**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

**FORM 10-Q**

**(Mark One)**

** **

**x**      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

** **

**For the quarterlyperiod ended** September30, 2006

**or**

** **

**o**         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For the transition period from                                        to**

**Commission FileNumber**  1-10581

**BENTLEY**PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

| **DELAWARE**                                                      |   | **No.  59-1513162**                     |
|-------------------------------------------------------------------|--------|-----------------------------------------|
| (State or other  jurisdiction of   incorporation or organization) |   | (I.R.S. Employer    Identification No.) |

 

**Bentley Park, 2 Holland Way, Exeter, New Hampshire 03833**

(Current Address of Principal Executive Offices)

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

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     YES  x    NO  o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).      YES  o     NO  x

Thenumber of shares of the registrant’s common stock outstanding as of November 8,2006 was 22,223,463.

 

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**Bentley Pharmaceuticals,Inc. and Subsidiaries**

**Form 10-Q for the Quarter Ended September 30, 2006**

**Index**
|              | ** **                                                           | ** **                                                                                                                                     | **Page** |
|--------------|----------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **Part I.**  | **Unaudited Financial Information**                                  |                                                                                                                                           |     |
|         |                                                                 |                                                                                                                                           |     |   |
|         | Item 1.                                                              | Condensed Consolidated Financial Statements:                                                                                                   |     |   |
|         |                                                                 |                                                                                                                                           |     |   |
|         |                                                                 | Consolidated  Balance Sheets as of September 30, 2006 and December 31, 2005                                                                    |     | 3 |
|         |                                                                 |                                                                                                                                           |     |   |
|         |                                                                 | Consolidated  Income Statements for the three months ended September 30, 2006 and 2005, and  the nine months ended September 30, 2006 and 2005 |     | 4 |
|         |                                                                 |                                                                                                                                           |     |   |
|         |                                                                 | Consolidated Statement of  Changes in Stockholders’ Equity for the nine  months ended September 30, 2006                                  |     | 5 |
|         |                                                                 |                                                                                                                                           |     |   |
|         |                                                                 | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2006 and  2005                                                  |     | 6 |
|         |                                                                 |                                                                                                                                           |     |   |
|         |                                                                 | Notes to  Condensed Consolidated Financial Statements                                                                                          |     | 8 |
|         |                                                                 |                                                                                                                                           |     |   |
|         | Item 2.                                                              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                    |     | 23 |
|         |                                                                 |                                                                                                                                           |     |   |
|         | Item 3.                                                              | Quantitative  and Qualitative Disclosures About Market Risk                                                                                    |     | 41 |
|         |                                                                 |                                                                                                                                           |     |   |
|         | Item 4.                                                              | Controls and  Procedures                                                                                                                       |     | 42 |
| ** **   | ** **                                                           |                                                                                                                                           |     |
| **Part II.** | **Other Information**                                                |                                                                                                                                           |     |
|         |                                                                 |                                                                                                                                           |     |   |
|         | Item 1. Legal Proceedings                                            |                                                                                                                                           | 42       |
|         |                                                                 |                                                                                                                                           |     |   |
|         | Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds |                                                                                                                                           | 43       |
|         |                                                                 |                                                                                                                                           |     |   |
|         | Item  6. Exhibits                                                    |                                                                                                                                           | 43       |

2

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**ConsolidatedBalance Sheets**
| ***(in thousands, except per share data)***                                        | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
|                                                                                                        |       |                         |       |                        |       |
| Current assets:                                                                                             |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                   |       | $                            | 18,200     |                        | $          | 32,384 |   |
| Marketable securities                                                                                       |       | 3,066                        |       | 462                         |       |
| Receivables, net                                                                                            |       | 32,568                       |       | 26,916                      |       |
| Inventories, net                                                                                            |       | 15,273                       |       | 12,147                      |       |
| Deferred taxes                                                                                              |       | 1,919                        |       | 1,099                       |       |
| Prepaid expenses and other                                                                                  |       | 1,905                        |       | 2,069                       |       |
| Total current assets                                                                                        |       | 72,931                       |       | 75,077                      |       |
|                                                                                                        |       |                         |       |                        |       |
| Non-current  assets:                                                                                        |       |                         |       |                        |       |
| Fixed assets, net                                                                                           |       | 45,033                       |       | 33,366                      |       |
| Drug licenses and related costs, net                                                                        |       | 15,302                       |       | 13,858                      |       |
| Restricted cash                                                                                             |       | 1,000                        |       | 1,000                       |       |
| Other                                                                                                       |       | 824                          |       | 919                         |       |
| Total non-current assets                                                                                    |       | 62,159                       |       | 49,143                      |       |
|                                                                                                        |       | $                            | 135,090    |                        | $          | 124,220 |   |
|                                                                                                        |       |                         |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
|                                                                                                        |       |                         |       |                        |       |
| Current  liabilities:                                                                                       |       |                         |       |                        |       |
| Accounts payable                                                                                            |       | $                            | 16,534     |                        | $          | 15,462 |   |
| Accrued expenses                                                                                            |       | 11,417                       |       | 9,428                       |       |
| Short-term borrowings                                                                                       |       | —                       |       | 2,608                       |       |
| Current portion of long-term debt                                                                           |       | 380                          |       | 387                         |       |
| Deferred income                                                                                             |       | 1,288                        |       | 795                         |       |
| Other current liabilities                                                                                   |       | 4,000                        |       | —                      |       |
| Total current liabilities                                                                                   |       | 33,619                       |       | 28,680                      |       |
|                                                                                                        |       |                         |       |                        |       |
| Non-current  liabilities:                                                                                   |       |                         |       |                        |       |
| Deferred taxes                                                                                              |       | 1,782                        |       | 1,665                       |       |
| Deferred income                                                                                             |       | 3,425                        |       | 2,286                       |       |
| Other liabilities                                                                                           |       | 3,546                        |       | —                      |       |
| Total non-current liabilities                                                                               |       | 8,753                        |       | 3,951                       |       |
|                                                                                                        |       |                         |       |                        |       |
| Commitments and  contingencies                                                                              |       |                         |       |                        |       |
|                                                                                                        |       |                         |       |                        |       |
| Stockholders’  equity:                                                                                 |       |                         |       |                        |       |
| Preferred stock, $1.00 par value, authorized 2,000  shares, issued and outstanding, none                    |       | —                       |       | —                      |       |
| Common stock, $0.02 par value, authorized 100,000  shares, issued and outstanding, 22,217 and 21,923 shares |       | 444                          |       | 438                         |       |
| Additional paid-in capital                                                                                  |       | 139,252                      |       | 139,381                     |       |
| Accumulated deficit                                                                                         |       | (53,430                      | )          | (49,990                     | )          |
| Accumulated other comprehensive income                                                                      |       | 6,452                        |       | 1,760                       |       |
| Total stockholders’ equity                                                                             |       | 92,718                       |       | 91,589                      |       |
|                                                                                                        |       | $                            | 135,090    |                        | $          | 124,220 |   |

 

*Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these financial statements.*

3

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**ConsolidatedIncome Statements**
| ***(in thousands, except per share data)*** | ** ** | **For the Three Months Ended   September 30,** | ** ** | **For the Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                                                     | ** ** | **2005**                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                            |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Net product sales                                                    |       | $                                                                            | 22,873     |                                                                        | $          | 22,057 |   | $ | 75,900 |   | $ | 68,769 |   |
| Licensing and collaboration revenues                                 |       | 2,283                                                                        |       | 1,455                                                                       |       | 6,517 |   | 3,751 |   |
| Total revenues                                                       |       | 25,156                                                                       |       | 23,512                                                                      |       | 82,417 |   | 72,520 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Cost of net  product sales                                           |       | 11,778                                                                       |       | 11,104                                                                      |       | 37,182 |   | 33,923 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Gross profit                                                         |       | 13,378                                                                       |       | 12,408                                                                      |       | 45,235 |   | 38,597 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Operating  expenses:                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Selling and marketing                                                |       | 3,495                                                                        |       | 3,503                                                                       |       | 11,876 |   | 12,118 |   |
| General and administrative                                           |       | 3,751                                                                        |       | 2,948                                                                       |       | 11,320 |   | 8,692 |   |
| Research and development                                             |       | 2,447                                                                        |       | 1,775                                                                       |       | 7,850 |   | 4,734 |   |
| Litigation settlement                                                |       | 8,932                                                                        |       | 88                                                                          |       | 10,269 |   | 380 |   |
| Depreciation and amortization                                        |       | 460                                                                          |       | 416                                                                         |       | 1,341 |   | 1,359 |   |
| Total operating expenses                                             |       | 19,085                                                                       |       | 8,730                                                                       |       | 42,656 |   | 27,283 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Income (loss)  from operations                                       |       | (5,707                                                                       | )          | 3,678                                                                       |       | 2,579 |   | 11,314 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Other income  (expenses):                                            |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Interest income                                                      |       | 223                                                                          |       | 238                                                                         |       | 661 |   | 610 |   |
| Interest expense                                                     |       | (15                                                                          | )          | (53                                                                         | )          | (109 | ) | (163 | ) |
| Other, net                                                           |       | —                                                                       |       | (1                                                                          | )          | 36 |   | 23 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Income (loss)  before income taxes                                   |       | (5,499                                                                       | )          | 3,862                                                                       |       | 3,167 |   | 11,784 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Provision for  income taxes                                          |       | 1,730                                                                        |       | 1,377                                                                       |       | 6,607 |   | 4,521 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Net income  (loss)                                                   |       | $                                                                            | (7,229     | )                                                                           | $          | 2,485 |   | $ | (3,440 | ) | $ | 7,263 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Net income  (loss) per common share:                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Basic                                                                |       | $                                                                            | (0.33      | )                                                                           | $          | 0.11 |   | $ | (0.16 | ) | $ | 0.34 |   |
| Diluted                                                              |       | $                                                                            | (0.33      | )                                                                           | $          | 0.11 |   | $ | (0.16 | ) | $ | 0.32 |   |
|                                                                 |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Weighted average  common shares outstanding:                         |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Basic                                                                |       | 22,194                                                                       |       | 21,652                                                                      |       | 22,107 |   | 21,455 |   |
| Diluted                                                              |       | 22,194                                                                       |       | 22,970                                                                      |       | 22,107 |   | 22,700 |   |

*The accompanying Notes to CondensedConsolidated Financial Statements are an integral part of these financialstatements.*

4

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**ConsolidatedStatement of Changes in Stockholders’ Equity**
| ***(in thousands)***               | ** ** | **$0.02 Par Value  Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|-------------------------|------------|-----------------|------------|---------------------------------------|------------|------------|------------|
| ** **                              | ** ** | **Shares**                                       | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit**                           | ** ** | **Income** | ** ** | **Total** | ** ** |
|                                    |       |                                             |       |                    |       |            |       |                                  |       |       |       |   |   |
| Balance at  December 31, 2005           |       | 21,923                                           |       | $                       | 438        |            | $          | 139,381                               |       | $          | (49,990    | ) | $ | 1,760 |   | $ | 91,589 |   |
| Comprehensive income (loss):            |       |                                             |       |                    |       |            |       |                                  |       |       |       |   |   |
| Net loss                                |       | —                                           |       | —                  |       | —          |       | (3,440                                | )          | —     |       | (3,440 | ) |
| Other comprehensive loss:               |       |                                             |       |                    |       |            |       |                                  |       |       |       |   |   |
| Foreign currency translation adjustment |       | —                                           |       | —                  |       | —          |       | —                                |       | 4,692      |       | 4,692 |   |
| Comprehensive income                    |       |                                             |       |                    |       |            |       |                                  |       |       |       | $ | 1,252 |   |
|                                    |       |                                             |       |                    |       |            |       |                                  |       |       |       |   |   |
| Exercise of stock options               |       | 679                                              |       | 14                      |       | 3,451           |       | —                                |       | —     |       | 3,465 |   |
| Purchase of treasury shares             |       | (399                                             | )          | (8                      | )          | (5,213          | )          | —                                |       | —     |       | (5,221 | ) |
| Equity-based compensation               |       | 14                                               |       | —                  |       | 1,633           |       | —                                |       | —     |       | 1,633 |   |
|                                    |       |                                             |       |                    |       |            |       |                                  |       |       |       |   |   |
| Balance at September  30, 2006          |       | 22,217                                           |       | $                       | 444        |            | $          | 139,252                               |       | $          | (53,430    | ) | $ | 6,452 |   | $ | 92,718 |   |

*The accompanying Notes to CondensedConsolidated Financial Statements are an integral part of these financialstatements.*

5

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**ConsolidatedStatements of Cash Flows**
| ***(in thousands)***                                                          | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
|                                                                               |       |                                                                  |       |   |   |
| Cash flows from  operating activities:                                             |       |                                                                  |       |   |   |
| Net (loss) income                                                                  |       | $                                                                     | (3,440     | ) | $ | 7,263 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                                  |       |   |   |
| Depreciation and amortization                                                      |       | 4,038                                                                 |       | 3,872 |   |
| Equity-based compensation expense                                                  |       | 1,633                                                                 |       | 179 |   |
| Loss on disposal of assets                                                         |       | 50                                                                    |       | 190 |   |
| Other non-cash items                                                               |       | 8                                                                     |       | 32 |   |
| (Increase) decrease in assets and increase  (decrease) in liabilities:             |       |                                                                  |       |   |   |
| Receivables                                                                        |       | (3,805                                                                | )          | (2,175 | ) |
| Inventories                                                                        |       | (2,118                                                                | )          | (4,193 | ) |
| Deferred income taxes                                                              |       | (694                                                                  | )          | (192 | ) |
| Prepaid expenses and other current assets                                          |       | 229                                                                   |       | (357 | ) |
| Other assets                                                                       |       | (6                                                                    | )          | (564 | ) |
| Accounts payable and accrued expenses                                              |       | 1,331                                                                 |       | 4,423 |   |
| Deferred income                                                                    |       | 1,351                                                                 |       | 1,880 |   |
| Other liabilities                                                                  |       | 7,546                                                                 |       | (14 | ) |
|                                                                               |       |                                                                  |       |   |   |
| Net cash provided by operating activities                                          |       | 6,123                                                                 |       | 10,344 |   |
|                                                                               |       |                                                                  |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                                  |       |   |   |
| Additions to fixed assets                                                          |       | (12,070                                                               | )          | (6,673 | ) |
| Additions to drug licenses and related costs                                       |       | (1,803                                                                | )          | (1,477 | ) |
| Proceeds from maturity of investments                                              |       | —                                                                |       | 158 |   |
| Purchase of investments                                                            |       | (2,402                                                                | )          | (158 | ) |
|                                                                               |       |                                                                  |       |   |   |
| Net cash used in  investing activities                                             |       | (16,275                                                               | )          | (8,150 | ) |
|                                                                                    |            |                                                                       |            |  |  |  |  |

(Continuedon following page)

*Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these financial statements.*

6

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**ConsolidatedStatements of Cash Flows (Concluded)**
| ***(in thousands)***                                                                                        | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| Cash flows from  financing activities:                                                                           |       |                                                                  |       |   |   |
| Proceeds from the exercise of stock options                                                                      |       | $                                                                     | 150        |   | $ | 1,800 |   |
| Remittance of employee tax liabilities in exchange  for common stock tendered to the Company                     |       | (1,907                                                                | )          | (1,082 | ) |
| Purchases of treasury stock                                                                                      |       | —                                                                |       | (305 | ) |
| Proceeds from borrowings                                                                                         |       | 1,404                                                                 |       | 1,338 |   |
| Repayment of borrowings                                                                                          |       | (3,700                                                                | )          | (1,684 | ) |
| Net cash (used in) provided by financing activities                                                              |       | (4,053                                                                | )          | 67 |   |
|                                                                                                             |       |                                                                  |       |   |   |
| Effect of  exchange rate changes on cash                                                                         |       | 21                                                                    |       | (678 | ) |
|                                                                                                             |       |                                                                  |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                                                            |       | (14,184                                                               | )          | 1,583 |   |
|                                                                                                             |       |                                                                  |       |   |   |
| Cash and cash  equivalents at beginning of period                                                                |       | 32,384                                                                |       | 34,230 |   |
|                                                                                                             |       |                                                                  |       |   |   |
| Cash and cash  equivalents at end of period                                                                      |       | $                                                                     | 18,200     |   | $ | 35,813 |   |
|                                                                                                             |       |                                                                  |       |   |   |
| **Supplemental  Disclosures of Cash Flow Information**                                                           | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| The Company paid  cash during the period for:                                                                    |       |                                                                  |       |   |   |
| Interest                                                                                                         |       | $                                                                     | 110        |   | $ | 153 |   |
| Foreign income taxes                                                                                             |       | $                                                                     | 4,372      |   | $ | 3,209 |   |
|                                                                                                             |       |                                                                  |       |   |   |
| **Supplemental  Disclosures of Non-Cash Financing and Investing Activities**                                     | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| The Company has  issued Common Stock as equity-based  compensation in lieu of cash during the period as follows: |       |                                                                  |       |   |   |
| Shares                                                                                                           |       | 14                                                                    |       | 16 |   |
| Amount                                                                                                           |       | $                                                                     | 182        |   | $ | 161 |   |
|                                                                                                             |       |                                                                  |       |   |   |
| Amounts included in  accounts payable at end of  period for fixed asset and drug license purchases               |       | $                                                                     | 3,796      |   | $ | 1,836 |   |

*Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these financial statements.*

7

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**Bentley Pharmaceuticals, Inc. and Subsidiaries**

**Notes to Condensed Consolidated FinancialStatements**

**History and Operations**

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

·                  SpecialtyGenerics: development, licensing and sales of generic and branded generic pharmaceuticalproducts and active pharmaceutical ingredients (API) and the manufacturing ofpharmaceuticals for others; and

·                  DrugDelivery: research, development and licensing/commercialization of advanceddrug delivery technologies and pharmaceutical products.

Bentley’spharmaceutical product sales and licensing activities are based primarily inSpain, where it has a significant commercial presence and manufactures and marketsapproximately 110 products of various dosages and strengths through threewholly-owned Spanish subsidiaries: Laboratorios Belmac, Laboratorios Davur andLaboratorios Rimafar. Bentley’s products include approximately 160 productpresentations in four primary therapeutic areas: cardiovascular,gastrointestinal, central nervous system and infectious diseases. Although mostof the sales of these products are currently in the Spanish market, the Companyhas experienced increasing sales in other European countries and othergeographic regions through strategic alliances with companies in theseterritories.  The Company continuallyadds to its product portfolio in response to increasing market demand forgeneric and branded generic therapeutic agents and, when appropriate, divestsportfolio products considered to be redundant or that have becomenon-strategic.  The Company also owns amanufacturing facility in Spain that specializes in the manufacturing of severalAPI. This facility has been approved by the U.S. Food and Drug Administration (“FDA”)for the manufacture of one ingredient for marketing and sale in the U.S. TheCompany markets its API products through its Spanish subsidiary, BentleyA.P.I.  The Company also has an Irishsubsidiary, Bentley Pharmaceuticals Ireland Limited, which received its firstmarketing approval by the Irish Medicines Board in 2005 and expects to fill itsfirst product sales order in the fourth quarter of 2006.

The Company has U.S. and international patents andother proprietary rights to technologies that facilitate the absorption ofdrugs. Bentley is developing products that incorporate its drug deliverytechnologies and has licensed applications of its proprietary CPE-215® drugdelivery technology to Auxilium Pharmaceuticals, Inc., which launched Testim®in the U.S. market in February 2003. Testim, which incorporates Bentley’s CPE-215 drug delivery technology,is a gel used for testosterone replacement therapy. Bentley continues to seekother pharmaceutical and biotechnology companies to form additional strategicalliances to facilitate the development and commercialization of other productsusing its drug delivery technologies.

**Basis ofCondensed Consolidated Financial Statements**

The Condensed Consolidated Financial Statementsof Bentley as of September 30, 2006 and for the three and nine months ended September30, 2006 and 2005, included herein, have been prepared by the Company, withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted insofar as such information was disclosedin the Company’s consolidated financial statements for the year ended December31, 2005.  These Condensed Consolidated FinancialStatements should be read in conjunction with the summary of significantaccounting policies and the audited consolidated financial statements and notesthereto included in Bentley’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

8

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In the opinion of management, the accompanyingunaudited Condensed Consolidated Financial Statements as of September 30, 2006,and for the three and nine months ended September 30, 2006 and 2005, arepresented on a basis consistent with the audited consolidated financialstatements for the year ended December 31, 2005 (with the exception ofequity-based compensation expense discussed in the “Equity-based compensation — required changein accounting principle” note below and royaltyrevenues on Auxilium’s sales of Testimdiscussed in the “Revenue recognition” note below) and contain all adjustments,consisting only of normal recurring adjustments, necessary to present fairlyBentley’s financial position as of September 30, 2006, the results of itsoperations for the three and nine months ended September 30, 2006 and 2005, andcash flows for the nine months ended September 30, 2006 and 2005.  The results of operations for the nine monthsended September 30, 2006 should not necessarily be considered indicative of theresults to be expected for the full year ending December 31, 2006.

**Cash and cash equivalents**

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

Included in *cash andcash equivalents* at September 30, 2006 and December 31, 2005 areapproximately $5,892,000 and $11,513,000 respectively, of short-terminvestments considered to be cash equivalents, as the original maturity datesof such investments were three months or less when purchased.

**Marketablesecurities**

The Company hasinvestments in securities, with maturities of greater than three months whenpurchased, which are classified as available-for-sale, totaling $3,066,000 asof September 30, 2006, compared to $462,000 as of December 31, 2005. The Company’s investments are carried atamortized cost which approximates fair value due to the short-term nature ofthese investments.  Accordingly, nounrealized gains or losses have been recognized on these investments. Shouldthe fair values differ significantly from the amortized costs, unrealized gainsor losses would be included as a component of *othercomprehensive income (loss)*.

**Receivables**

Receivables consist of the following (inthousands):
|                                                                                                                                     | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Trade  receivables (of which $0 and $2,595, respectively, collateralize short-term borrowings  with Spanish financial institutions) |       | $                                | 25,924     |                            | $          | 21,293 |   |
| VAT receivable                                                                                                                      |       | 2,535                            |       | 2,270                           |       |
| Royalties  receivable                                                                                                               |       | 4,054                            |       | 2,861                           |       |
| Other                                                                                                                               |       | 395                              |       | 694                             |       |
|                                                                                                                                |       | 32,908                           |       | 27,118                          |       |
| Less-allowance  for doubtful accounts                                                                                               |       | (340                             | )          | (202                            | )          |
|                                                                                                                                |       | $                                | 32,568     |                            | $          | 26,916 |   |

**Inventories**

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

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Inventory balances are comprisedof the following (in thousands):
|                                           | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials                             |       | $                                | 7,919      |                            | $          | 6,414 |   |
| Finished goods                            |       | 7,424                            |       | 5,869                           |       |
|                                      |       | 15,343                           |       | 12,283                          |       |
| Less allowance  for slow moving inventory |       | (70                              | )          | (136                            | )          |
|                                      |       | $                                | 15,273     |                            | $          | 12,147 |   |

**Fixed assets**

Fixedassets consist of the following (in thousands):
|                                | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Land                           |       | $                                | 2,807      |                            | $          | 2,673 |   |
| Buildings and  improvements    |       | 16,858                           |       | 14,151                          |       |
| Equipment                      |       | 19,000                           |       | 16,742                          |       |
| Furniture and  fixtures        |       | 2,045                            |       | 1,974                           |       |
| Other                          |       | 393                              |       | 148                             |       |
|                           |       | 41,103                           |       | 35,688                          |       |
| Capital  in-progress           |       | 17,626                           |       | 7,748                           |       |
|                           |       | 58,729                           |       | 43,436                          |       |
| Less accumulated  depreciation |       | (13,696                          | )          | (10,070                         | )          |
|                           |       | $                                | 45,033     |                            | $          | 33,366 |   |

 

In order to support the Company’sgrowth in Europe and prepare for prescription sales in the U.S., management isadding additional capacity to its manufacturing facilities through a series ofimprovements. The Company invested approximately $12,070,000 in capitaladditions during the nine months ended September 30, 2006, primarily forbuildings and improvements.

Depreciation expense of approximately $234,000and $235,000 has been charged to operations as a component of *depreciation and amortization expense* inthe Consolidated Income Statements for the three months ended September 30,2006 and 2005, respectively. Depreciation totaling approximately $2,697,000 and$2,513,000 has been included in *cost of netproduct sales* during the nine months ended September 30, 2006 and2005, respectively.

**Otherliabilities**

*Litigation*

The Company and its subsidiary, Laboratorios Belmac, have reachedsubstantial agreement with Ethypharm S.A. Spain and Ethypharm S.A. France onterms to settle all outstanding litigation. The Ethypharm claims were inreference to the manufacture and sale by Laboratorios Belmac of omeprazole andother pharmaceutical products which allegedly used Ethypharm’s proprietary pellet technology or infringed Ethypharm’spatents. In accordance withStatement of Financial Accounting Standard No. 5, *Accountingfor Contingencies*, the Company recorded a $7,546,000 charge in thethird quarter of 2006 representing the present value of $4,000,000 expected tobe paid in the fourth quarter of 2006 and four payments of $1,000,000 to bepaid on the first four anniversaries of the first payment, discounted at a rateof 4.72%. Because no definitive settlement agreement has yet been concluded,there can be no assurance as to whether, or on what additional terms, thislitigation will ultimately be settled. The Company has incurred approximately $2,723,000in related litigation defense costs in the nine months ended September 30, 2006,of which approximately $1,386,000 was incurred in the three months endedSeptember 30, 2006.  The litigation andrelated charges incurred in the three and nine months ended September 30, 2006reduced the Company’s net income by approximately $8,855,000 and $10,098,000,respectively or $0.40 

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and$.046 per share, respectively. The litigation related charges are recorded in *litigation settlement*expenses on the Company’s CondensedConsolidated Income Statement.

**Stockholders’ equity**

Asubstantial amount of the Company’s business is conducted in Europe and istherefore influenced by fluctuations in the U.S. Dollar’s value in relation toother currencies, especially the Euro. The exchange rates at September 30,2006 and December 31, 2005 were .79 Euros and .84 Euros per U.S. Dollar,respectively. The weighted average exchange rates for the three month periodsended September 30, 2006 and 2005 were .78 Euros and .82 Euros per U.S.Dollar, respectively. The weighted average exchange rates for the nine monthperiods ended September 30, 2006 and 2005 were .80 Euros and .79 Euros perU.S. Dollar, respectively. The net effect of foreign currency translation onour Condensed Consolidated Financial Statements for the nine months ended September 30,2006 was a net increase of $4,692,000, and the cumulative historical effect asof September 30, 2006 was an increase of $6,452,000, as reflected in ourConsolidated Balance Sheets as *accumulatedother**comprehensive income*. The carrying value of assets andliabilities can be materially affected by foreign currency translation, as canthe translated amounts of revenues and expenses. Management is considering theuse of derivates to limit foreign currency risks.

**Supplemental disclosures related to Consolidated Statements of CashFlows**

During the nine months endedSeptember 30, 2006, the Chief Executive Officer (“CEO”), the Chief MedicalOfficer (“CMO”) and the former Chief Financial Officer (“Former CFO”) of theCompany exercised stock options to purchase an aggregate of 650,400 shares ofthe Company’s Common Stock. In satisfaction of the option exercise prices, theCompany received an aggregate of approximately 254,300 shares of previouslyacquired Bentley Common Stock, with a fair market value of approximately $3,314,000.The Company also withheld a total of approximately 144,400 shares of CommonStock with a fair market value of approximately $1,900,000 from the shares tobe issued to these executives in connection with their exercises, in order tosatisfy minimum federal and statutory tax withholding requirements. The shares of Common Stock acquired by theCompany in connection with these stock option exercises were recorded at fairmarket value and are held by the Company as treasury shares.  In addition, in accordance with theseparation agreement with the Former CFO, an additional 1,604 shares of CommonStock associated with a grant of restricted stock units became vested andissuable to the Former CFO on September 30, 2006.  The Company withheld a total of 584 shares ofCommon Stock with a fair market value of approximately $7,000 from the issuanceof those shares in order to satisfy minimum federal and statutory taxwithholding requirements. As of September30, 2006 and December 31, 2005, the Company has recorded approximately 830,100and 430,800 shares, respectively, as treasury stock, with an historical cost of$10,536,200 and $5,321,000, respectively, which has been accounted for as areduction of *common stock* and *additional paid in capital*.

As of September 30, 2006,10,000 shares of the Company’s Common Stock are contingently issuable to theCompany’s non-employee Directors upon termination of their service as a memberof the Board in accordance with restricted stock unit awards granted to them.  The Company has included the contingentlyissuable shares in its computation of basic earnings per share in the three andnine months ended September 30, 2006.

During the nine months endedSeptember 30, 2005, the CEO, the Former CFO and the CMO of the Companyexercised stock options to purchase an aggregate of 801,300 shares of theCompany’s Common Stock. In satisfaction of the option exercise prices, theCompany received approximately $1,218,000 in cash proceeds and an aggregate ofapproximately 127,000 shares of previously acquired Bentley Common Stock, witha fair market value of approximately $1,400,000. The Company also received atotal of approximately 147,800 shares of Common Stock, with a fair market valueof approximately $1,668,000, from the three employees in order tosatisfy minimum federal and statutory tax withholding requirements.Approximately $1,082,000 of the withholding taxes on these option exerciseswere remitted by the Company during the nine months ended September 30, 2005and the remaining 

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$586,000were remitted subsequentto September 30, 2005. Additionally, the Company repurchased approximately90,600 shares of Common Stock with a fair market value of approximately$1,041,000 from the CEO and CMO, ofwhich approximately $736,000, representing the repurchase of approximately62,800 shares, was recorded as a related party payable to the CEO at September30, 2005 and subsequently paid. The shares of Common Stock acquired by theCompany in connection with these stock option exercises were recorded at fairmarket value and are held by the Company as treasury shares.

**Revenuerecognition**

Revenueon product sales is recognized when persuasive evidence of an arrangementexists, the price is fixed and final, delivery has occurred and there is areasonable assurance of collection of the sales proceeds. The Company generallyobtains purchase authorizations from its customers for a specified amount ofproduct at a specified price and considers delivery to have occurred when thecustomer takes possession of the product. The Company provides its customerswith a limited right of return. Revenue is recognized upon delivery and areserve for sales returns is recorded when considered appropriate. The Companyhas demonstrated the ability to make reasonable and reliable estimates ofproduct returns in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 48, *Revenue Recognition WhenRight of Return Exists*, (SFAS No. 48) and of allowances for doubtfulaccounts based on significant historical experience.

Revenue from service, research anddevelopment, and licensing agreements is recognized when the service procedureshave been completed or as revenue recognition criteria have been met for eachseparate unit of accounting as defined in Emerging Issues Task Force (EITF)Issue No. 00-21, *Accounting for RevenueArrangements with Multiple Deliverables*.  The Company has deferred the recognition ofapproximately $3,843,000 and $2,594,000 of licensing revenues as of September30, 2006 and December 31, 2005, respectively, for which the earnings processhas not been completed.

The Company earns royalty revenues on Auxilium’ssales of Testim, which incorporates the Company’s CPE-215 permeationenhancement technology. Since 2003, Auxilium has sold Testim to pharmaceuticalwholesalers and chain drug stores, which have the right to return purchasedproduct prior to the units being dispensed through patient prescriptions.Historically, customer returns were not able to be reasonably estimated.Therefore, in accordance with SFAS No. 48, the Company deferred the recognitionof royalty revenues on product shipments of Testim until the units weredispensed through patient prescriptions. During the quarter ended June 30, 2006, the Company recorded a one-timeincrease in royalty revenues of approximately $479,000, or $0.02 per share, dueto a change in estimate which, based on historical experience, allowed it to reasonablyestimate future product returns on sales of Testim. As a result of the changein estimate, there were no deferred Testim royalties as of September 30, 2006.Deferred income from Testim royalties totaled $348,000 as of December 31, 2005.

# **Provision for income taxes**

As a result of reporting taxable income in Spain, the Company recordedprovisions for foreign income taxes totaling $6,607,000 and $4,521,000 for the ninemonths ended September 30, 2006 and 2005, respectively.  The provisions represented 57% and 33% of thepre-tax income reported in Spain of $11,640,000 and $13,603,000 for the ninemonths ended September 30, 2006 and 2005, respectively. The Company isevaluating the tax deductibility of the litigation settlement charges recordedin the period (see “Other liabilities” footnote) and expects to conclude onsuch determination in the fourth quarter of 2006. Effective October 2005, theCompany executed intercompany agreements between Bentley Pharmaceuticals, Inc.and Bentley Pharmaceuticals Ireland Limited to license non-U.S. rights ofcertain technologies owned by Bentley Pharmaceuticals, Inc. and provide forcost-sharing of subsequent development efforts on those technologies.  These arrangements are intercompany innature, and the resulting income and expenses between the entities areeliminated in consolidation. As future operating profits in the U.S. andIreland cannot be reasonably assured, no tax benefit has been recorded for therelated losses, which totaled approximately $8,474,000 and $1,819,000 for the ninemonths ended September 30, 2006 and 2005, respectively. Accordingly, theCompany has established valuation allowances equal to the full amount of theU.S. and Irish deferred tax assets. As a result of the litigation settlementcharges recorded in Spain for which no tax benefit has been recorded in theperiod and the full valuation allowances in the U.S. and Ireland, the 

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provisionsrepresented 209% and 38% of consolidated pre-tax income for the nine monthsended September 30, 2006 and 2005, respectively.

Should the Company determine that it is morelikely than not that it will realize certain of its net deferred tax assets forwhich it has previously provided valuation allowances, an adjustment would berequired to reduce the existing valuation allowances. In addition, the Companyoperates within multiple taxing jurisdictions and is subject to audit in thosejurisdictions. These audits can involve complex issues, which may require anextended period of time for resolution. No additional potential taxcontingencies were considered to be probable and reasonably estimable as of September30, 2006. However, there is the possibility that the ultimate resolution ofsuch potential contingencies could have an adverse effect on the Company’s ConsolidatedFinancial Statements in the future.

# **Basic and diluted netincome per common share**

Basic net income per common share is based on theweighted average number of shares of common stock outstanding during eachperiod. The Company included the dilutive effect of outstanding stock options,as calculated using the treasury stock method and restricted stock units, whendetermining the diluted net income per common share for the three and nine monthsended September 30, 2006 and 2005.

The following is a reconciliation between basicand diluted net income per common share for the three and nine months ended September30, 2005. There is no dilutive effect of equity securities on the Company’searnings per share for the three and nine months ended September 30, 2006 dueto the net losses reported in those periods. Dilutive securities issuable forthe three and nine months ended September 30, 2005 included approximately 1,318,000and 1,245,000 dilutive incremental shares, respectively, issuable as a resultof various stock options and unvested restricted stock units that wereoutstanding. See the discussion of stock options and restricted stock units inthe section below entitled “Equity-based compensation — required change in accountingprinciple”.

For the three months ended September 30, 2005 (inthousands, except per share data):
|                                              | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive   Securities** | ** ** | **Diluted EPS** | ** ** |
|----------------------------------------------|------------|--------------------|------------|----------------------------------------------------|------------|----------------------|------------|
| Net Income                                   |       | $                  | 2,485      | * *                                           | $          | *—*             |       | $ | 2,485 |   |
| Weighted Average  Common  Shares Outstanding |       | 21,652             |       | 1,318                                              |       | 22,970               |       |
| Net Income Per Common  Share                 |       | $                  | 0.11       | * *                                           | $          | *—*             |       | $ | 0.11 |   |

For the nine months ended September 30, 2005 (inthousands, except per share data):
|                                              | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive   Securities** | ** ** | **Diluted EPS** | ** ** |
|----------------------------------------------|------------|--------------------|------------|----------------------------------------------------|------------|----------------------|------------|
| Net Income                                   |       | $                  | 7,263      | * *                                           | $          | *—*             |       | $ | 7,263 |   |
| Weighted Average  Common  Shares Outstanding |       | 21,455             |       | 1,245                                              |       | 22,700               |       |
| Net Income Per Common  Share                 |       | $                  | 0.34       | * *                                           | $          | (0.02                | )          | $ | 0.32 |   |

Excluded from the diluted EPS presentation for the three and nine monthsended September 30, 2006 were approximately 3,699,000 shares underlying outstandingstock options and 111,000 shares underlying outstanding restricted stock units asthe incremental effect of those shares would be anti-dilutive in those periods.

Excluded from the diluted EPS presentation for each of the three and ninemonths ended September 30, 2005 were options to purchase an aggregate ofapproximately 702,000 and 1,135,000 shares of Common 

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Stock, respectively, at exercise prices greater than the average fairvalue of the Common Stock for the three and nine months ended September 30, 2005.

**Equity-based compensation — required change in accounting principle**

InDecember 2004, the Financial Accounting Standards Board (“the FASB”) issuedSFAS No. 123 (Revised),*Share-Based Payment.*This Statement is a revision of SFAS No. 123, *Accountingfor Stock-Based Compensation*, and supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25, *Accounting for StockIssued to Employees*, and its related implementation guidance.  SFAS No. 123 (Revised) focuses primarilyon accounting for transactions in which an entity obtains employee services in exchangefor equity-based payment transactions and requires that the cost resulting fromthose transactions be recognized in the financial statements.  The Company has equity-based employee compensation plans that aredescribed more fully in Note 11 of theNotes to Consolidated Financial Statements included in the Annual Report onForm 10-K for the year ended December 31, 2005. The Company adopted SFAS No.123 (Revised) effective January 1, 2006 using the modified-prospectivetransition method. The Company uses the accelerated expense attribution methodpursuant to FASB Interpretation No. (“FIN”) 28 for all options previouslyaccounted for under APB Opinion No 25. Equity-based compensation attributableto equity awards granted subsequent to December 31, 2005 will be recognized usingthe straight-line method pursuant to SFAS No. 123 (Revised).  During the nine months ended September 30,2006, the Company awarded approximately 480,800 stock options and approximately129,000 restricted stock units.

TheCompany has in effect stock option and equity incentive plans (the “Plans”),pursuant to which directors, officers, employees and consultants of the Companyhave been awarded grants of options to purchase the Company’s Common Stock andrestricted stock units. The Company’s shareholders voted to increase the numberof shares of Common Stock authorized for issuance pursuant to the Company’s Amendedand Restated 2005 Equity and Incentive Plan by 750,000 shares in May 2006.  As of September 30, 2006, approximately4,560,300 shares of Common Stock have been reserved for issuance under thePlans, of which approximately 348,200 are outstanding that were issued underthe 1991 Stock Option Plan and approximately 2,500,500 are outstanding thatwere issued under the 2001 Employee and Director Plans.  Approximately 961,900 shares are outstandingthat were issued under the Amended and Restated 2005 Equity and Incentive Plan,excluding 10,000 shares underlying restricted stock units, contingentlyissuable to non-employee directors, that will be issued when the directorscease to serve as directors of the Company. The balance of approximately749,700 shares is available for future issuance under the Amended and Restated2005 Equity and Incentive Plan, which is now the successor to all the otherPlans.  Of the shares available forfuture issuance, approximately 289,400 are available for future stock options onlyand the remainder are available for any type of award allowed under the plan.

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes option valuation model. Options are granted for terms not exceeding ten years from the date ofgrant. Options shall not be granted at an exercise price that is less than 100%of the fair market value of the Company’s Common Stock on the date the optionsare granted, which is equal to the average of the high and low trading prices ofthe Company’s Common Stock onthe New York Stock Exchange on the date of the award. Options granted under the Plans generally vest over one to threeyears, commensurate with the related requisite service periods.

The fair value of eachrestricted stock unit award is estimated on the date of grant using the Company’sclosing stock price on the New York Stock Exchange on the date of the award.Restricted stock units granted to employees vestannually over four years, which is the requisite service period.  Shares of Common Stock underlying vested unitsbecome issuable to each employee on each annual vesting date.  Restricted stock units granted tonon-employee directors vest quarterly overone year, which is the related requisite service period.  Shares of Common Stock underlying vested unitsbecome issuable to each non-employee director upon termination of service as amember of the Board of Directors.

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Theadoption of SFAS No. 123 (Revised) in 2006 resulted in incremental equity-basedcompensation expense of approximately $1,424,000, or $0.06 per basic anddiluted share, for the nine months ended September 30, 2006, of which approximately $19,000 is included incost of sales, approximately $10,000 isincluded in selling and marketing expenses, approximately $913,000 (includingapproximately $97,000 of equity-based compensation expense recorded in thethird quarter in accordance with the provisions of the Former CFO’s separationagreement) is included in general and administrative expenses and approximately$482,000 is included in research and development expenses. The incrementalequity-based compensation expense resulted in a reduction in net income of$598,000 for the three months ended September 30, 2006, or $0.03 per basic anddiluted share, of which approximately $4,000 is included in cost of sales,approximately 2,000 is included in selling and marketing expenses,approximately $392,000 (including approximately $97,000 recorded in accordancewith the provisions of the Former CFO’s separation agreement) is included ingeneral and administrative expenses and approximately $200,000 is included inresearch and development expenses. No related compensation expense wascapitalized as the cost of an asset and there was no impact on net cashprovided by operating activities or net cash used in financing activities as aresult of these transactions.

At the discretion of theCompensation Committee of the Board of Directors, the Company may grant sharesof its Common Stock to employees in lieu of cash compensation. The Company alsosponsors a 401(k) Plan for eligible employees and matches eligiblecontributions with shares of the Company’s Common Stock. The Company issued approximately 5,100 and 4,200shares of Common Stock to its 401(k) Plan as matching contributions during the three months ended September 30, 2006and 2005, respectively, and approximately 13,900 shares and 16,000 sharesduring the nine months ended September 30, 2006 and 2005, respectively.  These shares are recorded at their fair valueon the last day of each payroll period in which they are earned.  All Company matching contributions vest 25%each year for the first four years of each employee’s employment in which theemployee works for the Company at least 1,000 hours.

Equity-basedcompensation expense attributable to the Company’s 401(k) Plan matching contributionsand non-employee options represents the remainder of the Company’s SFAS No. 123(Revised) equity-based compensation. General and administrative expensesinclude approximately $27,000 and $30,000 of such non-cash equity-basedcompensation for the three months ended September 30, 2006 and 2005,respectively, and approximately $87,000 and $74,000 of such compensation for thenine months ended September 30, 2006 and 2005, respectively. Research anddevelopment expenses include approximately $50,000 and $35,000 of such non-cashequity-based compensation for the three months ended September 30, 2006 and2005, respectively, and approximately $120,000 and $105,000 of suchcompensation for the nine months ended September 30, 2006 and 2005, respectively.

As the Company previouslyadopted only the pro forma disclosure provisions of SFAS No. 123, compensationcost relating to the unvested portion of equity-based awards granted prior tothe date of adoption will continue to be recognized using the same estimate ofthe grant-date fair value and the same accelerated attribution method used todetermine the pro forma disclosures under SFAS No. 123, except that theunamortized compensation expense related to those awards will be reduced forestimated forfeitures, as required by SFAS No. 123 (Revised).

The following table detailsthe reported effect that equity-based compensation expense had on net incomeand earnings per share for the three and nine months ended September 30, 2006and the pro forma effect that equity-based compensation expense would have hadon net income and earnings per share for the three and nine months ended September30, 2005.  The reported net income andearnings per share for the three and nine months ended September 30, 2006 inthe table below includes the equity-based compensation expense actuallyrecorded in the three and nine months ended September 30, 2006 under theprovisions of SFAS No. 123 (Revised). The amounts for the three and ninemonths ended September 30, 2006 are included in the table below only to providea comparative presentation to the prior year required disclosure (in thousands,except per share data), which was prepared in accordance with SFAS No. 123, asoriginally issued.

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|                                                                                                              | ** ** | **For the Three Months Ended   September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2006**                                                                | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income, as  reported                                                                                     |       | $                                                                       | (7,229     | )                                                                     | $          | 2,485 |   | $ | (3,440 | ) | $ | 7,263 |   |
| Add:  Equity-based employee compensation expense included in reported net income                             |       | 675                                                                     |       | 65                                                                    |       | 1,633 |   | 179 |   |
| Deduct: Total  equity-based employee compensation expense determined under fair value method  for all awards |       | (675                                                                    | )          | (1,232                                                                | )          | (1,633 | ) | (2,565 | ) |
|                                                                                                         |       |                                                                    |       |                                                                  |       |   |   |   |   |
| Net income / pro  forma net income                                                                           |       | $                                                                       | (7,229     | )                                                                     | $          | 1,318 |   | $ | (3,440 | ) | $ | 4,877 |   |
|                                                                                                         |       |                                                                    |       |                                                                  |       |   |   |   |   |
| Net income per  common share:                                                                                |       |                                                                    |       |                                                                  |       |   |   |   |   |
| Basic — as reported                                                                                     |       | $                                                                       | (0.33      | )                                                                     | $          | 0.11 |   | $ | (0.16 | ) | $ | 0.34 |   |
| Basic — pro forma                                                                                       |       |                                                                    |       | $                                                                     | 0.06       |   |   |   | $ |          0.23 |   |
|                                                                                                         |       |                                                                    |       |                                                                  |       |   |   |   |   |
| Diluted — as reported                                                                                   |       | $                                                                       | (0.33      | )                                                                     | $          | 0.11 |   | $ | (0.16 | ) | $ | 0.32 |   |
| Diluted — pro  forma                                                                                    |       |                                                                    |       | $                                                                     | 0.06       |   |   |   | $ | 0.22 |   |

A summary of stock option award activity under thePlans as of September 30, 2006 and changes during the nine month period thenended are presented below (shares and aggregate intrinsic values in thousands):
| ** **                               | ** ** | **For the Nine Months Ended September 30, 2006** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Number   of   Options**                                                 | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Weighted   Average   Remaining   Contractual   Term (Years)** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
| Options  outstanding, December 31, 2005  |       | 3,916                                                                               |       | $ | 8.72 |   |   |   |   |   |
| Granted                                  |       | 481                                                                                 |       | 11.80 |   |   |   |   |   |
| Exercised                                |       | (677                                                                                | )          | 5.11 |   |   |   |   |   |
| Forfeited and Expired                    |       | (21                                                                                 | )          | 10.01 |   |   |   |   |   |
| Options  outstanding, September 30, 2006 |       | 3,699                                                                               |       | $ | 9.77 |   | 6.70 |   | $ | 8,885 |   |
|                                     |       |                                                                                |       |   |   |   |   |   |   |
| Options exercisable,  September 30, 2006 |       | 2,875                                                                               |       | $ | 9.61 |   | 5.99 |   | $ | 7,508 |   |

The Company entered into a separation agreement with its former CFO,pursuant to which certain equity awards were modified during the quarter toallow for the acceleration of vesting and extension of post employment exerciseperiod. These modifications resulted in the recognition of approximately$97,000 of equity-based compensation which has been recorded in *general and administrative expenses* in the three and ninemonths ended September 30, 2006.

Duringthe first nine months of 2006, the Company granted 89,000 restricted stockunits to employees with a weighted average grant date fair value of $11.63 and40,000 restricted stock units to non-employee directors with a weighted averagegrant date fair value of $11.78, all of which were granted in the secondquarter.

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Asummary of restricted stock units award activity under the Amended and Restated2005 Equity and Incentive Plan as of September 30, 2006 and changes during thenine month period then ended are presented below (shares and aggregateintrinsic values in thousands):
| ** **                                              | ** ** | **For the Nine Months Ended September 30, 2006** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Number   of   Restricted   Stock   Units**                    | ** ** | **Weighted   Average   Grant Date   Fair Value** | ** ** | **Weighted   Average   Remaining  Contractual  Term (Years)** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
| Restricted stock  units outstanding December 31, 2005   |       | —                                                                              |       | $ | — |   |   |   |   |   |
| Granted                                                 |       | 129                                                                                 |       | 11.67 |   |   |   |   |   |
| Vested                                                  |       | (12                                                                                 | )          | 11.78 |   |   |   |   |   |
| Forfeited                                               |       | (6                                                                                  | )          | 11.78 |   |   |   |   |   |
| Restricted stock units  outstanding, September 30, 2006 |       | 111                                                                                 |       | $ | 11.66 |   | 1.67 |   | $ | 1,335 |   |
|                                                         |            |                                                                                     |            |  |  |  |  |  |  |  |  |

As of September30, 2006, unrecognized compensation expense related to the unvested portion ofthe Company’s restricted stock units was approximately $1,184,000 and isexpected to be recognized over a weighted average period of approximately 2.2years.  All of the Company’s outstanding restrictedstock units were unvested as of September 30, 2006.

Included in the approximately 12,000 units that vestedduring the year are 10,000 shares contingently issuable to non-employee directorsthat, pursuant to the terms and conditions of the restricted stock unitagreements, will be issued when the directors cease to serve as directors ofthe Company.  Shares of common stock wereissued in the third quarter for the balance of units that vested in 2006.  The intrinsic value of these shares when theyvested was approximately $20,000.  As future operating profits in the U.S.cannot be reasonably assured, the Company has not recorded any tax benefit resulting from the settlement of U.S. awards.

The table below summarizes options outstanding andexercisable at September 30, 2006 (number of options in thousands):
|                                   | ** ** | **Options Outstanding.** | ** ** | **Options Currently Exercisable** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|---------------------------------------------|------------|
| **Range ofExercise  Prices** | ** ** | **Number  Outstanding**       | ** ** | **Weighted  Average  Exercise  Price**      | ** ** | **Weighted  Average  Remaining Life  (Years)** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $2.00 - $3.00                     |       | 58                            |       | $                                           | 2.72       |   | 2.4 |   | 58 |   | $ | 2.72 |   |
| 5.70 -5.88                        |       | 142                           |       | 5.84                                        |       | 3.7 |   | 142 |   | 5.84 |   |
| 6.00 -6.33                        |       | 283                           |       | 6.01                                        |       | 4.6 |   | 283 |   | 6.01 |   |
| 7.10 -7.39                        |       | 182                           |       | 7.31                                        |       | 6.6 |   | 114 |   | 7.26 |   |
| 7.50                              |       | 345                           |       | 7.50                                        |       | 8.0 |   | 131 |   | 7.50 |   |
| 8.00 -8.93                        |       | 310                           |       | 8.28                                        |       | 6.0 |   | 310 |   | 8.28 |   |
| 9.00 -9.80                        |       | 469                           |       | 9.69                                        |       | 5.1 |   | 469 |   | 9.69 |   |
| 10.04                             |       | 273                           |       | 10.04                                       |       | 6.6 |   | 273 |   | 10.04 |   |
| 10.38 -10.79                      |       | 200                           |       | 10.76                                       |       | 8.0 |   | 195 |   | 10.77 |   |
| 11.00 -11.78                      |       | 818                           |       | 11.57                                       |       | 8.4 |   | 351 |   | 11.28 |   |
| 12.01 -12.55                      |       | 203                           |       | 12.30                                       |       | 8.4 |   | 133 |   | 12.44 |   |
| 13.30                             |       | 373                           |       | 13.30                                       |       | 6.3 |   | 373 |   | 13.30 |   |
| 13.48 -15.83                      |       | 43                            |       | 14.07                                       |       | 7.2 |   | 43 |   | 14.07 |   |
|                              |       |                          |       |                                        |       |   |   |   |   |   |   |
| $2.00 -  $15.83                   |       | 3,699                         |       | $                                           | 9.77       |   | 6.7 |   | 2,875 |   | $ | 9.61 |   |

 

17

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The fair value of each option award is estimatedon the date of grant using the Black-Scholes option valuation model.  Assumptions and the resulting fair value foroption awards granted during the three and nine months ended September 30, 2006and 2005 are provided below (results may vary depending on the assumptionsapplied within the model):
|                                | ** ** | **For the Three Months Ended   September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                                                     | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                           |       |                                                                         |       |                                                                  |       |   |   |   |   |
| Risk-free  interest rate       |       | 4.77%                                                                        |       | 4.09%                                                                 |       | 4.95% |   | 3.97% |   |
| Dividend yield                 |       | 0.00%                                                                        |       | 0.00%                                                                 |       | 0.00% |   | 0.00% |   |
| Expected life                  |       | 5  years                                                                     |       | 5  years                                                              |       | 5  years |   | 5  years |   |
| Volatility                     |       | 45.75%                                                                       |       | 46.28%                                                                |       | 46.24% |   | 45.44% |   |
| Fair value of options  granted |       | $                                                                            | 5.57       |                                                                  | $          | 5.02 |   | $ | 5.54 |   | $ | 3.87 |   |
|                                |            |                                                                              |            |                                                                       |            |  |  |  |  |  |  |  |  |

The expected life (estimated period of timeoutstanding) of options granted is estimated to be five years and is based onhistorical exercise behaviors.  The volatility of the Company’s stock is calculatedon the grant date of each equity award using daily price observations over aperiod of time commensurate with the related requisite service period.  Therisk-free interest rate is based on the yield curve of U.S. Treasury securitiesin effect at the date of the grant, having a duration commensurate with theestimated life of the award.

Asummary of the activity for nonvested share awards as of September 30, 2006 and2005 is provided below with changes during the nine month periods ended September30, 2006 and 2005 (shares in thousands):
| ** **                                              | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                                                  | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | **Number   of   Options**                                       | ** ** | **Weighted   Average   Grant Date  Fair Value** | ** ** | **Number   of   Options** | ** ** | **Weighted   Average   Grant Date  Fair Value** | ** ** |
| Nonvested  options outstanding, beginning of the period |       | 840                                                                       |       | $ | 4.35 |   | 748 |   | $ | 5.58 |   |
| Granted                                                 |       | 481                                                                       |       | 5.54 |   | 820 |   | 4.00 |   |
| Vested                                                  |       | (477                                                                      | )          | (4.81 | ) | (663 | ) | (5.07 | ) |
| Forfeited                                               |       | (20                                                                       | )          | (4.62 | ) | (15 | ) | 4.24 |   |
| Nonvested options  outstanding, end of the period       |       | 824                                                                       |       | $ | 4.77 |   | 890 |   | $ | 4.37 |   |

 

As ofSeptember 30, 2006, unrecognized compensation expense related to the unvestedportion of the Company’s stock options was approximately $2,814,000 and isexpected to be recognized over a weighted average period of approximately 2.3years.

Optionsto purchase approximately 677,000 and 876,000 shares of Common Stock wereexercised during the nine months ended September 30, 2006 and 2005,respectively.  Net cash proceeds to theCompany from the 2006 and 2005 exercises totaled approximately $150,000 and$1,800,000, respectively, while the total intrinsic value (the excess of themarket price over the exercise price) of those option exercises wasapproximately $5,384,000 and $6,742,000, respectively. As future operating profits in the U.S.cannot be reasonably assured, no tax benefit resultingfrom the settlement of U.S. awards has been recorded. The total fair value of stock options that vestedduring the nine months ended September 30, 2006 and 2005 was approximately $2,294,000and $3,361,000, respectively.

18

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The Company generally issuespreviously unissued shares for the exercise of stock options and to matcheligible 401(k) Plan contributions; however, the Company may reissue previouslyacquired treasury shares to satisfy these issuances in the future. The Companydoes not have a policy of repurchasing shares on the open market to satisfyoption exercises and matching contributions to the 401(k) Plan.

**Businesssegment information**

SFASNo. 131, *Disclosures About Segments ofan Enterprise and Related Information,* defines how operatingsegments are determined and requires disclosure of certain financial anddescriptive information about a company’s operating segments. Bentley isheadquartered in the U.S. and operates in two business segments, specialtygenerics and drug delivery, and two geographical locations (Europe and theU.S.).

TheCompany’s specialty generics segment is based in Europe and manufactures agrowing portfolio of generic and branded generic pharmaceuticals in Europe forthe treatment of cardiovascular, gastrointestinal, infectious and centralnervous system diseases through its subsidiary, Laboratorios Belmac, andmarkets these pharmaceutical products through its subsidiaries, LaboratoriosBelmac, Laboratorios Davur and Laboratorios Rimafar. Bentley Pharmaceuticals Ireland Limited hasreceived its first product sales order and expects to launch the first productin the fourth quarter of this year.

TheCompany’s drug delivery segment is based in both the U.S. and Europe and isfocused on the advancement of proprietary drug delivery technologies thatenhance or facilitate the absorption of pharmaceutical compounds across variousmembranes.  The drug delivery activitiesconsist primarily of licensing, product research and development, business development,corporate management and administration.

Setforth in the tables below is certain financial information with respect to theCompany’s business and geographical segments for the three and nine monthsended September 30, 2006 and 2005 and as of September 30, 2006 and December 31,2005. The segment information has been prepared using the same accountingpolicies as those described in the summary of significant accounting policiesin Note 2 of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

Forthe three months ended September 30, 2006 (in thousands):
| ** **                             | ** ** | **Specialty Generics** | ** ** | **Drug Delivery** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                             | ** ** | **Europe**                  | ** ** | **U.S.**               | ** ** | **Europe** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| Net product  sales                     |       | $                           | 22,834     |                   | $          | 39         |       | $ | — |   | $ | — |   | $ | 22,873 |   |
| Licensing and  collaboration revenues  |       | 170                         |       | —                 |       | —     |       | 2,113 |   | 2,283 |   |
| Total revenue                          |       | 23,004                      |       | 39                     |       | —     |       | 2,113 |   | 25,156 |   |
| Cost of net  product sales             |       | 11,739                      |       | 39                     |       | —     |       | — |   | 11,778 |   |
| Gross Profit                           |       | 11,265                      |       | —                 |       | —     |       | 2,113 |   | 13,378 |   |
| Selling and  marketing expense         |       | 3,495                       |       | —                 |       | —     |       | — |   | 3,495 |   |
| General and  administrative expense    |       | 1,901                       |       | —                 |       | 1          |       | 1,849 |   | 3,751 |   |
| Research and  development expense      |       | 421                         |       | —                 |       | 1,013      |       | 1,013 |   | 2,447 |   |
| Depreciation and  amortization expense |       | 270                         |       | 21                     |       | —     |       | 169 |   | 460 |   |
| Litigation  settlement                 |       | 7,764                       |       | 1,168                  |       | —     |       | — |   | 8,932 |   |
| (Loss) from operations                 |       | (2,586                      | )          | (1,189                 | )          | (1,014     | )          | (918 | ) | (5,707 | ) |
| Interest income                        |       | 55                          |       | —                 |       | —     |       | 168 |   | 223 |   |
| Interest expense                       |       | (15                         | )          | —                 |       | —     |       | — |   | (15 | ) |
| Other income  (expense), net           |       | —                      |       | —                 |       | —     |       | — |   | — |   |
| (Loss) before income taxes             |       | (2,546                      | )          | (1,189                 | )          | (1,014     | )          | (750 | ) | (5,499 | ) |
| Provision for  income taxes            |       | 1,730                       |       | —                 |       | —     |       | — |   | 1,730 |   |
| Net (loss)                             |       | (4,276                      | )          | (1,189                 | )          | (1,014     | )          | (750 | ) | (7,229 | ) |
| Expenditures for  fixed assets         |       | 4,597                       |       | —                 |       | —     |       | 157 |   | 4,754 |   |
| Expenditures for drug  licenses        |       | 572                         |       | —                 |       | —     |       | 360 |   | 932 |   |
|                                        |            |                             |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |

 

19

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For the three months endedSeptember 30, 2005 (in thousands):
| ** **                             | ** ** | **Specialty Generics** | ** ** | **Drug Delivery** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                             | ** ** | **Europe**                  | ** ** | **U.S.**               | ** ** | **Europe** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| Net product  sales                     |       | $                           | 22,057     |                   | $          | —     |       | $ | — |   | $ | — |   | $ | 22,057 |   |
| Licensing and  collaboration revenues  |       | 57                          |       | —                 |       | —     |       | 1,398 |   | 1,455 |   |
| Total revenues                         |       | 22,114                      |       | —                 |       | —     |       | 1,398 |   | 23,512 |   |
| Cost of net  product sales             |       | 11,104                      |       | —                 |       | —     |       | — |   | 11,104 |   |
| Gross profit                           |       | 11,010                      |       | —                 |       | —     |       | 1,398 |   | 12,408 |   |
| Selling and  marketing expense         |       | 3,503                       |       | —                 |       | —     |       | — |   | 3,503 |   |
| General and  administrative expense    |       | 2,763                       |       | —                 |       | —     |       | 185 |   | 2,948 |   |
| Research and  development expense      |       | 315                         |       | —                 |       | —     |       | 1,460 |   | 1,775 |   |
| Depreciation and  amortization expense |       | 237                         |       | 21                     |       | —     |       | 158 |   | 416 |   |
| Litigation  settlement                 |       | 60                          |       | 28                     |       | —     |       | — |   | 88 |   |
| Income(loss) from operations           |       | 4,132                       |       | (49                    | )          | —     |       | (405 | ) | 3,678 |   |
| Interest income                        |       | 35                          |       | —                 |       | —     |       | 203 |   | 238 |   |
| Interest expense                       |       | (53                         | )          | —                 |       | —     |       | — |   | (53 | ) |
| Other income  (expense), net           |       | 1                           |       | —                 |       | —     |       | (2 | ) | (1 | ) |
| Income (loss) before income taxes      |       | 4,115                       |       | (49                    | )          | —     |       | (204 | ) | 3,862 |   |
| Provision for  income taxes            |       | 1,377                       |       | —                 |       | —     |       | — |   | 1,377 |   |
| Net income (loss)                      |       | 2,738                       |       | (49                    | )          | —     |       | (204 | ) | 2,485 |   |
| Expenditures for  fixed assets         |       | 2,674                       |       | —                 |       | —     |       | 17 |   | 2,691 |   |
| Expenditures for drug  licenses        |       | 666                         |       | —                 |       | —     |       | 241 |   | 907 |   |
|                                        |            |                             |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |

For the nine months ended September 30, 2006 (inthousands):
| ** **                             | ** ** | **Specialty Generics** | ** ** | **Drug Delivery** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                             | ** ** | **Europe**                  | ** ** | **U.S.**               | ** ** | **Europe** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| Net product  sales                     |       | $                           | 75,861     |                   | $          | 39         |       | $ | — |   | $ | — |   | $ | 75,900 |   |
| Licensing and  collaboration revenues  |       | 409                         |       | —                 |       | —     |       | 6,108 |   | 6,517 |   |
| Total revenues                         |       | 76,270                      |       | 39                     |       | —     |       | 6,108 |   | 82,417 |   |
| Cost of net  product sales             |       | 37,143                      |       | 39                     |       | —     |       | — |   | 37,182 |   |
| Gross profit                           |       | 39,127                      |       | —                 |       | —     |       | 6,108 |   | 45,235 |   |
| Selling and  marketing expense         |       | 11,876                      |       | —                 |       | —     |       | — |   | 11,876 |   |
| General and  administrative expense    |       | 5,507                       |       | —                 |       | 68         |       | 5,745 |   | 11,320 |   |
| Research and  development expense      |       | 1,374                       |       | —                 |       | 3,238      |       | 3,238 |   | 7,850 |   |
| Depreciation and  amortization expense |       | 784                         |       | 63                     |       | —     |       | 494 |   | 1,341 |   |
| Litigation  settlement                 |       | 8,034                       |       | 2,235                  |       | —     |       | — |   | 10,269 |   |
| Income (loss) from operations          |       | 11,552                      |       | (2,298                 | )          | (3,306     | )          | (3,369 | ) | 2,579 |   |
| Interest income                        |       | 110                         |       | —                 |       | —     |       | 551 |   | 661 |   |
| Interest expense                       |       | (109                        | )          | —                 |       | —     |       | — |   | (109 | ) |
| Other income  (expense), net           |       | 36                          |       | —                 |       | —     |       | — |   | 36 |   |
| Income (loss) before income taxes      |       | 11,589                      |       | (2,298                 | )          | (3,306     | )          | (2,818 | ) | 3,167 |   |
| Provision for  income taxes            |       | 6,607                       |       | —                 |       | —     |       | — |   | 6,607 |   |
| Net income (loss)                      |       | 4,982                       |       | (2,298                 | )          | (3,306     | )          | (2,818 | ) | (3,440 | ) |
| Expenditures for  fixed assets         |       | 11,734                      |       | —                 |       | —     |       | 336 |   | 12,070 |   |
| Expenditures for drug  licenses        |       | 1,128                       |       | —                 |       | —     |       | 675 |   | 1,803 |   |
|                                        |            |                             |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |

 

20

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For the nine months ended September30, 2005 (in thousands):
| ** **                             | ** ** | **Specialty Generics** | ** ** | **Drug Delivery** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                             | ** ** | **Europe**                  | ** ** | **U.S.**               | ** ** | **Europe** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| Net product  sales                     |       | $                           | 68,769     |                   | $          | —     |       | $ | — |   | $ | — |   | $ | 68,769 |   |
| Licensing and  collaboration revenues  |       | 227                         |       | —                 |       | —     |       | 3,524 |   | 3,751 |   |
| Total revenues                         |       | 68,996                      |       | —                 |       | —     |       | 3,524 |   | 72,520 |   |
| Cost of net  product sales             |       | 33,923                      |       | —                 |       | —     |       | — |   | 33,923 |   |
| Gross profit                           |       | 35,073                      |       | —                 |       | —     |       | 3,524 |   | 38,597 |   |
| Selling and  marketing expense         |       | 12,118                      |       | —                 |       | —     |       | — |   | 12,118 |   |
| General and  administrative expense    |       | 6,787                       |       | —                 |       | —     |       | 1,905 |   | 8,692 |   |
| Research and  development expense      |       | 1,453                       |       | —                 |       | —     |       | 3,281 |   | 4,734 |   |
| Depreciation and  amortization expense |       | 836                         |       | 63                     |       | —     |       | 460 |   | 1,359 |   |
| Litigation  settlement                 |       | 217                         |       | 163                    |       | —     |       | — |   | 380 |   |
| Income from operations                 |       | 13,662                      |       | (226                   | )          | —     |       | (2,122 | ) | 11,314 |   |
| Interest income                        |       | 79                          |       | —                 |       | —     |       | 531 |   | 610 |   |
| Interest expense                       |       | (163                        | )          | —                 |       | —     |       | — |   | (163 | ) |
| Other income  (expense), net           |       | 25                          |       | —                 |       | —     |       | (2 | ) | 23 |   |
| Income before income taxes             |       | 13,603                      |       | (226                   | )          | —     |       | (1,593 | ) | 11,784 |   |
| Provision for  income taxes            |       | 4,521                       |       | —                 |       | —     |       | — |   | 4,521 |   |
| Net income (loss)                      |       | 9,082                       |       | (226                   | )          | —     |       | (1,593 | ) | 7,263 |   |
| Expenditures for  fixed assets         |       | 6,548                       |       | —                 |       | —     |       | 125 |   | 6,673 |   |
| Expenditures for drug  licenses        |       | 722                         |       | —                 |       | —     |       | 755 |   | 1,477 |   |
|                                        |            |                             |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |

As of September 30, 2006 (in thousands):
| ** **                       | ** ** | **Specialty Generics** | ** ** | **Drug Delivery** | ** ** | ** ** | ** ** |
|----------------------------------|------------|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                       | ** ** | **Europe**                  | ** ** | **U.S.**               | ** ** | **Europe** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| Receivables, net                 |       | $                           | 28,083     |                   | $          | 285        |       | $ | — |   | $ | 4,200 |   | $ | 32,568 |   |
| Other current  assets            |       | 29,264                      |       | —                 |       | —     |       | 11,099 |   | 40,363 |   |
| Fixed assets                     |       | 42,651                      |       | —                 |       | —     |       | 2,382 |   | 45,033 |   |
| Drug licenses  and related costs |       | 10,061                      |       | 1,737                  |       | —     |       | 3,504 |   | 15,302 |   |
| Other non-current  assets        |       | 632                         |       | —                 |       | —     |       | 1,192 |   | 1,824 |   |
| Total assets                     |       | 110,691                     |       | 2,022                  |       | —     |       | 22,377 |   | 135,090 |   |
| Current  liabilities             |       | 30,484                      |       | —                 |       | 32         |       | 3,103 |   | 33,619 |   |
| Non-current  liabilities         |       | 8,753                       |       | —                 |       | —     |       | — |   | 8,753 |   |
| Total liabilities                |       | 39,237                      |       | —                 |       | 32         |       | 3,103 |   | 42,372 |   |
|                                  |            |                             |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |

As of December 31, 2005 (in thousands):
| ** **                       | ** ** | **Specialty Generics** | ** ** | **Drug Delivery** | ** ** | ** ** | ** ** |
|----------------------------------|------------|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                       | ** ** | **Europe**                  | ** ** | **U.S.**               | ** ** | **Europe** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| Receivables, net                 |       | $                           | 23,469     |                   | $          | —     |       | $ | — |   | $ | 3,447 |   | $ | 26,916 |   |
| Other current  assets            |       | 25,443                      |       | —                 |       | —     |       | 22,718 |   | 48,161 |   |
| Fixed assets                     |       | 31,189                      |       | —                 |       | —     |       | 2,177 |   | 33,366 |   |
| Drug licenses  and related costs |       | 8,931                       |       | 1,581                  |       | —     |       | 3,346 |   | 13,858 |   |
| Other  non-current assets        |       | 1,615                       |       | —                 |       | —     |       | 304 |   | 1,919 |   |
| Total assets                     |       | 90,647                      |       | 1,581                  |       | —     |       | 31,992 |   | 124,220 |   |
| Current  liabilities             |       | 25,639                      |       | 97                     |       | —     |       | 2,944 |   | 28,680 |   |
| Non-current  liabilities         |       | 3,943                       |       | —                 |       | —     |       | 8 |   | 3,951 |   |
| Total liabilities                |       | 29,582                      |       | 97                     |       | —     |       | 2,952 |   | 32,631 |   |
|                                  |            |                             |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |

 

21

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**NewAccounting Pronouncements**

In June 2006, the Financial Accounting Standards Board issuedInterpretation No. (FIN) 48, “*Accounting for Uncertaintyin Income Taxes*,” which will become effective January 1, 2007. Thepurpose of FIN 48 is to clarify and set forth consistent rules for accountingfor uncertain tax positions in accordance with SFAS 109, “*Accountingfor Income Taxes*” by requiring the application of a “more likelythan not” threshold for the recognition and derecognition of tax positions. TheCompany is currently assessing what impact, if any, the adoption of this interpretationwill have on its consolidated financial statements.

On September 13, 2006, the Securities and Exchange Commission issuedStaff Accounting Bulletin No. 108 “*Considering the Effects ofPrior Year Misstatements When Quantifying Misstatements in Current YearFinancial Statements*” (“SAB 108”), which provides interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current year misstatement.SAB 108 is effective for fiscal years ending after November 15, 2006. TheCompany does not expect the adoption of SAB No. 108 to have a material impacton its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “*Fair ValueMeasurements*” (“SFAS 157”), which provides guidance for measuringthe fair value of assets and liabilities, as well as requires expanded disclosuresabout fair value measurements. SFAS 157 indicates that fair value should  be determined based on the assumptionsmarketplace participants would use in pricing the asset or liability, andprovides additional guidelines to consider in determining the market-basedmeasurement. The Company is currently assessing what impact, if any, theadoption of SFAS 157 will have on its consolidated financial statements.

# **Reclassifications**

Certain costs incurred in prior periods associatedwith litigation claims the Company has substantially agreed to settle in thecurrent quarter have been reclassified from *general and administrativeexpenses* to *litigation settlement*toconform with the current period’s presentation.  Such reclassifications donot have any net effect on the Company’s financial position, results ofoperations or cash flows for the prior periods presented.

22

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# **Item 2.        Management’s Discussion and Analysis of Financial Condition andResults of Operations**

You should read the following discussion andanalysis together with all financial and non-financial information appearingelsewhere in this report and with our consolidated financial statements andrelated notes included in our 2005 Annual Report on Form 10-K, which has beenpreviously filed with the SEC. In addition to historical information, thefollowing discussion and other parts of this report contain forward-lookinginformation that involves risks and uncertainties.  Our actual results could differ materiallyfrom those anticipated by such forward-looking information due to competitivefactors and other risks discussed in our 2005 Annual Report on Form 10-K underItem 1A, “Risk Factors”.

**Change in Estimate**

As discussed in the Notes to Condensed ConsolidatedFinancial Statements and under the heading “Critical Accounting Policies andEstimates” set forth below, during the quarter ended June 30, 2006, we recorded a one-time increasein royalty revenues of approximately $479,000, or $.02 per share, due to achange in estimate which, based on historical experience, allowed us toreasonably estimate future product returns on sales of Testim. This one-timeincrease is reported in *Licensingand collaboration revenues* and *Net income* for thethree months ended June 30, 2006 and the nine months ended September 30, 2006.

**Litigation Settlement**

We have reached substantial agreement with Ethypharm S.A. Spain and EthypharmS.A. France on terms to settle all outstanding litigation between the parties.  As a result, we recorded a $7,546,000 chargein the third quarter of 2006 representing the present value of $4,000,000 expectedto be paid in the fourth quarter of 2006 and four payments of $1,000,000 to bepaid on the first four anniversaries of the first payment, discounted at a rateof 4.72%.  Because no definitivesettlement agreement has yet been concluded, there can be no assurance as towhether, or on what additional terms, this litigation will ultimately besettled. We have also incurred approximately $2,723,000 in related litigationdefense costs in the nine months ended September 30, 2006, of whichapproximately $1,386,000 was incurred in the three months ended September 30,2006.  The settlement and related chargesare recorded in *litigation settlement*on theCondensed Consolidated Income Statement.

**Overview**

We are a specialtypharmaceutical company focused on:

·                  Specialty Generics: development, licensing and sales of generic andbranded generic pharmaceutical products and active pharmaceutical ingredientsand the manufacturing of pharmaceuticals for ourselves and others in Spain,other parts of Europe and international markets, including the U.S. market; and

·                  Drug Delivery: research, development andlicensing/commercialization of advanced proprietary drug delivery technologiesfor new and existing pharmaceutical products.

*Specialty GenericPharmaceuticals*

Our pharmaceuticalproduct sales activities are based in Spain, where we have a significantcommercial presence and we manufacture and market approximately 110pharmaceutical products of various dosages and strengths.  These products include approximately 160 productpresentations in four primary therapeutic areas: cardiovascular,gastrointestinal, central nervous system and infectious diseases. We market ourbranded generic and generic products to physicians, pharmacists and hospitalsthrough our three separate 

23

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sales and marketingorganizations based in Spain: Laboratorios Belmac, Laboratorios Davur andLaboratorios Rimafar. We target markets that offer compatible regulatoryapproval regimes and attractive product margins.  In August 2005, we formed an Irish subsidiary, Bentley PharmaceuticalsIreland Limited, to assist in our European expansion strategy. BentleyPharmaceuticals Ireland Limited received its first marketing approval by theIrish Medicines Board in November 2005 and expects to launch the first productin the fourth quarter of this year. We are currently pursuing severalalternatives for additional sales and distribution of our products through thisentity.

Weexpect to grow our business by acquiring rights to market additional productsto sell through our organization and our strategic alliances. We continuallyacquire rights to new products in response to increasing market demand forgeneric and branded generic therapeutic products.  For example, in November 2004, we enteredinto a collaboration agreement with Perrigo Company, the largest U.S.manufacturer of over-the-counter pharmaceutical and nutritional products forthe store brand market, to co-develop and market in the U.S. and potentiallyother markets a generic pharmaceutical product that we produce in Spain.  When appropriate, we divest products that weconsider to be redundant or that have become non-strategic.

We alsoown a manufacturing facility located in Zaragoza, Spain that specializes in themanufacture of several active pharmaceutical ingredients.  We manufacture and market these ingredientsthrough our subsidiary, Bentley A.P.I.  Thefacility has been approved by the FDA for the manufacture of one ingredient formarketing and sale in the U.S.  Ourfacility manufactures ingredients for pharmaceutical products that are marketedby other pharmaceutical companies both in Spain and in other internationalmarkets.

*DrugDelivery Technologies and Products*

Wedevelop products that incorporate our drug delivery technologies that we have acquiredand developed in the United States.  Wehave licensed applications of our proprietary CPE-215 drug delivery technologyto Auxilium Pharmaceuticals, Inc., which launched Testim, the first productincorporating our CPE-215 drug delivery technology, in the United States inFebruary 2003.  Testim is a gel used for testosteronereplacement therapy.  Testim is approved for marketing in Belgium, Canada,Denmark, Finland, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, theNetherlands, Norway, Portugal, Spain, Sweden and the United Kingdom. We are indiscussions with other pharmaceutical and biotechnology companies to formadditional strategic alliances to facilitate the development andcommercialization of other products using our drug delivery technologies.

*Research and Development Focus*

In 2005 we reported the results of our Phase II study, which we hadconcluded in December 2004, for the intranasal delivery of insulin in Type Idiabetes patients using our CPE-215 technology. We reported the results of thattrial in an abstract titled “Intranasal Insulin Administration in Type IDiabetic Patients Utilizing CPE-215 Technology” at the American DiabetesAssociation 65th Scientific Sessions, September 10-14, 2005, in San Diego,California. The full results of that trial were published in 2006 in thejournal *Diabetes Technology & Therapeutics*,Volume 8, Number 1.  Development andclinical programs for intranasal insulin will continue and expand both outsideand inside the U.S. We are continuing our clinical programs to support ourstrategy for the eventual distribution of certain of our Spanish genericpharmaceutical products in other countries, including the U.S. throughcollaboration agreements similar to our agreement with Perrigo Company. Weexpect to continue to invest our resources to conduct clinical trials andsupport the required regulatory submissions for our clinical programs. Weexpect to incur increased costs for product formulation and testing efforts.

24

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*Effect ofForeign Currency Fluctuations*

A substantial amount of ourbusiness is conducted in Europe and is therefore influenced by fluctuations inthe U.S. Dollar’s value in relation to other currencies, particularly the Euro.An increase in the weighted average value of the Euro in relation to the U.S. Dollar over theprior year third quarter, had the following impact on the results of ouroperations when reported in U.S. Dollars: (1) total revenues were increased by approximately$984,000, (2) gross profit was increased by approximately $477,000, (3) operatingexpenses increased by approximately $557,000, (4) provision for income taxeswas increased by approximately $76,000, which resulted in (5) a decrease to netincome of approximately $156,000. A decrease in the weighted average value ofthe Euro over the past year, in relation to the U.S. Dollar, had the following impact onthe results of our operations for the nine months ended September 30, 2006 whenreported in U.S. Dollars: (1) total revenues were decreased by approximately $744,000,(2) gross profit was decreased by approximately $389,000, (3) operatingexpenses were increased by approximately $118,000, (4) provision for incometaxes was decreased by approximately $61,000, which resulted in (5) a decreasein net income of approximately $445,000. Weare considering the use of derivates to limit foreign currency risks.

This section includes “constantcurrency” measures.  Constant currency removes from financial data theimpact of changes in exchange rates between the U.S. Dollar and othercurrencies, particularly the Euro, by translating current period financialdata into U.S. Dollars using the same foreign currency exchange rates that wereused to translate the financial data for the previous period. We believepresenting certain results on a constant currency basis is useful to investorsbecause it allows a more meaningful comparison of the performance of ourEuropean operations from period to period.

**RESULTS OF OPERATIONS:**

**Three Months Ended September 30, 2006 versus ThreeMonths Ended September 30, 2005**

*Revenues by Segment*

***(in thousands)***
|                                        | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2006**                                                                   | ** ** | **%**      | ** ** | **2005** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Specialty  Generics*                  | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Net product sales*                    | * *   | *$*                                                                        | *22,873*   | * *   | *91*       | *%* | *$* | *22,057* | * * | *94* | *%* | *$* | *816* | * * | *4* | *%* |
| *Licensing and collaboration revenues* | * *   | *170*                                                                      | * *   | *1*        | *%*        | *57* | * * | *** | * * | *113* | * * | *198* | *%* |
| * *                               | * *   | *23,043*                                                                   | * *   | *92*       | *%*        | *22,114* | * * | *94* | *%* | *929* | * * | *4* | *%* |
| *Drug  Delivery*                       | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Licensing and collaboration revenues* | * *   | *2,113*                                                                    | * *   | *8*        | *%*        | *1,398* | * * | *6* | *%* | *715* | * * | *51* | *%* |
| * *                               | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Total revenues*                       | * *   | *$*                                                                        | *25,156*   | * *   | *100*      | *%* | *$* | *23,512* | * * | *100* | *%* | *$* | *1,644* | * * | *7* | *%* |

 

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** Lessthan 1%*

*Revenues.    *Our revenues are generated through our primary sales channels ofbranded generic pharmaceuticals, generic pharmaceuticals, sales to licenseesand others and licensing and collaboration revenues. The following is a summaryof our revenues by sales channel and top-selling product lines:

25

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For the three months ended September30, 2006:

***(in thousands)***
| ** **                       | ** ** | **Revenues Within Spain** | ** ** | ** **   | ** ** | ** ** | ** ** | ** **          | ** ** |
|----------------------------------|------------|-------------------------------------|------------|--------------|------------|------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | **Revenues**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Branded**                         | ** ** | ** **   | ** ** | ** ** | ** ** | **Outside of** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**            | ** ** | **Generics**                        | ** ** | **Generics** | ** ** | **Other**  | ** ** | **Spain**           | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$*                                 | *671*      | * *     | *$*        | *3,896*    | * *   | *$*                 | *—*   | * * | *$* | *—* | * * | *$* | *4,567* | * * | *18* | *%* |
| *Simvastatin*                    | * *   | *457*                               | * *   | *1,371*      | * *   | *—*   | * *   | *—*            | * *   | *1,828* | * * | *7* | *%* |
| *Enalapril*                      | * *   | *1,241*                             | * *   | *347*        | * *   | *—*   | * *   | *—*            | * *   | *1,588* | * * | *6* | *%* |
| *Paroxetine*                     | * *   | *319*                               | * *   | *774*        | * *   | *—*   | * *   | *—*            | * *   | *1,093* | * * | *4* | *%* |
| *Lansoprazole*                   | * *   | *633*                               | * *   | *219*        | * *   | *—*   | * *   | *—*            | * *   | *852* | * * | *4* | *%* |
| *All  other products*            | * *   | *2,408*                             | * *   | *2,580*      | * *   | *301*      | * *   | *473*               | * *   | *5,762* | * * | *23* | *%* |
| *Sales  to licensees and others* | * *   | *—*                            | * *   | *—*     | * *   | *2,642*    | * *   | *4,541*             | * *   | *7,183* | * * | *29* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                            | * *   | *—*     | * *   | *170*      | * *   | *2,113*             | * *   | *2,283* | * * | *9* | *%* |
| *Total  Revenues*                | * *   | *$*                                 | *5,729*    | * *     | *$*        | *9,187*    | * *   | *$*                 | *3,113*    | * * | *$* | *7,127* | * * | *$* | *25,156* | * * | *100* | *%* |
| *% of Q-2 2006 Revenues*         | * *   | *23*                                | *%*        | *37*         | *%*        | *12*       | *%*        | *28*                | *%*        | *100* | *%* | * * | * * |

For the three months ended September30, 2005:

***(in thousands)***
| *** ***                     | ** ** | **Revenues Within Spain** | ** ** | ** **   | ** ** | ** ** | ** ** | ** **          | ** ** |
|----------------------------------|------------|-------------------------------------|------------|--------------|------------|------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | **Revenues**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Branded**                         | ** ** | ** **   | ** ** | ** ** | ** ** | **Outside of** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**            | ** ** | **Generics**                        | ** ** | **Generics** | ** ** | **Other**  | ** ** | **Spain**           | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$*                                 | *657*      | * *     | *$*        | *3,694*    | * *   | *$*                 | *—*   | * * | *$* | *—* | * * | *$* | *4,351* | * * | *19* | *%* |
| *Simvastatin*                    | * *   | *402*                               | * *   | *1,277*      | * *   | *—*   | * *   | *—*            | * *   | *1,679* | * * | *7* | *%* |
| *Enalapril*                      | * *   | *933*                               | * *   | *407*        | * *   | *—*   | * *   | *—*            | * *   | *1,340* | * * | *6* | *%* |
| *Paroxetine*                     | * *   | *294*                               | * *   | *765*        | * *   | *—*   | * *   | *—*            | * *   | *1,059* | * * | *5* | *%* |
| *Lansoprazole*                   | * *   | *427*                               | * *   | *146*        | * *   | *—*   | * *   | *—*            | * *   | *573* | * * | *2* | *%* |
| *All  other products*            | * *   | *2,224*                             | * *   | *2,226*      | * *   | *86*       | * *   | *424*               | * *   | *4,960* | * * | *21* | *%* |
| *Sales  to licensees and others* | * *   | *—*                            | * *   | *—*     | * *   | *2,479*    | * *   | *5,616*             | * *   | *8,095* | * * | *34* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                            | * *   | *—*     | * *   | *58*       | * *   | *1,397*             | * *   | *1,455* | * * | *6* | *%* |
| *Total  Revenues*                | * *   | *$*                                 | *4,937*    | * *     | *$*        | *8,515*    | * *   | *$*                 | *2,623*    | * * | *$* | *7,437* | * * | *$* | *23,512* | * * | *100* | *%* |
| *% of Q-2 2005 Revenues*         | * *   | *21*                                | *%*        | *36*         | *%*        | *11*       | *%*        | *32*                | *%*        | *100* | *%* | * * | * * |

Total revenues for the three months ended September 30, 2006 increased7% (3% in constant currency) from the same period in the prior year. The coreof our specialty generics business has been the efficient manufacturing andin-country marketing of branded generic and generic pharmaceuticalproducts.  Historically, ourpharmaceutical products were sold only within Spain.  However, the execution of our long-termstrategic plan over the past several years has created an opportunity for ourSpanish operations to expand beyond the borders of Spain into other Europeancountries and other countries outside of Europe.

In order to promote highervolume purchases from our customers, we have traditionally used a combinationof sales discounts and promotional goods. However, in August 2006, the Spanish government enacted new legislationthat restricted the use of certain promotional goods. Immediately prior to theimplementation date of the new law, certain competitors in Spain offeredunusually favorable promotions. Certain of our customers took advantage ofthose promotions and increased their inventory levels.  We believe the promotions offered by ourcompetitors created a temporary decrease in our sales levels early in thequarter. However, we believe that the impact was temporary and we have seen oursales begin to recover.

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*Branded Generic Pharmaceutical Products*

***(inthousands)***

|                                     | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2006**                                                                   | ** ** | **%**      | ** ** | **2005** | ** ** | **%** | ** ** | **$  ** | ** ** | **%** | ** ** |
| *Branded  Generic Product Sales:*   | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Enalapril*                         | * *   | *$*                                                                        | *1,241*    | * *   | *22*       | *%* | *$* | *933* | * * | *19* | *%* | *$* | *308* | * * | *33* | *%* |
| *Omeprazole*                        | * *   | *671*                                                                      | * *   | *12*       | *%*        | *657* | * * | *13* | *%* | *14* | * * | *2* | *%* |
| *Lansoprazole*                      | * *   | *632*                                                                      | * *   | *11*       | *%*        | *534* | * * | *11* | *%* | *98* | * * | *18* | *%* |
| *Codeisan*                          | * *   | *588*                                                                      | * *   | *10*       | *%*        | *427* | * * | *9* | *%* | *161* | * * | *38* | *%* |
| *Simvastatin*                       | * *   | *457*                                                                      | * *   | *8*        | *%*        | *402* | * * | *8* | *%* | *55* | * * | *14* | *%* |
| *All other branded genericproducts* | * *   | *2,140*                                                                    | * *   | *37*       | *%*        | *1,984* | * * | *40* | *%* | *156* | * * | *8* | *%* |
| *Total branded generic sales*       | * *   | *$*                                                                        | *5,729*    | * *   | *100*      | *%* | *$* | *4,937* | * * | *100* | *%* | *$* | *792* | * * | *16* | *%* |

Sales of our branded genericpharmaceutical products increased by 16% (12% in constant currency) during thethree months ended September 30, 2006 compared to the three months ended September30, 2005.  Sales of enalapril, whichaccounts for 22% of our branded generic pharmaceutical revenues during thequarter also accounted for 39% of the increase in our branded generic sales.Increased sales of our branded cold, cough product, Codeisan, accounted for 20%of the increase in sales of our branded generic products.

*Generic Pharmaceutical Products*

***(inthousands)***
|                              | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **2006**                                                                   | ** ** | **%**      | ** ** | **2005** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Generic  Product Sales:*    | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Omeprazole*                 | * *   | *$*                                                                        | *3,896*    | * *   | *43*       | *%* | *$* | *3,694* | * * | *43* | *%* | *$* | *202* | * * | *5* | *%* |
| *Simvastatin*                | * *   | *1,371*                                                                    | * *   | *15*       | *%*        | *1,277* | * * | *15* | *%* | *94* | * * | *7* | *%* |
| *Paroxetine*                 | * *   | *774*                                                                      | * *   | *8*        | *%*        | *765* | * * | *9* | *%* | *9* | * * | *1* | *%* |
| *Pentoxifylline*             | * *   | *654*                                                                      | * *   | *7*        | *%*        | *607* | * * | *7* | *%* | *47* | * * | *8* | *%* |
| *Trimetazidine*              | * *   | *586*                                                                      | * *   | *6*        | *%*        | *487* | * * | *6* | *%* | *99* | * * | *20* | *%* |
| *All other generic products* | * *   | *1,906*                                                                    | * *   | *21*       | *%*        | *1,685* | * * | *20* | *%* | *221* | * * | *13* | *%* |
| *Total generic sales*        | * *   | *$*                                                                        | *9,187*    | * *   | *100*      | *%* | *$* | *8,515* | * * | *100* | *%* | *$* | *672* | * * | *8* | *%* |

 

Sales of our generic pharmaceutical products increased by 8% (3% inconstant currency) during the three months ended September 30, 2006 compared tothe three months ended September 30, 2005. Continued strong sales of our generic simvastatin and omeprazoleaccounted for 44% of our increase in generic pharmaceutical sales in the thirdquarter of 2006. We expect to continue to increase our generic drug portfolioand increase our generic drug sales in Spain and other European countries asproducts come off patent in the future.

The Spanish Ministry of Health has approved a plan for nationwide expansionof a regional practice of filling prescriptions with one of the lowest-pricedgenerics then available if a prescription does not specify a brand name orlaboratory name.  This approval does not requiregovernment-mandated price reductions as in the past.  We do not anticipate that this approval willmaterially affect our 2006 revenues or profits. 

*Sales to Licensees and Others*

***(inthousands)***
|                                 | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|---------------------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **                      | ** ** | **2006**                                                                   | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                        | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Sales to licensees and others* | * *   | *$*                                                                        | *7,183*    | * *   | *$*        | *8,095* | * * | *$* | *(912* | *)* | *-11* | *%* |
|                                 |            |                                                                            |            |            |            |  |  |  |  |  |  |  |

27

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Inaddition to manufacturing and selling our own branded generic and genericproducts, we license the right to market products to others within and outsideof Spain.  These license agreements areusually accompanied by long-term exclusive supply agreements, whereby ourlicensees purchase the licensed products from our manufacturing facility (andare recorded as *net product sales* in theConsolidated Income Statements).  As of September 30, 2006, our Spanishoperations have executed 184 license agreements for product registrations, ofwhich 20 with customers in Spain and 91 with customers outside of Spain coveractively marketed products that are generating revenues.  The remaining licenses (nine with customersin Spain and 64 with customers outside of Spain) are for products that areawaiting regulatory approvals. Additionally,we have 16 contract manufacturing agreements in effect in Spain and sixcontract manufacturing agreements in effect for international customers.  Our clients market these products under theirown names and with their own labeling. Many of the products we manufacture for others use the same activeingredients that are used in our own marketed products. Sales tolicensees and others in the three months ended September 30, 2006 decreased 11%when compared to the prior year period. The decrease in the quarter is due tothe timing of shipments in the quarter as compared to timing of shipments inthe same period of the prior year.  Salesto our licensees are usually of larger quantities and occur on a less frequentbasis than our normal sales in Spain. Therefore, the shipment of one order, or delayed shipment of one order,could cause a significant fluctuation from quarter to quarter.

*Licensing and CollaborationRevenues*

***(in thousands)***
|                       | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                   | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                        | *170*      | * *   | *$*        | *57* | * * | *$* | *113* | * * | *198* | *%* |
| *Drug  delivery*      | * *   | *2,113*                                                                    | * *   | *1,398*    | * *   | *715* | * * | *51* | *%* |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                        | *2,283*    | * *   | *$*        | *1,455* | * * | *$* | *828* | * * | *57* | *%* |

 

Licensing and collaborationrevenues increased by 57% and accounted for 9% of total revenues for the threemonth period ended September 30, 2006 compared to 6% for the three month periodended September 30, 2005.  These revenuesincluded royalties from sales of Testim of approximately $­­­2,107,000 in thethree months ended September 30, 2006 compared to $1,390,000 in the thirdquarter of the prior year. Based on industrysources, Testim is currently reported to capture approximately 18% of alltestosterone gel replacement prescriptions in the U.S. market, compared toapproximately 16% of all testosterone gel replacement prescriptions one yearago.

*Gross Profit*

***(in thousands)***
|                       | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                   | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                        | *11,265*   | * *   | *$*        | *11,010* | * * | *$* | *255* | * * | *2* | *%* |
| *Drug  delivery*      | * *   | *2,113*                                                                    | * *   | *1,398*    | * *   | *715* | * * | *51* | *%* |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                        | *13,378*   | * *   | *$*        | *12,408* | * * | *$* | *970* | * * | *8* | *%* |

 

Gross profit increased by approximately $970,000,or 8% (4% in constant currency), in the three months ended September 30, 2006,when compared to the three months ended September 30, 2005, primarily fromincreased sales of Testim. However, our gross margins on specialty generic net product sales were 49% in thethree months ended September 30, 2006 compared to 50% in the three months endedSeptember 30, 2005.  Reduced marginsresulted from increased manufacturing personnel and depreciation expenses,associated with the continued expansion of our manufacturing facilities inSpain.

28

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*Selling and Marketing Expenses*  

***(in thousands)***
|                       | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                   | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                        | *3,495*    | * *   | *$*        | *3,503* | * * | *$* | *(8* | *)* | *** | * * |
| *Drug  delivery*      | * *   | *—*                                                                   | * *   | *—*   | * *   | *—* | * * | *—* | * * |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                        | *3,495*    | * *   | *$*        | *3,503* | * * | *$* | *(8* | *)* | *** | * * |

 

----

** Lessthan 1%*

Sellingand marketing expenses for the three months ended September 30, 2006 remainedconsistent with the same period in the prior year. As a percentage of netproduct sales, selling and marketing expenses decreased from 16% in the threemonths ended September 30, 2005, to 15% in the three months ended September 30,2006.

*General and AdministrativeExpenses*

***(in thousands)***
|                       | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                   | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                        | *1,901*    | * *   | *$*        | *2,763* | * * | *$* | *(862* | *)* | *(31* | *)%* |
| *Drug  delivery*      | * *   | *1,850*                                                                    | * *   | *185*      | * *   | *1,665* | * * | *900* | *%* |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                        | *3,751*    | * *   | *$*        | *2,948* | * * | *$* | *803* | * * | *27* | *%* |

Generaland administrative expenses, which excludes litigation settlement chargesassociated with the estimated loss contingency for litigation claims in thequarter (see *litigation settlement expenses*below),increased 27% when compared to the same period of the prior year.  Included in the current year are severance costsof approximately $600,000 related to a change in the Company’s Chief FinancialOfficer in September 2006 and approximately $300,000 in equity-basedcompensation in the current quarter which was not required to be recorded inthe prior year period. All of these costs except for $39,000 are included inthe Company’s drug delivery segment.

*Research and Development Expenses*

***(in thousands)***
|                       | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                   | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                        | *421*      | * *   | *$*        | *315* | * * | *$* | *106* | * * | *34* | *%* |
| *Drug  delivery*      | * *   | *2,026*                                                                    | * *   | *1,460*    | * *   | *566* | * * | *39* | *%* |
| * *              | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                        | *2,447*    | * *   | *$*        | *1,775* | * * | *$* | *672* | * * | *38* | *%* |

Research and developmentexpenses have increased 38% in the three months ended September 30, 2006 to$2,447,000 when compared to the third quarter of 2005.  The increase is attributed to our continuedinvestments in our research and development programs for drug deliverytechnologies, primarily our intranasal insulin product candidate. Research anddevelopment expenses also include approximately $200,000 of non-cash,equity-based compensation expense related to equity awards, for which there wasno comparable expense recorded in the same period of the prior year.  We plan to continue to invest in research anddevelopment for the remainder of 2006 to help us build on the clinical progressof CPE-215 and advance the early-stage research on our Nanocaplet technology. Weexpect an increase in the fourth quarter research and development expenses overthe third quarter expenses as a result of increased clinical activities plannedfor the fourth quarter.

29

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*Litigation Settlement Expenses*

***(in thousands)***

|                      | ** ** | **For the Three Months Ended September 30,** | ** ** | **Change** | ** ** |
|----------------------|------------|----------------------------------------------------------------------------|------------|------------|------------|
| ** **           | ** ** | **2006**                                                                   | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *             | * *   | * *                                                                   | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty generics* | * *   | *$*                                                                        | *8,932*    | * *   | *$*        | *88* | * * | *$* | *8,844* | * * | *** | * * |
|                      |            |                                                                            |            |            |            |  |  |  |  |  |  |  |

 

----

** Notmeaningful*

Litigation settlement expenses forthe three months ended September 30, 2006 includes $7,546,000 representing thepresent value of the Company’s estimated loss contingency stemming fromlitigation for which we reached substantial agreement on settlement terms inthe current quarter plus an additional $1,386,000 in related litigation defensecosts. The amounts recorded in the three months ended September 30, 2005represent the litigation defense costs related to the settled claim that wereincurred in that period. See “Other liabilities” in the Notes to CondensedConsolidated Financial Statements for additional information.  These amounts have been reclassified from *general and administrative expenses* on the CondensedConsolidated Income Statements.

*Benefit for Income Taxes*  

***(in thousands)***
|                                        | ** ** | **For the Three Months Ended September 30, 2006** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Spain**                                                                            | ** ** | **Ireland** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| *Loss  before income taxes*            | * *   | * *                                                                             | * *   | * * | * * | * * | * * | * * | * * |
| *Specialty generics*                   | * *   | *$*                                                                                  | *(2,545*   | *)* | *$* | *(1* | *)* | *$* | *(1,189* | *)* | *$* | *(3,735* | *)* |
| *Drug delivery*                        | * *   | *—*                                                                             | * *   | *(1,014* | *)* | *(750* | *)* | *(1,764* | *)* |
| * *                               | * *   | * *                                                                             | * *   | * * | * * | * * | * * | * * | * * |
| *Total  loss before income taxes*      | * *   | *(2,545*                                                                             | *)*        | *(1,015* | *)* | *(1,939* | *)* | *(5,499* | *)* |
| * *                               | * *   | * *                                                                             | * *   | * * | * * | * * | * * | * * | * * |
| *Provision (Benefit) for income taxes* | * *   | *1,730*                                                                              | * *   | *(126* | *)* | *(690* | *)* | *914* | * * |
| *Valuation allowance*                  | * *   | *—*                                                                             | * *   | *126* | * * | *690* | * * | *816* | * * |
| * *                               | * *   | * *                                                                             | * *   | * * | * * | * * | * * | * * | * * |
| *Net  provision for income taxes*      | * *   | *1,730*                                                                              | * *   | *—* | * * | *—* | * * | *1,730* | * * |
| * *                               | * *   | * *                                                                             | * *   | * * | * * | * * | * * | * * | * * |
| *Net  loss*                            | * *   | *$*                                                                                  | *(4,275*   | *)* | *$* | *(1,015* | *)* | *$* | *(1,939* | *)* | *$* | *(7,229* | *)* |
| * *                               | * *   | * *                                                                             | * *   | * * | * * | * * | * * | * * | * * |
| *Effective tax rate*                   | * *   | *68*                                                                                 | *%*        | *0* | *%* | *0* | *%* | *31* | *%* |

We recorded a provision forforeign income taxes totaling $­1,730,000 for the three months ended September30, 2006. As a result of reporting taxable income in Spain for the three monthsended September 30, 2005, we recorded a provision for foreign income taxestotaling $1,377,000.  The provision forincome taxes represented 68% of the Spanish pre-tax loss of $(2,545,000) forthe three months ended September 30, 2006 due to the $7,546,000 losscontingency recorded in Spain in September 2006 for which no tax benefit wasrecorded in the period. We are evaluating the tax deductibility of the losscontingency and expect to conclude on such determination in the fourth quarterof 2006. The provision for income taxes represented 33% of the pre-tax loss andincome reported in Spain of $4,113,000 for the three months ended September 30,2005.  As future operating profits in theU.S and Ireland cannot be reasonably assured, no tax benefit has been recordedfor the related losses, which totaled approximately $2,954,000 and $251,000 forthe three months ended September 30, 2006 and 2005, respectively. Accordingly,the Company has established valuation allowances equal to the full amount ofthe U.S. and Irish deferred tax assets. As a result of the litigationsettlement changes recorded in Spain, for which no tax benefit was recorded andthe valuation allowance on the Ireland and U.S. losses, we recorded a net provisionfor income taxes of $1,730,000 which represents 31% of the consolidated pre-taxloss in the three months ended September 30, 2006.  The provision for income taxes represented 36%of consolidated pre-tax income in the three months ended September 30, 2005.

Should we determine that it is more likely than not that we willrealize certain of our net deferred tax assets for which we have previously providedvaluation allowances, an adjustment would be required to reduce the existingvaluation allowances. In addition, we operate within multiple taxingjurisdictions and are subject to audit in those jurisdictions. These audits caninvolve complex issues, which may require an extended period of time forresolution. No additional potential tax contingencies were considered to beprobable and reasonably estimable as of September 30, 2006. However, there isthe possibility that the 

30

----

ultimate resolution of suchpotential contingencies could have an adverse effect on our ConsolidatedFinancial Statements in the future.

*Net (Loss) Income*    

***(in thousands, except per share data)***

|                                                | ** ** | **For the Three Months  Ended September 30,** | ** ** | **Change** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2006**                                                               | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                                       | * *   | * *                                                               | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty Generics*                           | * *   | *$*                                                                    | *(5,465*   | *)*        | *$*        | *2,689* | * * | *$* | *(8,154* | *)* | *-303* | *%* |
| *Drug Delivery*                                | * *   | *(1,764*                                                               | *)*        | *(204*     | *)*        | *(1,560* | *)* | *-809* | * * |
| * *                                       | * *   | * *                                                               | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total  net (loss) income*                     | * *   | *$*                                                                    | *(7,229*   | *)*        | *$*        | *2,485* | * * | *$* | *(9,714* | *)* | *-391* | *%* |
| * *                                       | * *   | * *                                                               | * *   | * *   | * *   | * * | * * | * * | * * |
| *Net  income per common share:*                | * *   | * *                                                               | * *   | * *   | * *   | * * | * * | * * | * * |
| *Basic*                                        | * *   | *$*                                                                    | *(0.33*    | *)*        | *$*        | *0.11* | * * | *$* | *(0.44* | *)* | *-400* | *%* |
| *Diluted*                                      | * *   | *$*                                                                    | *(0.33*    | *)*        | *$*        | *0.11* | * * | *$* | *(0.44* | *)* | *-400* | *%* |
| * *                                       | * *   | * *                                                               | * *   | * *   | * *   | * * | * * | * * | * * |
| *Weighted  average common shares outstanding:* | * *   | * *                                                               | * *   | * *   | * *   | * * | * * | * * | * * |
| *Basic*                                        | * *   | *22,194*                                                               | * *   | *21,652*   | * *   | *542* | * * | *3* | *%* |
| *Diluted*                                      | * *   | *22,194*                                                               | * *   | *22,970*   | * *   | *(776* | *)* | *-3* | *%* |

 

We reported loss from operations of $5,707,000 in the three monthsended September 30, 2006 compared to income from operations of $3,678,000 inthe three months ended September 30, 2005. The combination of loss fromoperations of $5,707,000 and the non-operating items, primarily the provisionfor income taxes of $1,730,000, resulted in net loss of $7,229,000, or $(0.33)per basic common share on 22,194,000 weighted average basic common sharesoutstanding in the three months ended September 30, 2006, compared to netincome of $2,485,000, or $0.11 per basic common share ($0.11 per diluted commonshare) on 21,652,000 weighted average basic common shares outstanding (22,970,000weighted average diluted common shares outstanding) in the same period of theprior year.

31

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**NineMonths Ended September 30, 2006 versus Nine Months Ended September 30, 2005**

*Revenues by Segment*

***(in thousands)***

|                                        | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2006**                                                                  | ** ** | **%**      | ** ** | **2005** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Specialty  Generics*                  | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Net product sales*                    | * *   | *$*                                                                       | *75,900*   | * *   | *92*       | *%* | *$* | *68,769* | * * | *95* | *%* | *$* | *7,131* | * * | *10* | *%* |
| *Licensing and collaboration revenues* | * *   | *409*                                                                     | * *   | ***        | * *   | *227* | * * | *** | * * | *182* | * * | *80* | *%* |
| * *                               | * *   | *76,309*                                                                  | * *   | *92*       | *%*        | *68,996* | * * | *95* | *%* | *7,313* | * * | *11* | *%* |
| *Drug  Delivery*                       | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Licensing and collaboration revenues* | * *   | *6,108*                                                                   | * *   | *8*        | *%*        | *3,524* | * * | *5* | *%* | *2,584* | * * | *73* | *%* |
| * *                               | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Total revenues*                       | * *   | *$*                                                                       | *82,417*   | * *   | *100*      | *%* | *$* | *72,520* | * * | *100* | *%* | *$* | *9,897* | * * | *14* | *%* |

 

----

** Lessthan 1%*

 

*Revenues.    *Set forth below is a summary of our revenues by sales channel andtop-selling product lines:

For the nine months ended September30, 2006:

***(in thousands)***
| ** **                       | ** ** | **Revenues Within Spain** | ** ** | ** **   | ** ** | ** ** | ** ** | ** **          | ** ** |
|----------------------------------|------------|-------------------------------------|------------|--------------|------------|------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | **Revenues**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Branded**                         | ** ** | ** **   | ** ** | ** ** | ** ** | **Outside of** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**            | ** ** | **Generics**                        | ** ** | **Generics** | ** ** | **Other**  | ** ** | **Spain**           | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$*                                 | *2,012*    | * *     | *$*        | *12,589*   | * *   | *$*                 | *—*   | * * | *$* | *—* | * * | *$* | *14,601* | * * | *18* | *%* |
| *Simvastatin*                    | * *   | *1,383*                             | * *   | *4,334*      | * *   | *—*   | * *   | *—*            | * *   | *5,717* | * * | *7* | *%* |
| *Enalapril*                      | * *   | *3,538*                             | * *   | *1,477*      | * *   | *—*   | * *   | *—*            | * *   | *5,015* | * * | *6* | *%* |
| *Paroxetine*                     | * *   | *1,094*                             | * *   | *2,389*      | * *   | *—*   | * *   | *—*            | * *   | *3,483* | * * | *4* | *%* |
| *Lansoprazole*                   | * *   | *1,958*                             | * *   | *671*        | * *   | *—*   | * *   | *—*            | * *   | *2,629* | * * | *3* | *%* |
| *All  other products*            | * *   | *7,693*                             | * *   | *8,172*      | * *   | *782*      | * *   | *1,100*             | * *   | *17,747* | * * | *22* | *%* |
| *Sales  to licensees and others* | * *   | *—*                            | * *   | *—*     | * *   | *9,553*    | * *   | *17,155*            | * *   | *26,708* | * * | *32* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                            | * *   | *—*     | * *   | *409*      | * *   | *6,108*             | * *   | *6,517* | * * | *8* | *%* |
| *Total  Revenues*                | * *   | *$*                                 | *17,678*   | * *     | *$*        | *29,632*   | * *   | *$*                 | *10,744*   | * * | *$* | *24,363* | * * | *$* | *82,417* | * * | *100* | *%* |
| *% of YTD 2006 Revenues*         | * *   | *21*                                | *%*        | *36*         | *%*        | *13*       | *%*        | *30*                | *%*        | *100* | *%* | * * | * * |

 

For the nine months ended September 30, 2005:

***(in thousands)***
| ** **                       | ** ** | **Revenues Within Spain** | ** ** | ** **   | ** ** | ** ** | ** ** | ** **          | ** ** |
|----------------------------------|------------|-------------------------------------|------------|--------------|------------|------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **                          | ** ** | ** **   | ** ** | ** ** | ** ** | **Revenues**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Branded**                         | ** ** | ** **   | ** ** | ** ** | ** ** | **Outside of** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**            | ** ** | **Generics**                        | ** ** | **Generics** | ** ** | **Other**  | ** ** | **Spain**           | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$*                                 | *2,107*    | * *     | *$*        | *11,948*   | * *   | *$*                 | *—*   | * * | *$* | *—* | * * | *$* | *14,055* | * * | *19* | *%* |
| *Simvastatin*                    | * *   | *1,275*                             | * *   | *3,862*      | * *   | *—*   | * *   | *—*            | * *   | *5,137* | * * | *7* | *%* |
| *Enalapril*                      | * *   | *3,084*                             | * *   | *1,319*      | * *   | *—*   | * *   | *—*            | * *   | *4,403* | * * | *6* | *%* |
| *Paroxetine*                     | * *   | *1,011*                             | * *   | *2,413*      | * *   | *—*   | * *   | *—*            | * *   | *3,424* | * * | *5* | *%* |
| *Lansoprazole*                   | * *   | *1,374*                             | * *   | *390*        | * *   | *—*   | * *   | *—*            | * *   | *1,764* | * * | *3* | *%* |
| *All  other products*            | * *   | *8,160*                             | * *   | *7,039*      | * *   | *271*      | * *   | *1,439*             | * *   | *16,909* | * * | *23* | *%* |
| *Sales  to licensees and others* | * *   | *—*                            | * *   | *—*     | * *   | *9,722*    | * *   | *13,355*            | * *   | *23,077* | * * | *32* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                            | * *   | *—*     | * *   | *228*      | * *   | *3,523*             | * *   | *3,751* | * * | *5* | *%* |
| *Total  Revenues*                | * *   | *$*                                 | *17,011*   | * *     | *$*        | *26,971*   | * *   | *$*                 | *10,221*   | * * | *$* | *18,317* | * * | *$* | *72,520* | * * | *100* | *%* |
| *% of YTD 2005 Revenues*         | * *   | *23*                                | *%*        | *37*         | *%*        | *14*       | *%*        | *26*                | *%*        | *100* | *%* | * * | * * |

32

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Totalrevenues for the nine months ended September 30, 2006 increased 14% from thesame period in 2005, or 15% when expressed in constant currency. A decrease inthe weighted average value of the Euro over the past year, in relation to theU.S. Dollar, had the effect of decreasing year-to-date 2006 revenues byapproximately $744,000 (almost entirely in the first quarter of 2006) comparedto the same nine month period of 2005. Our current period growth was drivenprimarily by (1) increased sales of our products to our licensees and others ofapproximately $3,631,000, which represents 37% of the growth in the period; (2)approximately $2,766,000 of increased licensing and collaboration revenues,primarily royalty revenue from the sales of Testim (see Notes to CondensedConsolidated Financial Statements — *Revenue recognition*for a discussion of a change in estimate regarding Testim royalties), whichrepresents 28% of the current period growth and (3) approximately $2,662,000from increased sales of our five top selling products, which represents 27% ofour current period growth.

*Branded Generic Pharmaceutical Products*

***(in thousands)***
|                                     | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2006**                                                                  | ** ** | **%**      | ** ** | **2005** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Branded  Generic Product Sales:*   | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Enalapril*                         | * *   | *$*                                                                       | *3,538*    | * *   | *20*       | *%* | *$* | *3,084* | * * | *18* | *%* | *$* | *454* | * * | *15* | *%* |
| *Codeisan*                          | * *   | *2,051*                                                                   | * *   | *12*       | *%*        | *2,531* | * * | *15* | *%* | *(480* | *)* | *-19* | *%* |
| *Omeprazole*                        | * *   | *2,012*                                                                   | * *   | *11*       | *%*        | *2,107* | * * | *12* | *%* | *(95* | *)* | *-5* | *%* |
| *Lansoprazole*                      | * *   | *1,958*                                                                   | * *   | *11*       | *%*        | *1,374* | * * | *8* | *%* | *584* | * * | *43* | *%* |
| *Simvastatin*                       | * *   | *1,383*                                                                   | * *   | *8*        | *%*        | *1,275* | * * | *8* | *%* | *108* | * * | *8* | *%* |
| *All other branded genericproducts* | * *   | *6,736*                                                                   | * *   | *38*       | *%*        | *6,640* | * * | *39* | *%* | *96* | * * | *1* | *%* |
| *Total branded generic sales*       | * *   | *$*                                                                       | *17,678*   | * *   | *100*      | *%* | *$* | *17,011* | * * | *100* | *%* | *$* | *667* | * * | *4* | *%* |

Sales of our branded genericpharmaceutical products increased 4% during the nine months of 2006 compared tothe nine months ended September 30, 2005. Increased sales of our enalapril andlansoprazole was partially offset by reduced sales of Codeisan, our leadingcough product, which decreased by $480,000, or 19% when compared to the ninemonths of 2005 as a result of a mild cough, cold and flu season in 2006.  Additionally, a decrease in the weightedaverage value of the Euro over the past year, in relation to the U.S. Dollar, had the effect ofdecreasing year-to-date 2006 branded generic sales by approximately $160,000when compared to the same nine month period of 2005.

*Generic Pharmaceutical Products*

***(in thousands)***
|                              | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **2006**                                                                  | ** ** | **%**      | ** ** | **2005** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Generic  Product Sales:*    | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Omeprazole*                 | * *   | *$*                                                                       | *12,589*   | * *   | *42*       | *%* | *$* | *11,948* | * * | *45* | *%* | *$* | *641* | * * | *5* | *%* |
| *Simvastatin*                | * *   | *4,334*                                                                   | * *   | *15*       | *%*        | *3,862* | * * | *14* | *%* | *472* | * * | *12* | *%* |
| *Paroxetine*                 | * *   | *2,389*                                                                   | * *   | *8*        | *%*        | *2,413* | * * | *9* | *%* | *(24* | *)* | *-1* | *%* |
| *Pentoxifylline*             | * *   | *1,932*                                                                   | * *   | *6*        | *%*        | *1,947* | * * | *7* | *%* | *(15* | *)* | *-1* | *%* |
| *Trimetazidine*              | * *   | *1,679*                                                                   | * *   | *6*        | *%*        | *1,693* | * * | *6* | *%* | *(14* | *)* | *-1* | *%* |
| *All other generic products* | * *   | *6,709*                                                                   | * *   | *23*       | *%*        | *5,108* | * * | *19* | *%* | *1,601* | * * | *31* | *%* |
| *Total generic sales*        | * *   | *$*                                                                       | *29,632*   | * *   | *100*      | *%* | *$* | *26,971* | * * | *100* | *%* | *$* | *2,661* | * * | *10* | *%* |

Sales of our genericpharmaceutical products increased by 10% (11% in constant currency) during the ninemonths ended September 30, 2006 compared to the nine months ended September 30,2005.  Increased demand for our genericomeprazole and simvastatin products accounted for 42% of our genericpharmaceutical revenue growth in the nine months ended September 30, 2006. Ourgeneric pharmaceutical products sales increased despite the decrease in theweighted average value of the Euro over the past year, in relation to the U.S. Dollar, which hadthe effect of decreasing our generic product sales by approximately $320,000when compared to the same nine month period of 2005.

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*Sales to Licensees and Others*

***(in thousands)***

|                                 | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **                      | ** ** | **2006**                                                                  | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                        | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Sales to licensees and others* | * *   | *$*                                                                       | *26,708*   | * *   | *$*        | *23,077* | * * | *$* | *3,631* | * * | *16* | *%* |
|                                 |            |                                                                           |            |            |            |  |  |  |  |  |  |  |

Sales to licensees andothers in the nine months ended September 30, 2006 increased 16% when comparedto the same nine month period of the prior year, or 17% in constantcurrency.  A decrease in the weightedaverage value of the Euro over the past year, in relation to the U.S. Dollar,had the effect of decreasing our revenues from sales to licensees and others byapproximately $220,000.

*Licensing and CollaborationRevenues*

***(in thousands)***

|                       | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                  | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                       | *409*      | * *   | *$*        | *227* | * * | *$* | *182* | * * | *80* | *%* |
| *Drug  delivery*      | * *   | *6,108*                                                                   | * *   | *3,524*    | * *   | *2,584* | * * | *73* | *%* |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                       | *6,517*    | * *   | *$*        | *3,751* | * * | *$* | *2,766* | * * | *74* | *%* |

Licensing and collaborationrevenues accounted for 8% of total revenues in the nine months ended September30, 2006 and totaled $6,517,000. These revenues included increased royalties ofapproximately $6,089,000 in the nine months ended September 30, 2006 (whichincludes a one-time increase of approximately $479,000) compared to $3,512,000in the nine months ended September 30, 2005. See “Revenue recognition” in theNotes to Condensed Consolidated Financial Statements and “Change in Estimate”above for additional information.

*Gross Profit*

***(in thousands)***
|                       | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                  | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                       | *39,127*   | * *   | *$*        | *35,073* | * * | *$* | *4,054* | * * | *12* | *%* |
| *Drug  delivery*      | * *   | *6,108*                                                                   | * *   | *3,524*    | * *   | *2,584* | * * | *73* | *%* |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                       | *45,235*   | * *   | *$*        | *38,597* | * * | *$* | *6,638* | * * | *17* | *%* |

Grossprofit increased by approximately $6,638,000, or 17%, in the nine months ended September30, 2006 when compared to the nine months ended September 30, 2005.  Gross margins on net product sales were 51% in the nine months ended September30, 2006 and 2005. Since the first quarter of 2005, the Company has beenrecording an estimate for a pharmaceutical tax in Spain in accordance with theguidelines established by the Spanish government. The Company received itsactual 2005 pharmaceutical tax assessment from the government in the secondquarter of 2006. The assessment was less than the amount previously estimatedby the Company for 2005 and resulted in a benefit of approximately $460,000 to *cost of net product sales* for the three months ended June30, 2006.

*Selling and Marketing Expenses*  

***(in thousands)***
|                       | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                  | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                       | *11,876*   | * *   | *$*        | *12,118* | * * | *$* | *(242* | *)* | *-2* | *%* |
| *Drug  delivery*      | * *   | *—*                                                                  | * *   | *—*   | * *   | *—* | * * | *—* | * * |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                       | *11,876*   | * *   | *$*        | *12,118* | * * | *$* | *(242* | *)* | *-2* | *%* |

 

Sellingand marketing expenses for the nine months ended September 30, 2006 decreased 2%from the same period in the prior year; however, selling and marketing expensesremained relatively consistent 

34

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when expressedin constant currency. The decrease inthe weighted average value of the Euro, in relation to the U.S. Dollar over thepast year, had the effect of decreasing selling and marketing expenses byapproximately $118,000 in the nine months ended September 30, 2006.Selling and marketing expenses as a percentage of net product sales decreasedfrom 18% in the nine months ended September 30, 2005 to 16% in the nine monthsended September 30, 2006.

*General and AdministrativeExpenses*

***(in thousands)***
|                       | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                  | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                       | *5,507*    | * *   | *$*        | *6,787* | * * | *$* | *(1,280* | *)* | *-19* | *%* |
| *Drug  delivery*      | * *   | *5,813*                                                                   | * *   | *1,905*    | * *   | *3,908* | * * | *205* | *%* |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                       | *11,320*   | * *   | *$*        | *8,692* | * * | *$* | *2,628* | * * | *30* | *%* |

Generaland administrative expenses, which excludes litigation settlement chargesassociated with the estimated loss contingency for litigation claims in thequarter (see *litigation settlement expenses*below),increased 30% when compared to the same period of the prior year.  General and administrative expenses includesnon-cash equity-based compensation expense of approximately $816,000 in thenine months ended September 30, 2006, which was not required to be recorded inthe nine months ended September 30, 2005. General and administrative expensesalso include severance costs of approximately $600,000 related to a change inthe Company’s Chief Financial Officer in September 2006. General andadministrative expenses would have been approximately $251,000 lower, absentthe change in the weighted average value of the Euro, in relation to the U.S.Dollar, over the past year.

*Research and Development Expenses*

***(in thousands)***
|                       | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                                                  | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics* | * *   | *$*                                                                       | *1,374*    | * *   | *$*        | *1,453* | * * | *$* | *(79* | *)* | *-5* | *%* |
| *Drug  delivery*      | * *   | *6,476*                                                                   | * *   | *3,281*    | * *   | *3,195* | * * | *97* | *%* |
| * *              | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total*               | * *   | *$*                                                                       | *7,850*    | * *   | *$*        | *4,734* | * * | *$* | *3,116* | * * | *66* | *%* |

Research and developmentexpenses for the nine months ended September 30, 2006 increased 66% from thesame period in the prior year. The increase is directly attributed to theadvancement of our research and development programs in the Drug Deliverysegment of our business. See the explanation under *Research andDevelopment Expenses* for the three months ended September 30, 2006. Weexpect to continue to incur increased costs to support our clinical programs forthe remainder of 2006.

*Litigation Settlement Expenses*

***(in thousands)***

|                      | ** ** | **For the Nine Months Ended September 30,** | ** ** | **Change** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **           | ** ** | **2006**                                                                  | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *             | * *   | * *                                                                  | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty generics* | * *   | *$*                                                                       | *10,269*   | * *   | *$*        | *380* | * * | *$* | *9,889* | * * | *** | * * |
|                      |            |                                                                           |            |            |            |  |  |  |  |  |  |  |

 

----

** Notmeaningful*

Litigation settlement expenses forthe nine months ended September 30, 2006 include $7,546,000 representing thepresent value of the Company’s estimated loss contingency stemming fromlitigation for which we reached substantial agreement on settlement terms inthe current quarter plus an additional $2,723,000 in related litigation defensecosts in the nine month period. The amounts recorded in the nine monthsended September 30, 2005 represent the litigation defense costs related to thesettled claim that were incurred in the same period of the prior year. SeeNotes to Condensed Consolidated Financial Statements for additionalinformation.  These amounts have beenreclassified from *general and administrative expenses*on the Condensed Consolidated Income Statements.

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*Provision for Income Taxes*  

***(in thousands)***
|                                            | ** ** | **For the Nine Months Ended September 30, 2006** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Spain**                                                                           | ** ** | **Ireland** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| *Income  (loss) before income taxes*       | * *   | * *                                                                            | * *   | * * | * * | * * | * * | * * | * * |
| *Specialty generics*                       | * *   | *$*                                                                                 | *11,630*   | * * | *$* | *(41* | *)* | *$* | *(2,298* | *)* | *$* | *9,291* | * * |
| *Drug delivery*                            | * *   | *—*                                                                            | * *   | *(3,306* | *)* | *(2,818* | *)* | *(6,124* | *)* |
| * *                                   | * *   | * *                                                                            | * *   | * * | * * | * * | * * | * * | * * |
| *Total  income (loss) before income taxes* | * *   | *11,630*                                                                            | * *   | *(3,347* | *)* | *(5,116* | *)* | *3,167* | * * |
| * *                                   | * *   | * *                                                                            | * *   | * * | * * | * * | * * | * * | * * |
| *Provision (benefit) for income taxes*     | * *   | *6,607*                                                                             | * *   | *(418* | *)* | *(1,863* | *)* | *4,326* | * * |
| *Valuation allowance*                      | * *   | *—*                                                                            | * *   | *418* | * * | *1,863* | * * | *2,281* | * * |
| * *                                   | * *   | * *                                                                            | * *   | * * | * * | * * | * * | * * | * * |
| *Net  provision for income taxes*          | * *   | *6,607*                                                                             | * *   | *—* | * * | *—* | * * | *6,607* | * * |
| * *                                   | * *   | * *                                                                            | * *   | * * | * * | * * | * * | * * | * * |
| *Net  income (loss)*                       | * *   | *$*                                                                                 | *5,023*    | * * | *$* | *(3,347* | *)* | *$* | *(5,116* | *)* | *$* | *(3,440* | *)* |
| * *                                   | * *   | * *                                                                            | * *   | * * | * * | * * | * * | * * | * * |
| *Effective tax rate*                       | * *   | *57*                                                                                | *%*        | *0* | *%* | *0* | *%* | *209* | *%* |

We have recorded provisionsfor foreign income taxes totaling $6,607,000 and $4,521,000 for the nine monthsended September 30, 2006 and 2005, respectively.  The provisions represented 57% and 33% of thepre-tax income reported in Spain of $11,630,000 and $13,603,000 for the ninemonths ended September 30, 2006 and 2005, respectively.  The 2006 effective tax rate for Spainincreased when compared to the same period in prior year due to the $7,546,000loss contingency recorded in Spain in September 2006 for which no tax benefitwas recorded in the period. We are evaluating the tax deductibility of the losscontingency and expect to conclude on such determination in the fourth quarterof 2006.  As future operating profits inthe U.S and Ireland cannot be reasonably assured, no tax benefit has beenrecorded for the related losses, which totaled approximately $8,463,000 and $1,819,000for the nine months ended September 30, 2006 and 2005, respectively.Accordingly, we have established valuation allowances equal to the full amountof the U.S. and Irish deferred tax assets. As a result of the litigationsettlement charges recorded in Spain, for which no tax benefit was recorded andthe valuation allowance on the Ireland and U.S. losses, the consolidated incometax provision represents 209% of pre-tax income for the nine months endedSeptember 30, 2006, compared to 38% of consolidated pre-tax income for the ninemonths ended September 30, 2005.

Should we determine that it is more likelythan not that we will realize certain of our net deferred tax assets for whichwe have previously provided valuation allowances, an adjustment would berequired to reduce the existing valuation allowances. In addition, we operatewithin multiple taxing jurisdictions and are subject to audit in thosejurisdictions. These audits can involve complex issues, which may require anextended period of time for resolution.

*Net (Loss) Income*    

***(in thousands, except per share data)***
|                                                | ** ** | **For the Nine Months  Ended September 30,** | ** ** | **Change** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2006**                                                              | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** |
| * *                                       | * *   | * *                                                              | * *   | * *   | * *   | * * | * * | * * | * * |
| *Specialty  generics*                          | * *   | *$*                                                                   | *2,684*    | * *   | *$*        | *8,856* | * * | *$* | *(6,172* | *)* | *-70* | *%* |
| *Drug  delivery*                               | * *   | *(6,124*                                                              | *)*        | *(1,593*   | *)*        | *(4,531* | *)* | *-284* | *%* |
| * *                                       | * *   | * *                                                              | * *   | * *   | * *   | * * | * * | * * | * * |
| *Total  net (loss) income*                     | * *   | *$*                                                                   | *(3,440*   | *)*        | *$*        | *7,263* | * * | *$* | *(10,703* | *)* | *-147* | *%* |
| * *                                       | * *   | * *                                                              | * *   | * *   | * *   | * * | * * | * * | * * |
| *Net  income per common share:*                | * *   | * *                                                              | * *   | * *   | * *   | * * | * * | * * | * * |
| *Basic*                                        | * *   | *$*                                                                   | *(0.16*    | *)*        | *$*        | *0.34* | * * | *$* | *(0.50* | *)* | *-147* | *%* |
| *Diluted*                                      | * *   | *$*                                                                   | *(0.16*    | *)*        | *$*        | *0.32* | * * | *$* | *(0.48* | *)* | *-150* | *%* |
| * *                                       | * *   | * *                                                              | * *   | * *   | * *   | * * | * * | * * | * * |
| *Weighted  average common shares outstanding:* | * *   | * *                                                              | * *   | * *   | * *   | * * | * * | * * | * * |
| *Basic*                                        | * *   | *22,107*                                                              | * *   | *21,455*   | * *   | *652* | * * | *3* | *%* |
| *Diluted*                                      | * *   | *22,107*                                                              | * *   | *22,700*   | * *   | *(593* | *)* | *-3* | *%* |

Wereported net loss of $3,440,000 in the nine months ended September 30, 2006compared to net income of $7,263,000 in the nine months ended September 30, 2005.The combination of income from 

36

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operations of $2,579,000 and the non-operating items,primarily a provision for income taxes of $6,607,000 and the net ofother income and expenses totaling $588,000 resultedin net loss of $3,440,000, or $(0.16) per basic common share on 22,107,000weighted average basic common shares outstanding in the nine months endedSeptember 30, 2006, compared to net income of $7,263,000, or $0.34 per basiccommon share ($0.32 per diluted common share) on 21,455,000 weighted averagebasic common shares outstanding (22,700,000 weighted average diluted commonshares outstanding) in the nine months ended September 30, 2005.

37

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**LIQUIDITY AND CAPITAL RESOURCES****:**

Totalassets increased from $124,220,000 at December 31, 2005 to $135,090,000 atSeptember 30, 2006, and stockholders’ equity increased from $91,589,000 atDecember 31, 2005 to $92,718,000 at September 30, 2006. The increasein stockholders’ equity during the nine months ended September 30, 2006primarily reflects the effect of fluctuations in the Euro/U.S. Dollar exchangerate, which resulted in a net increase of $4,692,000 in our balance sheet.

Cash,cash equivalents and marketable securities decreased by approximately 35% or$11,580,000 from $32,846,000 at December 31, 2005 to $21,266,000 atSeptember 30, 2006.  Uses of cashincluded additions to fixed assets totaling $12,070,000, additions to druglicenses totaling $1,803,000 the purchase of investments of $2,402,000 and the$4,053,000 net effect of financing activities detailed below.  These uses were partially offset by cash flowfrom operations, which totaled $6,123,000 and included a net loss of $3,440,000.  Cash and cash equivalents atSeptember 30, 2006 include approximately $5,892,000 of short-term liquidinvestments considered to be cash equivalents.

Receivablesincreased by approximately 21% from $26,916,000 at December 31, 2005 to $32,568,000at September 30, 2006.  Whenexpressed in constant currency, receivables increased $3,805,000, or 14%, primarilydue to increased net product sales outside of Spain, which generally havelonger negotiated payment terms.  Changesin foreign currency exchange rates increased receivables by approximately $1,847,000.  Furthermore, receivables from a co-marketingpartner totaled $3,075,000 at September 30, 2006 and we owe the same co-marketingpartner approximately $2,489,000 for co-marketing expenses at September 30,2006.  We have not experienced anymaterial delinquencies on any of our receivables that have had a materialeffect on our financial position, results of operations or cash flows.

Inventorybalances increased by approximately $3,126,000 from $12,147,000 atDecember 31, 2005 to $15,273,000 at September 30, 2006.  Excluding fluctuations in foreign currency,which had the effect of increasing inventories by approximately $1,008,000, theconstant currency increase of $2,118,000 was due to increases in finished goodsand raw materials balances needed to meet projected future demand.

Thecombined total of accounts payable and accrued expenses increased from$24,890,000 at December 31, 2005 to $27,951,000 at September 30,2006.  The $3,061,000 net increase wasprimarily attributed to: (1) an increase in income taxes payable of $2,486,000,(2) fluctuations in foreign currency exchange rates, which increased thebalances by approximately $1,731,000, (3) an increase of approximately $1,128,000in payables to a co-marketing partner and (4) an increase in payables ofapproximately $959,000 related to fixed assets and drug licenses.  These increases were offset by a $2,209,000decrease in payables for inventory, a $620,000 decrease in a Spanishpharmaceutical tax and a $310,000 decrease in employment taxes payable.

Short-termborrowings and current portion of long-term debt decreased from $2,995,000 atDecember 31, 2005 to $380,000 at September 30, 2006, primarily as aresult of net repayment of short-term borrowings. The weighted average interestrate on our short-term borrowings at September 30, 2006 was 5.8%.

Otherliabilities increased by approximately $7,546,000 which is equal to the presentvalue of estimated payment obligations in connection with the Ethypharmlitigation in the period.

Operatingactivities for the nine months ended September 30, 2006 provided net cash of $6,123,000,which is a decrease of $4,221,000 when compared to the nine months ended September30, 2005.  This change is primarily dueto a $10,703,000 decrease in net income, a decrease in accounts payable andaccrued expenses of approximately $3,092,000 primarily offset by an increase inother liabilities of approximately $7,560,000 and an increase in non-cashequity-based compensation expense of approximately $1,454,000.

38

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Investing activities, primarilycapital expenditures to expand the capacity of our manufacturing facilities inSpain, along with additions to drug licenses and related costs, required cashtotaling $13,873,000 during the nine months ended September 30, 2006. We alsoinvested $2,402,000 of excess cash in short-term marketable securities duringthe nine months ended September 30, 2006.

Financing activities during the nine months endedSeptember 30, 2006 used net cash of $4,053,000, which resulted from: (1) theremittance of employee tax withholding liabilities of approximately $1,907,000resulting from cashless stock option exercises, and (2) net repayment ofborrowings totaling $2,296,000.  Theseactivities were partially offset by cash proceeds from the exercise of stockoptions of approximately $150,000.

Long-termdebt, which totaled $380,000 and $387,000 at September 30, 2006 andDecember 31, 2005, respectively, has been classified as current in anticipationof repayment during 2006.

*Seasonality.*  In the past, we have experienced lower salesin the third calendar quarter and higher sales in the fourth calendar quarterdue to seasonality.  However, a mildcough, cold and flu season could moderate the impact of the seasonality on ourrevenues. As we market more pharmaceutical products whose sales are seasonal,seasonality of sales may become more significant.

*Effect of Inflation and ChangingPrices.*  Neither inflation nor changingprices has materially affected our net product sales or income from operationsfor the periods presented.

*Liquidity*.  We plan to continuemaking improvements to our manufacturing facilities during 2006 that includethe acquisition of additional manufacturing equipment and expansion of ourmanufacturing facilities, in order to accommodate our planned growth. Our 2006 capital expenditure planprovides for total spending of $22.6 million, of which we have investedapproximately $12,070,000 in equipment and improvements during the nine monthsended September 30, 2006. We plan to finance the remaining capital expendituresplanned for 2006 from a combination of cash flows from operations, borrowingsand existing cash balances. We also plan to make our estimated litigationsettlement payments of $4,000,000 in the fourth quarter of 2006 and $1,000,000per year over the next four years with our cash flow from operations. As mentioned above, wehave cash, cash equivalents and short-term marketable securities totalingapproximately $21,266,000 as of September 30, 2006, which we believe will be sufficientto fund our operations and expected litigation settlement payments for at leastthe next twelve months. Although the Company is generating positive cash flowfrom operations, (approximately $6,123,000 in the nine months ended September 30,2006), there can be no assurance that changes in our research and developmentplans, capital expenditures and/or acquisitions, or other events affecting ournet product sales or operating expenses will not result in the earlierdepletion of our funds.  Consequently, wecontinue to explore alternative sources for financing our business activities.In appropriate situations, which will be strategically determined, we may seek toraise money from other sources, including contribution by others to jointventures and other collaborative or licensing arrangements for the development,testing, manufacturing and marketing of products under development.

**Critical Accounting Policies and Estimates**

Our significant accounting policies are describedin Note 2 to our consolidated financial statements in our 2005 Annual Report onForm 10-K. Certain of our accounting policies are particularly important to theportrayal of our financial position, results of operations and cash flows andrequire the application of significant judgment by our management; as a resultthey are subject to an inherent degree of uncertainty. In applying thosepolicies, our management uses its judgment to determine the appropriateassumptions to be used in the determination of certain estimates. Thoseestimates are based on our historical experience, terms of existing contracts,our observation of trends in the industry, information provided by ourcustomers and information available from other outside sources, as appropriate.We have reviewed our critical accounting policies and estimates discussed inour 2005 Annual Report on Form 10-K and have determined that, with 

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the exception of the below modifications to our criticalaccounting policies and estimates, those policies continue to be our mostcritical accounting policies for the nine months ended September 30, 2006. Wedid not make any other changes to those policies during the nine months ended September30, 2006.

*Revenue recognition and accounts receivable*

Royalty revenues are earned onAuxilium’s sales of Testim, which incorporates our CPE-215 permeation enhancementtechnology. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalersand chain drug stores, which have the right to return purchased product priorto the units being dispensed through patient prescriptions. Historically,customer returns were not able to be reasonably estimated. Therefore, inaccordance with SFAS No. 48, we deferred the recognition of royalty revenues onproduct shipments of Testim, until the units were dispensed through patientprescriptions. During the nine months ended September 30, 2006, we recorded aone-time increase in royalty revenues of approximately $479,000, or $0.02 pershare, due to a change in estimate which, based on historical experience,allowed us to reasonably estimate future product returns on sales of Testim.

*Equity-basedcompensation*

Commencing January 1, 2006, we began accounting for equity-basedcompensation in accordance with the fair value recognition provisions ofSFAS No. 123 (Revised). Under the fair value recognition provisions ofSFAS No. 123 (Revised), equity-based compensation cost is measured at thegrant date based on the fair value of the award and is recognized as expenseover the requisite service period. Determining the fair value of equity awardsat the grant date requires judgment. We estimate the grant date fair value ofstock options using the Black-Scholes option valuation model. This optionvaluation model requires the input of subjective assumptions including: (1)Expected life - the expected life (estimated period of time outstanding) ofoptions granted is estimated based on historical exercise behaviors; (2)Volatility - the volatility of the Company’s stock is calculated on the grantdate of each equity award using daily price observations over a period of timecommensurate with the related requisite service period; (3) Risk-free rate -the risk-free interest rate is based on the yield curve of U.S. Treasurysecurities in effect at the date of the grant, having a duration commensuratewith the estimated life of the award; and (4) Dividends - as we have notdeclared dividends, and we do not expect to declare dividends in the future, weinclude an annual dividend rate of 0% when calculating the grant date fairvalue of equity awards. Because equity-based compensation expense is based onawards ultimately expected to vest, it is reduced for estimated forfeitures.SFAS No. 123 (Revised) requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Forfeitures are estimated based on historicalexperience. While we recognize equity-based compensation under the acceleratedexpense attribution method pursuant to FASB Interpretation No. 28 for alloptions previously accounted for under APB Opinion No. 25, we have elected torecognize equity-based compensation attributable to equity awards grantedsubsequent to December 31, 2005 under the straight-line method which is anoption allowed for under SFAS No. 123 (Revised).  Had we elected to recognize compensationexpense for new equity awards under the accelerated expense attribution method,recognition of the related compensation expense would be front-loaded in therequisite service period as opposed to being recognized evenly over the period.

**Important Factors That May Affect Future Results**

This Quarterly Report on Form 10-Q containsforward-looking statements. These forward-looking statements appear principallyin the section entitled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.” Forward-looking statements may appear inother sections of this report, as well. Generally, the forward-lookingstatements in this report include such words as “expect,” “believe,” “continue,”“anticipate,” “estimate,” “may,” “will,” “could,” “opportunity,” “future,” “project,”and similar expressions.

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The forward-looking statements include statementsabout our:

·                  Strategic plans;

·                  Sales growth;

·                  Anticipated sources offuture revenues;

·                  Anticipated 2006expenses, margins and operating performance;

·                  Expected launch of newproducts;

·                  Anticipated expenses andspending;

·                  Planned and continuingclinical trials;

·                  Anticipated regulatorychanges and approvals; and

·                  The sufficiency ofcapital resources to fund our operations.

These forward-looking statements are based on ourcurrent expectations, beliefs, assumptions, estimates, forecasts andprojections for our business and the industry and markets in which we compete.These statements are not guarantees of future performance and involve certainrisks, uncertainties and assumptions that are difficult to predict. Therefore,actual outcomes and results may differ materially from what is expressed insuch forward-looking statements. We caution investors not to place unduereliance on the forward-looking statements contained in this report. Thesestatements speak only as of the date of this report, and we do not undertakeany obligation to update or revise them, except as required by law.  We refer you to our description of the riskfactors related to our business, which are contained in the section entitled “RiskFactors” in our 2005 Annual Report on Form 10-K. As a result of these and otherfactors, we may experience material fluctuations in our future operatingresults, which could materially affect our business, financial position, andstock price.

# **Item 3.        Quantitative andQualitative Disclosures About Market Risk**

*ForeignCurrency.*  A substantial amount of ourbusiness is conducted in Europe and is therefore influenced to the extent towhich there are fluctuations in the U.S. Dollar’s value in relation to othercurrencies, especially the Euro. The exchange rates at September 30, 2006and December 31, 2005 were .79 Euros and .84 Euros per U.S. Dollar,respectively. The weighted average exchange rate for the three months endedSeptember 30, 2006 and 2005 was .78 Euros and .82 Euros per U.S. Dollar,respectively. The weighted average exchange rate for the nine months endedSeptember 30, 2006 and 2005 was .80 Euros and .79 Euros per U.S. Dollar,respectively. The net effect of foreign currency translation on our CondensedConsolidated Financial Statements for the three and nine months endedSeptember 30, 2006 was a net increase of $1,021,000 and $4,692,000,respectively, and the cumulative historical effect as of September 30, 2006 wasan increase of $6,452,000, as reflected in our Consolidated Balance Sheets as *accumulated other**comprehensive income*. A decrease in the weighted average value ofthe Euro over the past year, in relation to the U.S. Dollar, had the following impact onthe results of our operations for the nine months ended September 30, 2006 whenreported in U.S. Dollars: (1) total revenues were decreased by approximately$744,000, (2) gross profit was decreased by approximately $389,000, (3)operating expenses were increased by approximately $118,000, (4) provision forincome taxes was decreased by approximately $61,000, and (5) net income wasdecreased by approximately $445,000. Thecarrying values of assets and liabilities can be materially impacted by foreigncurrency translation, as can the translated amounts of revenues and expenses. Weare considering the use of derivates to limit foreign currency risks.

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

*InterestRates.*  The weighted average interestrate on our short-term borrowings is 5.8% and the amount of borrowingsoutstanding is $380,000 as of September 30, 2006. The effect of anincrease in interest rates of one percentage point (one hundred basis points) toan average of 6.8% on short-term borrowings would have the effect of increasinginterest expense by approximately $4,000 annually.

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# **Item 4.        Controls andProcedures**

Bentley maintains disclosure controls and procedures that are designedto ensure that information required to be disclosed in Bentley’s reports thatare filed or submitted under the Securities Exchange Act of 1934, as amended(the “Exchange Act”) with the Securities and Exchange Commission is recorded,processed, summarized and reported within the time periods required for eachreport and that such information is reported to Bentley’s management, includingits principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosure.

Bentley’s management carried out an evaluation, with the participationof Bentley’s principal executive officer and principal financial officer, ofthe effectiveness of Bentley’s disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of theperiod covered by this quarterly report. Based on that evaluation, Bentley’s principal executive officer andprincipal financial officer concluded that Bentley’s disclosure controls andprocedures were effective as of September 30, 2006.

There was no change in Bentley’s internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)identified in connection with the evaluation of Bentley’s internal controlsthat occurred during the three months ended September 30, 2006 that hasmaterially affected, or is reasonably likely to materially affect, Bentley’sinternal control over financial reporting.

**PART II.                OTHER INFORMATION**

**Item 1. Legal Proceedings**

On September 27, 2004, the Company was served with a complaint in anaction captioned Ethypharm S.A. France & Ethypharm S.A. Spain v. BentleyPharmaceuticals, Inc., U.S. District Court for the District of Delaware,Civil Action No. 04-1300 (SLR).  In thisaction, Ethypharm S.A. France and Ethypharm S.A. Spain, which are referred toindividually and collectively as Ethypharm, alleged that since March 2002 theCompany and its Spanish subsidiary Laboratorios Belmac, S.A. (“Belmac”)misappropriated unspecified Ethypharm trade secrets and confidentialinformation and used that information in the manufacture of omeprazole, one ofBelmac’s pharmaceutical products.  OnApril 11, 2005, Ethypharm S.A. Spain filed suit against Belmac S.A. in theCommercial Court No. 5 of Madrid, Spain. The complaint alleged that Belmac refused to renew its contract withEthypharm for the manufacture of omeprazole which expired on March 22, 2002,and that after that date Belmac’s continued manufacture of omeprazole pursuantto its own patented technology infringed Ethypharm’s Spanish Patent No.ES9301319.  In its complaint, Ethypharmsought an order from the court declaring Belmac to be in violation of Ethypharm’spatent, preventing further sales of omeprazole by Belmac using processes theallegedly infringe Ethypharm’s patent, and awarding monetary damages.

The Company and Belmac have reached substantial agreement withEthypharm on terms to settle all outstanding litigation between the parties. Underthe agreed terms, Belmac will pay Ethypharm $4,000,000 in the fourth quarter of2006 and make four payments of $1,000,000 to be paid on the first fouranniversaries of the first payment. Because no definitive settlement agreementhas yet been concluded, there can be no assurance as to whether, or on whatadditional terms, this litigation will ultimately be settled.

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# **Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

IssuerRepurchases
| ** **                                    | ** ** | **Total   Number  of Shares  (or Units)  Purchased  (1)** | ** ** | **Average   Price  Paid per   Share(2)** | ** ** | **Total Number of Shares  (or Units)   Purchased as  Part of Publicly  Announced Plans   or  Programs** | ** ** | **Maximum Number  (or approximate   dollar value)  of Shares (or Units)   that  may yet be Purchased  under the Plans or  Programs** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1, 2006  through July 31, 2006           |       | —                                                                   |       | $                                                       | —     |                                                                                                                                                      | —     |                                                                                                                                                                                                       | —     |   |
| August 1, 2006  through August 31, 2006       |       | —                                                                   |       | —                                                  |       | —                                                                                                                                                    |       | —                                                                                                                                                                                                     |       |
| September 1,  2006 through September 30, 2006 |       | 91,907                                                                   |       | $                                                       | 12.631     |                                                                                                                                                      | —     |                                                                                                                                                                                                       | —     |   |
|                                          |       |                                                                     |       |                                                    |       |                                                                                                                                                      |       |                                                                                                                                                                                                       |       |
| Total                                         |       | 91,907                                                                   |       | $                                                       | 12.631     |                                                                                                                                                      | —     |                                                                                                                                                                                                       | —     |   |

 

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**(1)**         Represents shares tendered to the Company atfair market value from option holders using mature stock to exercise vestedstock options and satisfy minimum tax withholding liabilities.

 

**(2)  **Weighted average of the high and low prices on the New York StockExchange on the dates of exercise.

#  

# **Item 6. Exhibits**

The Exhibits filed as part of this report are listed on the ExhibitIndex immediately following the signature page, which Exhibit Index isincorporated herein by reference.

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SIGNATURES

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|             |   | BENTLEY PHARMACEUTICALS, INC.            |   |
|------------------|--------|------------------------------------------|--------|
|             |   | Registrant                               |   |
|             |   |                                     |   |
|             |   |                                     |   |
| November 8, 2006 | By:    | /s/ James R. Murphy                      |   |   |
|             |   | James R. Murphy                          |   |
|             |   | Chairman of the Board of Directors       |   |
|             |   | and Chief Executive Officer              |   |
|             |   | (Principal Executive Officer)            |   |
|             |   |                                     |   |
|             |   |                                     |   |
| November 8, 2006 | By:    | /s/ Richard P. Lindsay                   |   |   |
|             |   | Richard P. Lindsay                       |   |
|             |   | Vice President, Chief Financial Officer, |   |
|             |   | Secretary and Treasurer                  |   |
|             |   | (Principal Financial Officer)            |   |

 

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# **Exhibit Index**

| Exhibit  Number | ** ** | ** ** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                          |
|-----------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                |
| 10.1            |       |       |       | Employment Agreement dated as of September 11,  2006 by and between Bentley Pharmaceuticals, Inc. and Richard P. Lindsay.  (Reference is made to Exhibit 10.1 of the Registrant’s Current Report on Form  8-K dated September 11, 2006, Commission File No. 1-10581, which exhibit is  incorporated herein by reference.) |
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                |
| 10.2            |       |       |       | Separation Agreement dated as of September 15, 2006  by and between Bentley Pharmaceuticals, Inc. and Michael D. Price.  (Reference is made to Exhibit 10.2 of the Registrant’s Current Report on Form  8-K dated September 11, 2006, Commission File No. 1-10581, which exhibit is  incorporated herein by reference.)   |
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                |
| 31.1            |       | *          |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                            |
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                |
| 31.2            |       | *          |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                            |
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                |
| 32.1            |       | *          |       | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                             |
|            |       |       |       |                                                                                                                                                                                                                                                                                                                                |
| 32.2            |       | *          |       | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                             |

 

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*              Filedherewith.

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