOTE 10--STOCKHOLDERS' EQUITY

At December 31, 1999 the Company had the  following  Common  Stock  reserved for
issuances under various plans and agreements (in thousands):

                                                                 COMMON SHARES
                                                                 -------------
For exercise of stock purchase warrants                              4,806

For conversion of debentures                                         2,902

For exercise of stock options                                        2,504

For other                                                                3
                                                                  ---------
                                                                    10,215
                                                                  =========

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.

STOCK PURCHASE WARRANTS

At December  31,  1999,  stock  purchase  warrants to purchase an  aggregate  of
approximately  4,806,000  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,  775,000  warrants have an
exercise  price of $2.50 per share,  460,000  warrants have an exercise price of
$3.00 per share,  25,000  warrants  have an  exercise  price of $3.50 per share,
approximately  3,106,000  warrants  have an  exercise  price of $5.00 per share,
20,000  warrants have an exercise  price of $5.63 per share and 20,000  warrants
have an exercise price of $20.00 per share. The warrants expire through December
2009.

During the year ended  December 31,  1999,  the Company  issued  stock  purchase
warrants to purchase an  aggregate  of 450,000  shares of the  Company's  Common
Stock at $1.50 per share as partial consideration for the purchase of permeation
enhancement technology (see Note 6), of which 50,000 were exercised during 1999,
and issued Class B Warrants to purchase 659,000 shares of Common Stock for $5.00
per share.  In addition,  approximately  859,000 Class A Warrants were exercised
during the year ended December 31, 1999 to acquire  approximately 859,000 shares
of Common Stock and  approximately  859,000  Class B Warrants,  resulting in net
cash proceeds to the Company of approximately  $2,600,000.  Warrants to purchase
approximately   1,322,000  shares  of  Common  Stock  (including   approximately
1,252,000 Class A Warrants) expired  unexercised  during the year ended December
31, 1999.

During the year ended  December 31,  1998,  the Company  issued  stock  purchase
warrants to purchase an  aggregate  of 425,000  shares of the  Company's  Common
Stock at $2.50 per share.

                                      F-19
<PAGE>

During 1998, 5000 Class B Warrants were exercised,  resulting in the purchase of
2,500 shares of Common Stock. Warrants to purchase  approximately 192,000 shares
of Common Stock expired unexercised during the year ended December 31, 1998.

During the year ended  December 31,  1997,  the Company  issued  stock  purchase
Warrants to purchase an aggregate of 2,574,000  shares of the  Company's  Common
Stock (including Class B Warrants to purchase  approximately  2,450,000  shares,
which became outstanding upon exercise of the Class A Warrants). During the year
ended December 31, 1997, the Company  temporarily  lowered the exercise price on
its  Class  A  and  Class  B  Redeemable  Warrants.  Approximately  70%  of  all
outstanding  Class  A  Redeemable  Warrants  (approximately  4,900,000  Class  A
Warrants)  were  exercised  during this period,  which  generated  approximately
$9,800,000  in,  proceeds to the  Company.  The exercise of the Class A Warrants
resulted in  issuance  of  approximately  4,900,000  shares of Common  Stock and
approximately 4,900,000 Class B Warrants. The exercise price of the Registrant's
Class B  Redeemable  Warrants  was also  temporarily  lowered  and 5,000 Class B
Warrants  were  exercised  in January  1998,  resulting in the issuance of 2,500
shares of Common Stock, as discussed above.

Additionally,  162,000 stock purchase Warrants were converted into shares of the
Company's Common Stock,  yielding net proceeds of $405,000 to the Company during
1997. Also during 1997, 110  underwriters'  Warrants were  exercised,  providing
proceeds of  $132,000  to the  Company,  which  resulted in the  issuance of 110
$1,000 principal amount 12% Debentures due February 13, 2006 and 110,000 Class A
Warrants.  Such  Warrants  were  exercised  during 1997 and are  included in the
4,900,000  discussed above. The proceeds were allocated  between the Debentures,
the Class A Warrants and the conversion feature of the Debentures based upon the
relative  fair  value  of each on the date of  issuance.  Warrants  to  purchase
approximately 120,000 shares of Common Stock expired unexercised during the year
ended December 31, 1997.

In  addition,  the Company  has granted  warrants  in  connection  with  private
placements of its securities and as consideration  for various  services.  These
warrants  have been granted for terms not  exceeding  ten years from the date of
grant.

                                      F-20
<PAGE>


The table below  summarizes  warrant  activity for the years ended  December 31,
1997, 1998 and 1999.
<TABLE>
<CAPTION>

                                                                       WEIGHTED
                                                    NUMBER OF        AVERAGE PRICE
(in thousands except per share data)              COMMON SHARES       PER SHARE
                                                  -------------       ---------
<S>                                              <C>                <C>
Outstanding at December 31, 1996                       8,304             $ 3.55

 Granted                                               2,574             $ 4.93

 Exercised                                            (5,061)            $ 2.02

 Canceled                                               (120)            $17.34
                                                        -----

Outstanding at December 31, 1997                       5,697             $ 4.39

 Granted                                                 425             $ 2.50

 Exercised                                                (2)            $ 3.00

 Canceled                                               (192)            $20.69
                                                        -----

 Outstanding at December 31, 1998                      5,928             $ 3.84

  Granted                                              1,109             $ 3.58

  Exercised                                             (909)            $ 2.92

  Canceled                                            (1,322)            $ 3.05
                                                      -------

Outstanding at December 31, 1999                       4,806             $ 4.17
                                                       =====
</TABLE>


COMMON STOCK TRANSACTIONS

During the year ended  December  31,  1999,  the  Company  issued  approximately
585,000 shares of Common Stock as partial  consideration  for the acquisition of
permeation enhancement technology,  approximately 859,000 shares of Common Stock
as a  result  of  the  exercise  of  approximately  859,000  Class  A  Warrants,
approximately  77,000  shares  of Common  Stock  upon  conversion  of 193 of the
Company's  12%  Convertible  Debentures,  150,000  shares  of  Common  Stock  as
compensation in lieu of cash,  66,000 shares of Common Stock for consulting fees
earned in 1996, 1997 and 1998 and 50,000 shares of Common Stock upon exercise of
stock purchase warrants.

                                      F-21
<PAGE>

During the year ended December 31, 1998, the Company issued approximately 15,500
shares  of  Common  Stock as a result  of the  conversion  of  60,000  shares of
Redeemable  Preferred  Stock and issued 2,500 shares of Common Stock as a result
of the exercise of 5,000 Class B Warrants.

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

STOCK OPTION PLANS

The Company has in effect Stock Option  Plans (the  "Plans"),  pursuant to which
directors,  officers,  and employees of the Company who contribute materially to
the  success of the Company  are  eligible to receive  grants of options for the
Company's  Common Stock.  An aggregate of 2,504,000  shares of Common Stock have
been reserved for issuance under the Plans, of which  approximately  427,000 are
outstanding  under the 1991 and 1994 Plans and 1,500,000 are  outstanding  under
the Executive Plan as of December 31, 1999. Options may be granted for terms not
exceeding  ten years from the date of grant except for stock  options  which are
granted to persons  owning more than 10% of the total  combined  voting power of
all  classes of stock of the  Company.  For these  individuals,  options  may be
granted for terms not exceeding  five years from the date of grant.  Options may
not be granted at a price,  which is less than 100% of the fair market  value on
the date the options are granted  (110% in the case of persons  owning more than
10% of the total  combined  voting power of the  Company).  No such options were
exercised during the years ended December 31, 1999 or 1998; however,  during the
year ended  December 31, 1997,  9,000 stock  options were  exercised to purchase
9,000 shares of the Company's Common Stock.

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

                                                      FOR THE YEAR ENDED
                                                         DECEMBER 31,
                                                 --------------------------
                                                 1999       1998       1997
                                                 ----       ----       ----
Net loss                                       ($1,365)  ($3,067)   ($3,938)
Basic and diluted net loss per common share     ($0.15)   ($0.38)    ($1.00)

The  preceding  pro  forma  results  were  calculated  using  the  Black-Scholes
option-pricing  model.  The following  assumptions were used for the years ended
December 31, 1999, 1998 and 1997, respectively:  (1) risk-free interest rates of
5.8%, 5.4% and 6.2%; (2) dividend yields of 0.0%;


                                      F-22
<PAGE>

(3) expected lives of 10, 10 and 9.7 years;  and (4) volatility of 90.0%,  85.3%
and 73.1%.  Results may vary  depending on the  assumptions  applied  within the
model.

The table below  summarizes  activity in the Company's Plans for the years ended
December 31, 1997, 1998 and 1999.

(in thousands except per share data)
<TABLE>
<CAPTION>

                                                                        NUMBER OF                WEIGHTED AVERAGE
                                                                       COMMON SHARES             EXERCISE PRICE
                                                                       -------------             --------------
<S>                                                                   <C>                       <C>
Outstanding at December 31, 1996                                             1,718                     $ 6.39

 Granted                                                                        53                     $ 2.93
 Exercised                                                                      (9)                    $ 2.31
 Canceled                                                                      (21)                    $47.68
                                                                            ------                     ------

Outstanding at December 31, 1997                                             1,741                     $ 5.81

 Granted                                                                        98                     $ 2.25
 Canceled                                                                      (16)                    $ 3.20
                                                                            ------                     ------

 Outstanding at December 31, 1998                                             1,823                   $ 5.64

  Granted                                                                      105                    $ 2.98
  Canceled                                                                      (1)                   $ 2.75
                                                                            ------                     ------

Outstanding at December 31, 1999                                             1,927                    $ 5.50
                                                                             =====                    ======
</TABLE>

The table below summarizes  options  outstanding and exercisable at December 31,
1999:
<TABLE>
<CAPTION>

                                 OPTIONS OUTSTANDING                               OPTIONS CURRENTLY EXERCISABLE
            ---------------------------------------------------------------        -----------------------------
                                                                                                      WEIGHTED
            RANGE OF            NUMBER         WEIGHTED        WEIGHTED AVG.       NUMBER              AVERAGE
            EXERCISE              OF            AVERAGE       REMAINING LIFE         OF               EXERCISE
             PRICES            OPTIONS       EXERCISE PRICE      (YEARS)           OPTIONS             PRICE
             ------            -------       --------------    ----------        -----------        -----------
     <S>                     <C>            <C>                <C>             <C>                 <C>
         $ 1.50-$2.89           664,856               $2.77           6.8            643,856              $2.78
            3.00-3.75           707,500                3.61           6.6            623,000               3.69
                 4.73           500,000                4.73           6.3            500,000               4.73
          11.25-22.50            32,000               19.53           3.7             32,000              19.53
                45.00             3,000               45.00           3.1              3,000              45.00
        145.00-177.50            20,000              153.38           2.1             20,000             153.38
        -------------         ---------              ------           ---             ------             ------
       $ 1.50-$177.50         1,927,356               $5.50           6.5          1,821,856              $5.64
       ==============         =========              ======           ===          =========              =====
</TABLE>

Options and warrants outstanding include approximately  4,806,000 warrants,  all
of  which  are  exercisable,  and  approximately  1,927,000  options,  of  which
approximately  1,822,000 are vested

                                      F-23
<PAGE>

and  exercisable  at December 31, 1999. If all such warrants and options,  which
are exercisable on December 31, 1999, were exercised,  the Company would receive
cash proceeds of approximately $30,600,000.

Options and  warrants  outstanding  at  December  31,  1998  included  5,928,000
warrants and 1,823,000  options,  of which 5,928,000 and 720,000,  respectively,
were exercisable at that date. Options and warrants  outstanding at December 31,
1997,  included 6,122,000 warrants and 1,741,000 options, of which 6,122,000 and
679,000, respectively, were exercisable at that date.

On December 22, 1999, the Board of Directors adopted a stockholder  rights plan.
The Board of Directors approved the declaration of the dividend of one right for
each  outstanding  share of the  Company's  Common  Stock on the record  date of
December  27, 1999.  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  any  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.  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.

NOTE 11--PROVISION FOR INCOME TAXES

The Company has recognized a deferred tax asset of approximately  $31,120,000 as
of December 31, 1999,  primarily  related to net operating loss and capital loss
carryforwards.  The Company has established a valuation  allowance equal to the
full amount of the  deferred tax asset,  as future  domestic  operating  profits
cannot be assured.

At  December  31,  1999,   the  Company  has  net  operating  loss  (the  "NOL")
carryforwards  of  approximately  $30,900,000  available  to offset  future U.S.
taxable income. The Company calculates that its use of the NOL generated through
December  31,  1997 may be limited to  approximately  $1,000,000  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. The NOL of approximately
$3,200,000 generated during the tax year ended December 31, 1998 is available to
offset future  taxable income without  limitation.  Additionally,  approximately
$1,800,000 of the NOL generated in 1995 available to offset future U.S.  taxable
income  will be limited  to  approximately  $300,000  per year over the next six
years due to the  change  in tax year end  during  1995.  The  Company  utilized
approximately  $14,000,000  of NOLs to offset taxable income during 1997. If not
offset against future taxable income,  the NOL carryforwards  will expire in tax
years 2008 through 2019.


                                      F-24
<PAGE>

Total income tax expense was $781,000 (all foreign) for the year ended  December
31,  1999,  which  arose  from  current  operations  of  the  Company's  foreign
subsidiaries.  This amount differs from the amount computed by applying the U.S.
federal income tax rate of 34% to pretax loss as a result of the increase in the
valuation  allowance  established to offset domestic deferred tax assets and the
Company's  tax  position  in Spain.  Total  income  tax  expense  (benefit)  was
($280,000)  (domestic)  and $516,000  (foreign) for the year ended  December 31,
1998.  These  amounts  differ  from the amounts  computed  by applying  the U.S.
federal income tax rate of 34% to pretax loss as a result of the increase in the
valuation  allowance  established to offset domestic deferred tax assets and the
Company's  tax  position in Spain.  The Company  incurred  income tax expense of
$280,000 (domestic) and $341,000 (foreign) for the year ended December 31, 1997.
These  amounts  differ from the amounts  computed by applying  the U.S.  federal
income tax rate of 34% to pretax  loss as a result of U.S.  alternative  minimum
taxes and certain nondeductible expenses in Spain.

The valuation  allowance  increased  (decreased) by $1,720,000,  $10,500,000 and
($2,100,000)  for each of the years  ended  December  31,  1999,  1998 and 1997,
respectively.

NOTE 12--BUSINESS SEGMENT INFORMATION

The  Company  is  a  U.S.-based  drug  delivery  company,  specializing  in  the
development of products  based upon  innovative  and  proprietary  drug delivery
systems,  which also has a commercial  presence in Europe. The Company's Spanish
subsidiary,  Laboratorios  Belmac S.A.,  manufactures,  markets and  distributes
these  pharmaceutical  products from Spain.  During the year ended  December 31,
1997,  the  Company  divested  its  French  subsidiary,  Chimos/LBF,  which  was
primarily  involved in the import and  distribution of specialty  pharmaceutical
products in France. In the U.S., the Company's  activities  consist primarily of
limited   product   research  and   development,   corporate   management,   and
administration.  The Company manages its operating  segments  separately because
they either provide different products/services or require different strategies.

Laboratorios  Belmac  derives its revenues from the sales of its own products as
well as from products under contract for others, within four primary therapeutic
categories of  cardiovascular,  gastrointestinal,  neurological  and  infectious
diseases.  Until its  divestiture  in June 1997,  the  operations  of Chimos/LBF
consisted   of  revenues   from  the  import  and   distribution   of  specialty
pharmaceutical  products to  hospitals  and others in France as well as sales of
"orphan drugs" (drugs used for the treatment of rare  diseases).  Until December
1998, the Company's operations in the United States included sales of disposable
linen  products.  The Company  discontinued  such activities in December 1998 in
order  to  focus  on  acquisition  and  development  of  permeation  enhancement
technology and potential  product  applications,  in addition to other corporate
office functions, including management, administration and raising of capital.

Set forth in the tables below is certain  financial  information with respect to
the Company's operating segments for the years ended December 31, 1999, 1998 and
1997. The operating


                                      F-25
<PAGE>

segments use the same  accounting  policies as those described in the summary of
significant  accounting  policies  in Note 2.  Chimos/LBF  was  divested  by the
Company  in June  1997  and the  following  information  for 1997  reflects  its
operating results through this date.

<TABLE>
<CAPTION>
                                                                          (in thousands)
                                                                 YEAR ENDED DECEMBER 31, 1999
                                                                 ----------------------------
                                                                               CORPORATE/
                                                                             CONSOLIDATION/
                                                          SPAIN               ELIMINATION        CONSOLIDATED
                                                          -----               -----------        ------------
<S>                                                    <C>                 <C>               <C>
Revenues                                                  $20,249                        -            $20,249
Interest income                                                 -                     $244                244
Interest Expense                                              147                    1,021              1,168
Depreciation and amortization expense                         289                      270                559
Net income (loss) before income taxes                       1,686                   (1,995)              (309)
Income tax expense (benefit)                                  781                        -                781
Net income (loss)                                             905                   (1,995)            (1,090)
Fixed assets                                                3,512                      172              3,684
Drug licenses                                               1,709                    4,098              5,807
Total assets                                               11,739                   10,498             22,237
Total liabilities                                           4,499                    6,164             10,663
Expenditures for drug licenses/delivery technology            440                    1,335              1,775
Expenditures for fixed assets                                 799                      170                969

</TABLE>



<TABLE>
<CAPTION>

                                                                                  (in thousands)
                                                                           YEAR ENDED DECEMBER 31, 1998
                                                                           ----------------------------
                                                                               CORPORATE/
                                                                             CONSOLIDATION/
                                                           SPAIN              ELIMINATION        CONSOLIDATED
                                                           -----              -----------        ------------
<S>                                                     <C>                  <C>               <C>
Revenues                                                  $15,148                     $95             $15,243
Interest income                                                 -                     499                 499
Interest expense                                              105                     971               1,076
Depreciation and amortization expense                         250                      53                 303
Non-recurring charge                                            -                   1,176               1,176
Net income (loss) before income taxes                       1,410                  (4,050)             (2,640)
Income tax expense (benefit)                                  516                    (280)                236
Net income (loss)                                             894                  (3,770)             (2,876)
Fixed assets                                                3,515                      36               3,551
Drug licenses                                               2,433                       -               2,433
Total assets                                               11,777                   8,541              20,318
Total liabilities                                           7,809                   3,517              11,326
Expenditures for drug licenses                                141                   1,418               1,559
Expenditures for fixed assets                                 548                      11                 559
</TABLE>


                                      F-26
<PAGE>

<TABLE>
<CAPTION>

                                                                                  (in thousands)
                                                                            YEAR ENDED DECEMBER 31, 1997
                                                                            ----------------------------
                                                                                            CORPORATE/
                                                                                          CONSOLIDATION/
                                                         SPAIN             FRANCE          ELIMINATION     CONSOLIDATED
                                                         -----             ------          -----------     ------------
<S>                                                   <C>               <C>               <C>            <C>
Revenues                                               $12,491            $2,029               $382           $14,902
Interest income                                              -                 -                123               123
Interest expense                                           131                13                942             1,086
Depreciation and amortization expense                      215                28                 52               295
Other expenses                                               -                 -                685               685
Net income (loss) before income taxes                      623               (20)            (3,797)           (3,194)
Income tax expense                                         341                 -                280               621
Net income (loss)                                          282               (20)            (4,077)           (3,815)
Fixed assets                                             2,839                 -                 79             2,918
Drug licenses                                              691                 -                  -               691
Total assets                                             6,949                 -             14,094            21,043
Total liabilities                                        3,203                 -              6,597             9,800
Expenditures for drug licenses                              40                 -                  -                40
Expenditures for fixed assets                               91                 -                 17               108
</TABLE>

Interest  income and interest  expense are based upon the actual results of each
operating segment's assets and borrowings. The consolidation/elimination  column
includes  the  elimination  of all  inter-segment  amounts as well as  corporate
segment amounts. The principal component of the inter-segment amounts related to
inter-segment advances.

Revenues from two customers  exceeded 10% of  consolidated  revenues  during the
year  ended  December  31,  1999,   accounting  for  13.0%  and  12.6%  of  1999
consolidated revenues, respectively and revenues from a single customer exceeded
10% of consolidated revenues during the year ended December 31, 1998, accounting
for 11.5% of 1998 consolidated revenues.  Revenues derived from any one customer
did not exceed 10% of consolidated revenues during 1997.

NOTE 13--COMMITMENTS AND CONTINGENCIES

The Company completed the sale of Chimos/LBF   for  approximately  $3,650,000 in
June  1997.   The   Company   received   approximately   $3,300,000,   including
approximately  $2,600,000 of cash and cash  equivalents  on  Chimos/LBF's  books
prior to its  disposition,  of which  approximately  $500,000  was used to repay
indebtedness  to the former  subsidiary in 1997. An escrow fund in the amount of
approximately   $350,000,   representing  the  balance  due  the  Company,   was
established  for certain  contingent  obligations  or  liabilities.  The Company
established  a reserve  in the amount of  $100,000  during  1998 to reflect  the
estimated  realizable value,  taking into  consideration  certain  contingencies
being claimed by the buyer. The Company agreed to accept approximately  $207,000
during 1999 in full  settlement  of the amount  owed and  charged the  remaining
$43,000 to general and administrative expense during the year ended December 31,

                                      F-27
<PAGE>

1999.

In November 1999, Creative  Technologies,  Inc. ("Creative") commenced a lawsuit
against the Company and others,  asserting that the Company breached a brokerage
or finder's  fee  contract  with  Creative  regarding  its 1999  acquisition  of
permeation enhancement technology.  The Company has made a motion to dismiss the
complaint and each count therein.  In the opinion of management,  the claims are
without  merit and the outcome is  expected  to have no  material  effect on the
financial position or results of operations of the Company.

The Company was awarded a judgment of approximately  $2,130,000  during the year
ended  December 31, 1998,  relating to the  Company's  claims of civil theft and
breach of  employment  agreement  filed  against its former  President and Chief
Executive Officer, Michael M. Harshbarger.  The judgment included treble damages
totaling $418,000 related to its civil theft claim and $1,712,000 related to its
breach of employment  agreement  claim. In addition to establishing a receivable
on its books,  the Company has  established a reserve  equal to the  receivable.
Harshbarger filed a Motion for Relief From Judgment in September 1999,  alleging
among other things that he was not  provided  notice of the August 24, 1998 jury
trial.  Discovery  is ongoing and a hearing is expected to be held to  determine
the merits of Harshbarger's claims. In the opinion of management, the outcome is
expected to have no adverse material effect on the financial position or results
of operations of the Company.

The Company is obligated to pay certain royalty payments upon  commercialization
of products using technologies  acquired in a transaction,  which it consummated
during the year ended December 31, 1999  (see Note 6).

The Company leases certain of its assets under noncancellable  operating leases,
which expire through the year 2004.  Total charges to operations under operating
leases were  approximately  $442,000,  $487,000 and $350,000 for the years ended
December 31, 1999,  1998 and 1997,  respectively.  Future minimum lease payments
under operating leases are as follows:

                        (in thousands)
                    YEAR ENDING DECEMBER 31,
                    ------------------------
                  2000                    $400
                  2001                     412
                  2002                     422
                  2003                     435
                  2004                     407

NOTE 14--COSTS OF ABANDONED ACQUISITIONS

During 1998, the Company  negotiated to acquire a manufacturing  facility in the
United  States and a portfolio  of products  from  Schwarz  Pharma.  The Company
decided to abandon this effort in May 1998 and, consequently,  recorded a charge
of $1,176,000  (including  $158,000 of non-cash  items) in the second quarter of
1998, representing costs of abandoned acquisitions. Of this



                                      F-28
<PAGE>

amount,  $448,000  was paid  during  the year  ended  December  31,  1997.

NOTE 15--SUBSEQUENT EVENTS

As of March 9, 2000,  the Company had received net cash  proceeds of  $1,894,500
from the exercise of various warrants (including 460 Underwriters' warrants), in
exchange for the issuance of 460 Debentures and 460,000 stock purchase  warrants
to the  Underwriter  of its 1996 public  offering  and 488,500  shares of Common
Stock, subsequent to December 31, 1999.

On March 9, 2000, the Company's Board of Directors voted to redeem the Company's
12% Convertible Senior Subordinated Debentures. Written notice is being provided
to all holders of the Debentures, which provides that if such Debentures are not
converted  into shares of the  Company's  Common Stock by April 12,  2000,  such
remaining  Debentures  will be redeemed by the Company for 105% of the principal
amount plus  accrued  interest,  or $1,054,  per  Debenture.  Each  Debenture is
convertible  into 400 shares of the Company's Common Stock until April 12, 2000.
As of March 9, 2000,  269 of the Company's 12%  Convertible  Debentures had been
voluntarily  converted  into  107,600  shares  of  the  Company's  Common  Stock
subsequent  to  December  31, 1999 and 6,985 of the 12%  Convertible  Debentures
remain outstanding as of March 9, 2000.

As long as the market price of the  Company's  Common Stock remains above $2.625
per share, holders, upon conversion,  will receive Common Stock having a greater
market value than the cash they would receive upon redemption.  However,  if the
holders  of all 6,985  Debentures  outstanding  on March 9, 2000  decide  not to
convert  such  Debentures  into shares of Common  Stock,  but decide  instead to
receive  cash of  $1,054  (including  accrued  interest)  for  each  outstanding
Debenture,  the Company  would have to pay an aggregate of  $7,363,000 to redeem
the  Debentures.  Consequently,  the Company has classified such Debentures as a
current liability as of December 31, 1999.


                                      F-29
<PAGE>


INDEPENDENT AUDITORS' REPORT



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

We   have   audited   the   consolidated   financial   statements   of   Bentley
Pharmaceuticals,  Inc. and subsidiaries (the "Company") as of December 31, 1999
and 1998, and for each of the three years in the period ended December 31, 1999,
and have issued our report  thereon  dated  March 10,  2000;  such  consolidated
financial  statements and report are included elsewhere in this Annual Report on
Form 10-K.  Our audits also  included the  financial  statement  schedule of the
Company   listed  in  Item  14.  This  financial   statement   schedule  is  the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audits. In our opinion,  such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole,  presents fairly in all material  respects the information set forth
therein.



/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 10, 2000


                                      F-30
<PAGE>

<TABLE>
<CAPTION>

                                                    BENTLEY PHARMACEUTICALS, INC.

                                                             Schedule II

                                           Valuation and qualifying accounts and reserves

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

For the year ended December 31, 1999      $711,000        $385,000         ($101,000)                      $995,000

For the year ended December 31, 1998       528,000         138,000            45,000                        711,000

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


Goodwill:

For the year ended December 31, 1999          -                                                                  -

For the year ended December 31, 1998          -                                                                  -

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


Reserve for inventory obsolescence:

For the year ended December 31, 1999      $108,000                          ($11,000)      $27,000(c)       $70,000

For the year ended December 31, 1998       125,000                             7,000        24,000(c)       108,000

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

</TABLE>

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

(a)      Effect of exchange rate fluctuations.

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

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

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



                                      F-31