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) OF THE
---      SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003
                               -------------

                                       OR

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---      SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ____________________

                         Commission File Number 1-10581


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


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

                  Bentley Park, 2 Holland Way, Exeter, NH 03833
                (Current Address of Principal Executive Offices)

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

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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in rule 12b-2 of the Exchange Act). YES X      NO
                                               ----      ------

The number of shares of the registrant's common stock outstanding as of July 31,
2003 was 17,763,908.

<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                  FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003
                                      INDEX


Part I.   UNAUDITED FINANCIAL INFORMATION                                   PAGE
          -------------------------------                                   ----

          Item 1. Consolidated Financial Statements:

                  Consolidated Balance Sheets as of June 30, 2003
                  and December 31, 2002                                        3

                  Consolidated Income Statements and Statements
                  of Comprehensive Income for the three months
                  ended June 30, 2003 and 2002, and the six months
                  ended June 30, 2003 and 2002                                 4

                  Consolidated Statement of Changes in Stockholders'
                  Equity for the six months ended June 30, 2003                5

                  Consolidated Statements of Cash Flows for the
                  six months ended June 30, 2003 and 2002                      6

                  Notes to Consolidated Financial Statements                   8


          Item 2. Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                         16

          Item 3. Quantitative and Qualitative Disclosures About Market Risk  27

          Item 4. Controls and Procedures                                     28


Part II.  OTHER INFORMATION
          -----------------


          Item 1. Legal Proceedings                                           29

          Item 2. Changes in Securities and Use of Proceeds                   29

          Item 4. Submission of Matters to a Vote of Security Holders         29

          Item 6. Exhibits and Reports on Form 8-K                            31


                                       2
<PAGE>
                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(in thousands, except per share data)                                          June 30,             December 31,
                                                                                 2003                   2002
                                                                            ----------------       ---------------
ASSETS
------
Current assets:
<S>                                                                                <C>                   <C>
  Cash and cash equivalents                                                        $ 24,823              $ 26,581
  Marketable securities                                                                 436                   396
  Receivables, net                                                                   17,325                10,874
  Inventories, net                                                                    5,563                 5,133
  Deferred foreign taxes                                                                134                   123
  Prepaid expenses and other                                                          1,174                   865
                                                                            ----------------       ---------------
    Total current assets                                                             49,455                43,972
                                                                            ----------------       ---------------
Non-current assets:
  Fixed assets, net                                                                  14,096                 9,565
  Drug licenses and related costs, net                                               13,261                10,975
  Restricted cash                                                                     1,000                     -
  Other                                                                                 180                   180
                                                                            ----------------       ---------------
    Total non-current assets                                                         28,537                20,720
                                                                            ----------------       ---------------
                                                                                   $ 77,992              $ 64,692
                                                                            ================       ===============

LIABILITIES  AND  STOCKHOLDERS'  EQUITY
---------------------------------------
Current liabilities:
  Accounts payable                                                                  $ 9,676               $ 7,206
  Accrued expenses                                                                    7,136                 4,059
  Short-term borrowings                                                               1,606                 1,598
  Current portion of long-term debt                                                     138                   127
  Deferred income                                                                     1,168                   279
                                                                            ----------------       ---------------
    Total current liabilities                                                        19,724                13,269
                                                                            ----------------       ---------------
Non-current liabilities:
  Deferred foreign taxes                                                              2,335                 2,141
  Long-term debt                                                                        322                   345
  Other                                                                                 179                   186
                                                                            ----------------       ---------------
    Total non-current liabilities                                                     2,836                 2,672
                                                                            ----------------       ---------------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $1.00 par value, authorized 2,000 shares,
    issued and outstanding, none                                                          -                     -
  Common stock, $.02 par value, authorized 100,000 shares,
    issued and outstanding, 17,664 and 17,404 shares                                    354                   348
  Stock purchase warrants (to purchase 3,147 and 3,292
    shares of common stock)                                                             429                   431
  Additional paid-in capital                                                        122,507               121,084
  Accumulated deficit                                                               (69,635)              (72,696)
  Accumulated other comprehensive income (loss)                                       1,777                  (416)
                                                                            ----------------       ---------------
    Total stockholders' equity                                                       55,432                48,751
                                                                            ----------------       ---------------
                                                                                   $ 77,992              $ 64,692
                                                                            ================       ===============
</TABLE>

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

                                        3
<PAGE>
                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                         CONSOLIDATED INCOME STATEMENTS
                     AND STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
    (in thousands, except per share data)
                                                        For the Three Months Ended June 30,    For the Six Months Ended June 30,
                                                        -----------------------------------    ----------------------------------
                                                             2003                2002               2003               2002
                                                        ----------------    ---------------    ---------------    ---------------
    Revenues:
<S>                                                            <C>                 <C>               <C>                <C>
      Net product sales                                        $ 16,596            $ 9,809           $ 30,831           $ 18,866
      Licensing and collaboration revenues                          158                 58                911                175
                                                        ----------------    ---------------    ---------------    ---------------
    Total revenues                                               16,754              9,867             31,742             19,041

    Cost of net product sales                                     6,819              4,249             12,940              8,025
                                                        ----------------    ---------------    ---------------    ---------------

     Gross profit                                                 9,935              5,618             18,802             11,016
                                                        ----------------    ---------------    ---------------    ---------------

    Operating expenses:
       Selling and marketing                                      3,626              2,608              6,979              5,218
       General and administrative                                 1,786              1,315              3,345              2,409
       Research and development                                     879                583              1,897              1,347
       Depreciation and amortization                                328                237                611                484
                                                        ----------------    ---------------    ---------------    ---------------

      Total operating expenses                                    6,619              4,743             12,832              9,458
                                                        ----------------    ---------------    ---------------    ---------------

    Gain on sale of drug licenses                                     -                520                  -                592
                                                        ----------------    ---------------    ---------------    ---------------

    Income from operations                                        3,316              1,395              5,970              2,150
                                                        ----------------    ---------------    ---------------    ---------------

    Other income (expenses):
        Interest income                                              82                 85                165                 93
        Interest expense                                            (60)               (67)              (114)              (110)
        Other                                                        (4)                (8)                (4)                 4
                                                        ----------------    ---------------    ---------------    ---------------

    Income before income taxes                                    3,334              1,405              6,017              2,137

    Provision for foreign income taxes                            1,805                886              2,956              1,483
                                                        ----------------    ---------------    ---------------    ---------------

    Net income                                                  $ 1,529              $ 519            $ 3,061              $ 654
                                                        ================    ===============    ===============    ===============

    Net income per common share:
    Basic                                                        $ 0.09             $ 0.03             $ 0.17             $ 0.04
                                                        ================    ===============    ===============    ===============
    Diluted                                                      $ 0.07             $ 0.03             $ 0.15             $ 0.03
                                                        ================    ===============    ===============    ===============

    Weighted average common shares outstanding:
    Basic                                                        17,534             16,823             17,495             15,735
                                                        ================    ===============    ===============    ===============
    Diluted                                                      20,878             20,484             20,617             19,204
                                                        ================    ===============    ===============    ===============

    Net income                                                  $ 1,529              $ 519            $ 3,061              $ 654
    Other comprehensive income (loss):
       Foreign currency translation gains                         1,513              2,105              2,193              1,846
                                                        ----------------    ---------------    ---------------    ---------------
    Comprehensive income                                        $ 3,042            $ 2,624            $ 5,254            $ 2,500
                                                        ================    ===============    ===============    ===============
</TABLE>
       The accompanying Notes to Consolidated Financial Statements are an
                  integral part of these financial statements.

                                        4
<PAGE>
                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

(in thousands, except per share data)        $.02 Par Value                                               Accumulated
                                              Common Stock          Stock       Additional                   Other
                                          --------------------     Purchase      Paid-In    Accumulated   Comprehensive
                                           Shares      Amount      Warrants      Capital      Deficit      Income (Loss)    Total
                                          ---------   --------  ------------    ----------  -----------   -------------- -----------

<S>                                       <C>         <C>           <C>       <C>         <C>               <C>        <C>
Balance at December 31, 2002                17,404      $ 348         $ 431     $121,084    $ (72,696)        $ (416)    $ 48,751
   Exercise of stock options and warrants      205          4            (2)         960            -              -          962
   Equity based compensation                    55          2             -          463            -              -          465
   Foreign currency translation adjustment       -          -             -            -            -          2,193        2,193
   Net income                                    -          -             -            -        3,061              -        3,061
                                          ---------   --------  ------------    ----------  -----------   -------------   ---------
Balance at June 30, 2003                    17,664      $ 354         $ 429     $122,507    $ (69,635)       $ 1,777     $ 55,432
                                          =========   ========  ============    ==========  ===========   =============  ==========
</TABLE>





























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

                                        5


<PAGE>

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



<TABLE>
<CAPTION>
 (in thousands)
                                                                       For the Six Months Ended June 30,
                                                                   ---------------------------------------
                                                                         2003                  2002
                                                                   -----------------      ----------------

 Cash flows from operating activities:
<S>                                                                         <C>                     <C>
   Net income                                                        $        3,061         $         654
   Adjustments to reconcile net income to net
     cash provided by (used in) operating activities:
     Gain on sale of drug licenses                                                -                  (592)
     Depreciation and amortization                                            1,078                   735
     Equity-based compensation expense                                          237                    90
     Other non-cash items                                                      (149)                  507
     (Increase) decrease in assets and
       increase (decrease) in liabilities:
       Receivables                                                           (4,709)               (2,128)
       Inventories                                                               33                  (937)
       Prepaid expenses and other current assets                               (134)                 (390)
       Other assets                                                              (9)                   50
       Accounts payable and accrued expenses                                  3,732                 1,446
       Deferred income                                                          753                  (190)
       Other liabilities                                                         (7)                    -
                                                                   -----------------      ----------------

         Net cash provided by (used in) operating activities                  3,886                  (755)
                                                                   -----------------      ----------------

 Cash flows from investing activities:
   Proceeds from sale of drug licenses                                            -                   598
   Proceeds from sale of investments                                        114,600                11,290
   Purchase of investments                                                 (114,509)              (21,467)
   Additions to fixed assets                                                 (4,131)               (1,320)
   Additions to drug licenses and related costs                              (2,054)                 (160)
                                                                   -----------------      ----------------

         Net cash used in investing activities                               (6,094)              (11,059)
                                                                   -----------------      ----------------

</TABLE>



                          (Continued on following page)


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

                                        6


<PAGE>

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


<TABLE>
<CAPTION>
 (in thousands)
                                                                       For the Six Months Ended June 30,
                                                                   ---------------------------------------
                                                                         2003                  2002
                                                                   -----------------      ----------------

 Cash flows from financing activities:
<S>                                                                  <C>                    <C>
   Proceeds from offering of common stock, net                       $            -         $      22,106
   Proceeds from exercise of stock options/warrants                             962                   970
   Repayment of borrowings                                                   (1,329)               (2,203)
   Proceeds from borrowings                                                   1,150                 1,530
   Increase in restricted cash                                               (1,000)                    -
                                                                   -----------------      ----------------

         Net cash (used in) provided by financing activities                   (217)               22,403
                                                                   -----------------      ----------------

 Effect of exchange rate changes on cash                                        667                   164
                                                                   -----------------      ----------------

 Net (decrease) increase in cash and cash equivalents                        (1,758)               10,753

 Cash and cash equivalents at beginning of period                            26,581                 5,736
                                                                   -----------------      ----------------

 Cash and cash equivalents at end of period                          $       24,823         $      16,489
                                                                   =================      ================



 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 The Company paid cash during the period for:

   Interest                                                          $           97         $         107
                                                                   =================      ================
   Foreign income taxes                                              $          847         $         420
                                                                   =================      ================

 SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING
    AND INVESTING ACTIVITIES
 The Company has issued shares of common stock to employees in lieu
   of cash compensation as follows:

   Shares                                                                        55                    13
                                                                   =================      ================
   Amount                                                            $          465         $         134
                                                                   =================      ================

   Included in accounts payable are fixed
    asset and drug license purchases totaling                        $        1,222         $         320
                                                                   =================      ================

</TABLE>





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

                                        7


<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





HISTORY AND OPERATIONS:

     Bentley Pharmaceuticals, Inc. and Subsidiaries (which may be referred to as
Bentley Pharmaceuticals, Bentley, the Company, we, us or our) is a U.S.-based
international specialty pharmaceutical company focused on advanced drug delivery
technologies and pharmaceutical products. We own U.S. and international patent
and other proprietary rights to technologies that enhance or facilitate the
absorption of drugs across biological membranes. We are developing products
incorporating these technologies and seek to form strategic alliances with other
pharmaceutical and biotechnology companies to facilitate the development and
commercialization of our products. We currently have strategic alliances with
Pfizer Inc. and Auxilium Pharmaceuticals, Inc. and are in preliminary
discussions with a number of pharmaceutical companies to form additional
alliances. Bentley Pharmaceuticals is incorporated in the State of Delaware.

     We also have a commercial presence in Spain, where we manufacture, market
and sell branded and generic pharmaceutical products primarily within four
therapeutic areas: cardiovascular, gastrointestinal, neurological and infectious
diseases.

     We anticipated the opportunities that the emerging generic drug market in
Spain presented and began taking measures over four years ago to enter the
Spanish generic drug market. We created Laboratorios Davur, a wholly-owned
subsidiary of our Spanish entity, Laboratorios Belmac, to register, market and
distribute generic pharmaceutical products in Spain and began aligning our
business model to be competitive, including hiring and training a new generic
sales force, submission of generic-equivalent products to the Spanish Ministry
of Health for approval and a marketing campaign designed to position our Spanish
generic subsidiary as a leader in the Spanish generic drug market. In July 2000,
we entered into a strategic alliance with Teva Pharmaceutical Industries, Ltd.
(Teva), whereby we have received the right to register and market in Spain more
than 75 of Teva's products. Teva also entered into a supply agreement with us
pursuant to which Teva will manufacture the products and supply them to us for
marketing and sale in Spain. Teva was also granted a right of first refusal to
acquire Laboratorios Davur in the event that we decide to sell that subsidiary
or its direct parent, Laboratorios Belmac. We also granted Teva the right to bid
for Laboratorios Belmac in the event we decide to sell that subsidiary.





                                       8
<PAGE>

BASIS OF CONSOLIDATED FINANCIAL STATEMENTS:

     The consolidated financial statements of Bentley Pharmaceuticals at June
30, 2003 and 2002, included herein, have been prepared by us, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted in so far as such
information was disclosed in our consolidated financial statements for the year
ended December 31, 2002. These consolidated financial statements should be read
in conjunction with the summary of significant accounting policies and the
audited consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2002.

     In the opinion of management, the accompanying unaudited consolidated
financial statements for the period ended June 30, 2003 and 2002 are presented
on a basis consistent with the audited consolidated financial statements for the
year ended December 31, 2002 and contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly Bentley's financial
position as of June 30, 2003 and the results of our operations and our cash
flows for the six months ended June 30, 2003 and 2002. The results of operations
for the six months ended June 30, 2003 should not necessarily be considered
indicative of the results to be expected for the year.


CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:

     Included in cash and cash equivalents at June 30, 2003 and December 31,
2002 are approximately $22,015,000 and $23,360,000, respectively, of short-term
investments considered to be cash equivalents, as the remaining maturity dates
of such investments were three months or less when purchased.

     We acquired intellectual property during the quarter ended June 30, 2003
for $1,000,000 plus future royalties on sales and licensing income. We have
obtained a renewable, irrevocable letter of credit in the amount of $1,000,000
in favor of the assignor to guarantee future royalty payments. We have
classified the $1,000,000 used to secure the letter of credit as restricted cash
in the Consolidated Balance Sheets as of June 30, 2003.


MARKETABLE SECURITIES:

     We have investments in securities, with remaining maturities of greater
than three months when purchased, totaling $436,000 and $396,000, which are
classified as marketable securities as of June 30, 2003 and December 31, 2002,
respectively. These investments are considered available-for-sale and are
carried at fair value. Unrealized gains or losses, if any, are recorded as a
component of other comprehensive income in the Consolidated Balance Sheets.


                                       9
<PAGE>

INVENTORIES:

     Inventories are stated at the lower of cost or market, cost being
determined on the first in, first out ("FIFO") method, and are comprised of the
following (in thousands):

<TABLE>
<CAPTION>
                                                  JUNE 30, 2003       DECEMBER 31, 2002
                                                  -------------       -----------------

<S>                                                    <C>                    <C>
Raw materials                                          $3,534                 $3,518
Finished goods                                          2,097                  1,677
                                                        -----                ------
                                                        5,631                  5,195
Less allowance for slow moving inventory                  (68)                   (62)
                                                       ------                 ------
                                                       $5,563                 $5,133
                                                       ======                 ======
</TABLE>


FIXED ASSETS:

     Fixed assets consist of the following (in thousands):


<TABLE>
<CAPTION>
                                                  JUNE 30, 2003       DECEMBER 31, 2002
                                                  -------------       -----------------
<S>                                                   <C>                      <C>
Land                                                  $ 1,789                  $ 930
Buildings                                               7,220                  5,576
Equipment                                               7,641                  5,197
Furniture and fixtures                                  1,451                  1,006
Leasehold improvements                                     43                     52
                                                      -------                -------
                                                       18,144                 12,761
Less accumulated depreciation                          (4,048)                (3,196)
                                                      -------                -------
                                                      $14,096                 $9,565
                                                      =======                 ======
</TABLE>

     We purchased a 15,700 square foot commercial building located on
approximately 14 acres of land in Exeter, NH for $1,776,600 in January 2003. The
purchase included furniture and fixtures in the building and the purchase price
was allocated to the following components in accordance with their relative fair
market values: land - $775,100, buildings - $898,400, and furniture and fixtures
- $103,100. We moved our corporate headquarters into the new building in April
2003. We have expensed $42,000 for the remaining lease costs and abandonment of
leasehold improvements related to the former office space, all of which has been
recorded in general and administrative expenses in the Consolidated Income
Statements for the quarter ended June 30, 2003. The lease agreement ends in
February 2004.

     Depreciation expense of approximately $147,000 and $114,000 has been
charged to operations as a component of depreciation and amortization expense on
the Consolidated Income Statements for the six months ended June 30, 2003 and
2002, respectively. We have included depreciation totaling approximately
$467,000 and $251,000 in cost of net product sales during the six months ended
June 30, 2003 and 2002, respectively.


                                       10
<PAGE>


STOCKHOLDERS' EQUITY:

     A substantial amount of our business is conducted in Europe and is
therefore influenced to the extent to which there are fluctuations in the U.S.
Dollar's value against other currencies, specifically the Euro. The exchange
rate at June 30, 2003 and December 31, 2002 was .88 Euros and .95 Euros per U.S.
Dollar, respectively. The weighted average exchange rate for the three months
ended June 30, 2003 and 2002 was .88 Euros and 1.09 Euros per U.S. Dollar,
respectively. The weighted average exchange rate for the six months ended June
30, 2003 and 2002 was .91 Euros and 1.11 Euros per U.S. Dollar, respectively.
The effect of foreign currency fluctuations on long lived assets for the six
months ended June 30, 2003 was an increase of $2,193,000 and the cumulative
historical effect on equity was an increase of $1,777,000, as reflected in our
Consolidated Balance Sheets as accumulated other comprehensive income.

     At our Annual Meeting of Stockholders on May 21, 2003, the stockholders of
the Company approved an increase in the number of the Company's authorized
Common Shares from 35,000,000 to 100,000,000.


LICENSING AND COLLABORATION REVENUES:

     Auxilium Pharmaceuticals, Inc. launched its new testosterone replacement
gel, Testim TM, which utilizes Bentley's patented CPE-215TM drug delivery
technology, during the first quarter of 2003. Auxilium paid a milestone payment
to us during the first quarter of 2003, which we recorded as licensing and
collaboration revenues in the Consolidated Income Statement for the three months
ended March 31, 2003. In connection with the Testim product launch, Bentley
began earning royalty revenues on a percentage of Testim sales as defined in the
licensing agreement with Auxilium. Royalty revenues on Testim product sales are
recognized based on an estimate of Auxilium's sell-through of the Testim product
based on prescriptions written, until such time that returns from wholesalers
and pharmacies can be reasonably estimated. For the three and six months ended
June 30, 2003, we recognized royalty revenues of $158,000 and $208,000,
respectively, based on an estimate of prescriptions written. The difference
between the total amount due from Auxilium under the royalty arrangement and the
amount recognized as net product sales has been recorded as deferred income in
the Consolidated Balance Sheet as of June 30, 2003. We will continue to use
available market information to determine the amount and timing of royalty
revenue recognition.


PROVISION FOR INCOME TAXES:

     As a result of reporting taxable income for tax purposes in Spain, we
recorded provisions for foreign income taxes totaling $1,805,000 and $886,000
for the three months ended June 30, 2003 and 2002, respectively. These amounts
represent 42% and 43% of the pre-tax income reported in Spain for the three
months ended June 30, 2003 and 2002, respectively. We have recorded provisions
for foreign income taxes totaling $2,956,000 and $1,483,000 for the six months
ended June 30, 2003 and 2002, respectively. These amounts represent 40% and 41%
of the pre-tax income reported in Spain for the six



                                       11
<PAGE>

months ended June 30, 2003 and 2002, respectively. No tax benefit has been
recorded for U.S. losses, which totaled ($976,000) and ($651,000) for the three
months ended June 30, 2003 and 2002, respectively, and ($1,465,000) and
($1,453,000) for the six months ended June 30, 2003 and 2002, respectively, as
future domestic operating profits cannot be assured. Accordingly, we have
established a valuation allowance equal to the full amount of the U.S. deferred
tax assets. The provisions for income taxes differ from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax income, primarily as
a result of the increase in the valuation allowance to offset U.S. deferred tax
assets, certain nondeductible expenses in Spain and the higher statutory income
tax rate of 35% in Spain.

     Certain tax contingencies exist and when probable and reasonably estimable,
are provided for in the Consolidated Financial Statements. Accordingly, as of
June 30, 2003, no amounts have been provided for related to these contingencies.


BASIC AND DILUTED NET INCOME PER COMMON SHARE:

     Basic and diluted net income per common share is based on the weighted
average number of shares of common stock outstanding during each period. The
dilutive effect of our outstanding stock options and stock purchase warrants
were considered in the income per share calculations for the three and six
months ended June 30, 2003 and 2002.

     The following is a reconciliation between basic and diluted net income per
common share for the three and six months ended June 30, 2003 and 2002. Dilutive
securities issuable for the three and six months ended June 30, 2003 include
approximately 1,334,000 and 1,260,000 shares, respectively, issuable as a result
of exercisable Class B Warrants and approximately 2,010,000 and 1,862,000
shares, respectively, issuable as a result of various stock options and other
warrants that are outstanding and exercisable. Dilutive securities issuable for
the three and six months ended June 30, 2002 include approximately 1,499,000 and
2,048,000 shares, respectively, issuable as a result of exercisable Class B
Warrants and approximately 2,162,000 and 1,421,000 shares issuable as a result
of various stock options and other warrants that are outstanding and
exercisable.

                      (in thousands, except per share data)

     For the Three Months Ended June 30, 2003:
<TABLE>
<CAPTION>
                                                                Effect of Dilutive
                                            Basic EPS               Securities                  Diluted EPS
                                        ------------------     ----------------------     ------------------------
<S>                                         <C>                 <C>                             <C>
Net Income                                    $ 1,529                $       -                    $ 1,529
Number of Common Shares                        17,534                    3,344                     20,878
Net Income Per Common Share                   $   .09               ($     .02)                   $   .07

</TABLE>


                                       12
<PAGE>


     For the Six Months Ended June 30, 2003:
<TABLE>
<CAPTION>
                                                                Effect of Dilutive
                                            Basic EPS               Securities                  Diluted EPS
                                        ------------------     ----------------------     ------------------------
<S>                                           <C>                 <C>                            <C>
Net Income                                    $ 3,061               $       -                      $ 3,061
Number of Common Shares                        17,495                   3,122                       20,617
Net Income Per Common Share                   $   .17              ($     .02)                     $   .15


</TABLE>
     For the Three Months Ended June 30, 2002:

<TABLE>
<CAPTION>
                                                                Effect of Dilutive
                                            Basic EPS               Securities                  Diluted EPS
                                        ------------------     ----------------------     ------------------------
<S>                                           <C>                 <C>                            <C>
Net Income                                    $   519                $      -                      $   519
Number of Common Shares                        16,823                   3,661                       20,484
Net Income Per Common Share                   $   .03               ($    .00)                     $   .03

</TABLE>
     For the Six Months Ended June 30, 2002:

<TABLE>
<CAPTION>
                                                                Effect of Dilutive
                                            Basic EPS               Securities                  Diluted EPS
                                        ------------------     ----------------------     ------------------------
<S>                                           <C>                 <C>                            <C>
Net Income                                    $   654               $       -                      $   654
Number of Common Shares                        15,735                   3,469                       19,204
Net Income Per Common Share                   $   .04              ($     .01)                     $   .03
</TABLE>

     Excluded from the diluted EPS presentation, because their exercise prices
were greater than the average fair value of the Common Stock in the respective
periods, were warrants and options to purchase an aggregate of 518,000 and
1,328,000 shares of Common Stock, for the three and six months ended June 30,
2003, respectively, and warrants and options to purchase an aggregate of 212,000
and 327,000 shares of Common Stock for the three and six months ended June 30,
2002, respectively.


STOCK BASED COMPENSATION:

     We have stock-based employee compensation plans that are described more
fully in Note 11 of the Notes to Consolidated Financial Statements included in
the Annual Report on Form 10-K for the year ended December 31, 2002. We account
for these plans under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
Options granted under these plans have exercise prices equal to or greater than
the market value of the underlying common stock on the dates of grant, which is
the date on which compensation is measured. In addition to these plans, we also
sponsor a 401(k) plan for eligible employees and match eligible contributions
with shares of our Common Stock. From time to time, at the discretion of the
Compensation Committee, we grant shares of our Common Stock to employees in lieu
of cash compensation. Related stock-based employee compensation costs are
reflected in the Consolidated Income Statements and Statements of Cash Flows.





                                       13
<PAGE>


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

<TABLE>
<CAPTION>
                                                  FOR THE THREE MONTHS ENDED            FOR THE SIX MONTHS ENDED
                                                          JUNE 30,                               JUNE 30,
                                            -------------------------------------     -------------------------------------
                                                 2003                 2002                 2003                 2002
                                            ------------------   ----------------     -----------------    ----------------

<S>                                               <C>              <C>                 <C>                 <C>
Net income, as reported                            $ 1,529          $    519           $  3,061            $     654

Add: Stock-based employee compensation
  expense included in reported net income              109                37                237                   90

Deduct: Total stock-based employee
  compensation expense determined under
  fair value method for all awards                    (775)             (980)            (1,512)              (2,232)
                                                   -------          --------           --------            ---------

Pro forma net income (loss)                        $   863          $   (424)          $  1,786            $  (1,488)
                                                   =======          ========           ========            =========

Net income (loss) per share:
    Basic - as reported                            $  0.09          $   0.03           $   0.17            $    0.04
                                                   =======          ========           ========            =========
    Basic - pro forma                              $  0.05          $  (0.03)          $   0.10            $   (0.09)
                                                   =======          ========           ========            =========

    Diluted - as reported                          $  0.07          $   0.03           $   0.15            $    0.03
                                                   =======          ========           ========            =========
    Diluted - pro forma                            $  0.04          $  (0.03)          $   0.09            $   (0.09)
                                                   =======          ========           ========            =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                  FOR THE THREE MONTHS ENDED            FOR THE SIX MONTHS ENDED
                                                          JUNE 30,                               JUNE 30,
                                            -------------------------------------     -------------------------------------
                                                 2003                 2002                 2003                 2002
                                            ------------------   ----------------     -----------------    ----------------

<S>                                               <C>                  <C>                  <C>                 <C>
Risk-free interest rate                            3.62%               5.13%                 3.89%               5.13%
Dividend yield                                     0.00%               0.00%                 0.00%               0.00%
Expected life                                    5 years             5 years               5 years             5 years
Volatility                                        53.06%              93.23%                54.30%              94.33%
Fair value of options granted                     $4.87               $5.74                 $4.98               $5.74

</TABLE>
     Stock or other equity based compensation for non-employees is accounted for
under the fair value method as required by SFAS No. 123 and Emerging Issues Task
Force ("EITF") Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in



                                       14
<PAGE>

Conjunction with Selling, Goods or Services and other related interpretations.
Under this method, the equity based instrument is valued at either the fair
value of the consideration received or the equity instrument issued on the
measurement date, which is typically the date of grant. The resulting
compensation cost is recognized and charged to operations over the service
period, which is usually the vesting period.

     At our Annual Meeting of Stockholders on May 21, 2003, the Company's
stockholders approved an increase in the number of shares authorized for
issuance under the Company's 2001 Employee Stock Option Plan by 1,500,000 shares
and an increase in the number of shares authorized for issuance under the
Company's 2001 Directors' Stock Option Plan by 500,000 shares.


RECLASSIFICATIONS:

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


NEW ACCOUNTING PRONOUNCEMENTS:

     In December 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. We have adopted the disclosure
requirements of FIN 45 as of December 31, 2002 and determined that no additional
disclosures were required. In addition, we are required to adopt the initial
recognition and measurement of the fair value of the obligation undertaken in
issuing the guarantee on a prospective basis to guarantees issued or modified
after December 31, 2002. The adoption of FIN 45 has not had, nor do we expect it
to have, a material effect on our financial position, results of operations or
cash flows.

     In November 2002, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF
Issue No. 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF Issue No. 00-21 establishes three principles: revenue arrangements with
multiple deliverables should be divided into separate units of accounting,
arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values, and revenue recognition criteria
should be considered individually for each separate unit of accounting. EITF
Issue No. 00-21 is effective for all revenue arrangements entered into in fiscal
periods beginning after June 15, 2003, with early adoption permitted. We do not
believe EITF Issue No. 00-21 will have a material effect on our financial
position, results of operations or cash flows.


                                       15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

CRITICAL ACCOUNTING POLICIES
----------------------------

     Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements in our Annual Report of Form 10-K for the
year ended December 31, 2002. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result they are subject to an inherent degree of uncertainty.
In applying those policies, our management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
Those estimates are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by our
customers and information available from other outside sources, as appropriate.
Our significant accounting policies include:

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

o    Revenue recognition and accounts receivable. Revenue on product sales is
     recognized when persuasive evidence of an arrangement exists, the price is
     fixed and final, delivery has occurred and there is a reasonable assurance
     of collection of the sales proceeds. We generally obtain purchase
     authorizations from our customers for a specified amount of product at a
     specified price and consider delivery to have occurred when the customer
     takes possession of the products. We provide our customers with a right of
     return. Revenue is recognized upon delivery of products and a reserve for
     sales returns is recorded. We have demonstrated the ability to make
     reasonable and reliable estimates of product returns in accordance with
     SFAS No. 48 and of allowances for doubtful accounts based on significant
     historical experience. Revenue from service sales is recognized when the
     service procedures have been completed or applicable milestones have been
     achieved. Revenue from research and development contracts is recognized
     over applicable contractual periods or as defined milestones are attained,
     as specified by each contract and as costs related to the contracts are
     incurred. Royalty revenue is recognized based on an estimate of
     sell-through of product based on prescriptions written, until such time
     that returns from wholesalers and pharmacies can be reasonably estimated.

o    Foreign currency translation. The financial position and results of
     operations of our foreign subsidiaries are measured using local currency as
     the functional currency. Assets and liabilities of each foreign subsidiary
     are translated at the rate of exchange in effect at the end of the period.
     Revenues and expenses are translated at the average exchange rate for the
     period. Foreign currency translation gains and losses are credited to or
     charged against other comprehensive income (loss). Foreign currency
     translation gains and losses arising from cash transactions are credited to
     or charged against current earnings.



                                       16
<PAGE>

o    Drug licenses and related costs. Drug licenses and related costs incurred
     in connection with acquiring licenses, patents and other proprietary rights
     related to our commercially developed products are capitalized. Capitalized
     drug licenses and related costs are being amortized on a straight-line
     basis for periods not exceeding 15 years from the dates of acquisition.
     Carrying values of such assets are reviewed quarterly by comparing the
     carrying amounts to their estimated undiscounted cash flows and adjustments
     are made for any diminution in value.


RESULTS OF OPERATIONS:
----------------------

THREE MONTHS ENDED JUNE 30, 2003 VERSUS THREE MONTHS ENDED JUNE 30, 2002
------------------------------------------------------------------------

     Net Product Sales. Net product sales increased by 69% from $9,809,000 in
the three months ended June 30, 2002 to $16,596,000 in the three months ended
June 30, 2003. The $6,787,000 increase was primarily the result of our increased
sales in the generic drug market in Spain. We anticipated the opportunities in
the emerging generic drug market in Spain and began taking measures over four
years ago to enter the Spanish generic drug market. We began to register,
manufacture and market generic pharmaceutical products in Spain and began
aligning our business model to be competitive in this arena, including hiring
and training a new generic products sales force, submission of
generic-equivalent products to the Spanish Ministry of Health for approval and a
marketing campaign designed to position ourselves as a leader in the Spanish
generic drug market. We experienced an increase in net sales of 37% in local
currency in Spain in the three months ended June 30, 2003 compared to the same
period of the prior year. An increase in the weighted average value of the Euro,
in relation to the U.S. Dollar, had the effect of increasing revenues by
approximately $3,178,000 during the three months ended June 30, 2003.

     Prices for prescription pharmaceuticals in Spain must be approved by the
Ministry of Health. In order to control rising healthcare costs, substitution of
generically equivalent products is often encouraged. In certain circumstances,
local governments in Spain require that prescriptions for generic medications be
filled using one of the three least expensive products on the market unless the
prescription specifies a particular manufacturer's product. There can be no
assurance that other local government agencies or the Ministry of Health will
not adopt similar practices. These policies may have the effect of eroding gross
margins, as sales of higher priced branded products may be replaced with sales
of lower priced generic products. We are striving to maintain product sales and
gross margins by concentrating our efforts on increasing sales volume, being
competitive in the generic drug market, developing new products and increasing
exports outside Spain.

     Licensing and Collaboration Revenues. Licensing and collaboration revenues
totaled $158,000 in the three months ended June 30, 2003 and represent royalties
from sales of Testim, the first product containing our CPE-215 technology to be
marketed in the U.S.



                                       17
<PAGE>

     Gross Profit. Gross profit increased by 77% from $5,618,000 in the three
months ended June 30, 2002 to $9,935,000 in the three months ended June 30,
2003. The $4,317,000 increase was the direct result of the growth in our net
product sales, combined with U.S. royalty revenues. Our gross margins on net
product sales in the three months ended June 30, 2003 totaled 59% compared to
57% for the same period in the prior year. We experienced an increase in gross
profit of 45% in local currency in the three months ended June 30, 2003 compared
to the same period of the prior year. An increase in the weighted average value
of the Euro, in relation to the U.S. Dollar, had the effect of increasing gross
profit by approximately $1,796,000 during the three months ended June 30, 2003.
Sales of generic products accounted for approximately 43% of our net product
sales for the three months ended June 30, 2003. Although we expect to continue
to benefit from economies of scale in the future as we grow, gross margins may
decrease as sales of generic products, with lower margins, become more
significant in the future. Additionally, the Ministry of Health in Spain levies
a tax on pharmaceutical companies for the purpose of funding rising healthcare
costs in Spain. In the three months ended June 30, 2003, this tax had the effect
of reducing gross profit by approximately $210,000 and gross margins by
approximately 1 percentage point.

     Selling and Marketing Expenses. Selling and marketing expenses increased by
39% from $2,608,000 in the three months ended June 30, 2002 to $3,626,000 in the
three months ended June 30, 2003. The $1,018,000 increase was instrumental in
achieving a 69% increase in net product sales during the period, as a result of
our successful sales and marketing programs. The increase in the weighted
average value of the Euro, in relation to the U.S. Dollar, had the effect of
increasing selling and marketing expenses by $691,000 in the three months ended
June 30, 2003. Selling and marketing expenses as a percentage of net product
sales decreased to 22% in the three months ended June 30, 2003 compared to 27%
of sales in the same period of the prior year.

     General and Administrative Expenses. General and administrative expenses
increased by 36% from $1,315,000 in the three months ended June 30, 2002 to
$1,786,000 in the three months ended June 30, 2003. The $471,000 increase was
the result of increased general and administrative activities required to
support our revenue growth in the current quarter. General and administrative
expenses as a percent of total revenues decreased to less than 11% for the three
months ended June 30, 2003, compared to more than 13% of total revenues for the
same period of the prior year. General and administrative expenses would have
been approximately $202,000 lower in the three months ended June 30, 2003,
absent the increase in the weighted average value of the Euro, in relation to
the U.S. Dollar. We expect that our future expenditures for general and
administrative expenses will continue to increase as we grow. Although we cannot
reasonably estimate the total costs associated with implementation of the
internal control provisions of the Sarbanes-Oxley Act of 2002, we are presently
incurring costs and expect to incur additional costs not previously experienced;
however, we do not believe that these costs will be material to our financial
position, results of operations or cash flows.




                                       18
<PAGE>

     Research and Development Expenses. Research and development expenses
increased by 51% from $583,000 in the three months ended June 30, 2002 to
$879,000 in the three months ended June 30, 2003. The $296,000 increase was the
result of pre-clinical programs underway in collaboration with universities and
with product formulation and testing efforts being performed in the laboratory
in our U.S. headquarters and at our facility in Zaragoza, Spain. We are using
our U.S. laboratory to develop potential product applications using our drug
delivery technologies. The expenditures in research and development reflect our
focus on projects that are necessary for expansion of our portfolio of marketed
products and clinical trials involving our drug delivery technologies. We expect
that our future expenditures for research and development activities will
continue to increase as a result of programs that are necessary to advance new
applications of our technologies.

     Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by 38% from $237,000 in the three months ended June 30, 2002
to $328,000 in the three months ended June 30, 2003. The $91,000 increase was
primarily the result of higher depreciation charges with respect to recent asset
additions and the effect of fluctuations in foreign currency exchange rates.

     Provision for Income Taxes. We generated additional U.S. federal net
operating loss carry-forwards in the three months ended June 30, 2003 and 2002
as a result of U.S. pretax losses of ($976,000) and ($651,000), respectively.
However, since we are not assured of future profitable domestic operations, we
have recorded a valuation allowance for any future tax benefit of such losses in
the U.S. Therefore, no tax benefit has been recognized with respect to U.S.
losses reported in the three months ended June 30, 2003 or 2002. We recorded a
provision for foreign income taxes totaling $1,805,000 (approximately 42% of the
Spanish pretax income of $4,310,000) for the three months ended June 30, 2003
compared to a provision for foreign income taxes of $886,000 (approximately 43%
of the Spanish pretax income of $2,056,000) in the same period of the prior
year. The provision for foreign income taxes for the current quarter would have
been approximately $371,000 lower than reported, absent the increase in the
weighted average value of the Euro, in relation to the U.S. Dollar.

     Net Income. We reported income from operations of $3,316,000 for the three
months ended June 30, 2003 compared to income from operations of $1,395,000
(including $520,000 of pre-tax gain on sale of drug licenses) in the same period
of the prior year. The combination of income from operations of $3,316,000 and
the non-operating items, primarily the provision for foreign income taxes of
$1,805,000, resulted in net income of $1,529,000, or $.09 per basic common share
($.07 per diluted common share) on 17,534,000 weighted average basic common
shares outstanding (20,878,000 weighted average diluted common shares
outstanding) for the three months ended June 30, 2003, compared to net income
for the three months ended June 30, 2002 of $519,000, or $.03 per basic and
diluted common share (on 16,823,000 weighted average basic common shares
outstanding and 20,484,000 weighted average diluted common shares outstanding).



                                       19
<PAGE>

SIX MONTHS ENDED JUNE 30, 2003 VERSUS SIX MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------------------


     Net Product Sales. Net product sales increased by 63% from $18,866,000 in
the six months ended June 30, 2002 to $30,831,000 in the six months ended June
30, 2003. The $11,965,000 increase was primarily the result of our increased
sales in the generic drug market in Spain. We anticipated the opportunities in
the emerging generic drug market in Spain and began taking measures over four
years ago to enter the Spanish generic drug market. We began to register,
manufacture and market generic pharmaceutical products in Spain and began
aligning our business model to be competitive in this arena, including hiring
and training a new generic products sales force, submission of
generic-equivalent products to the Spanish Ministry of Health for approval and a
marketing campaign designed to position ourselves as a leader in the Spanish
generic drug market. We experienced an increase in net sales of 37% in local
currency in Spain in the six months ended June 30, 2003 compared to the same
period of the prior year. An increase in the weighted average value of the Euro,
in relation to the U.S. Dollar, had the effect of increasing revenues by
approximately $5,032,000 during the six months ended June 30, 2003.

     Prices for prescription pharmaceuticals in Spain must be approved by the
Ministry of Health. In order to control rising healthcare costs, substitution of
generically equivalent products is often encouraged. In certain circumstances,
local governments in Spain require that prescriptions for generic medications be
filled using one of the three least expensive products on the market unless the
prescription specifies a particular manufacturer's product. There can be no
assurance that other local government agencies or the Ministry of Health will
not adopt similar practices. These policies may have the effect of eroding gross
margins, as sales of higher priced branded products may be replaced with sales
of lower priced generic products. We are striving to maintain product sales and
gross margins by concentrating our efforts on increasing sales volume, being
competitive in the generic drug market, developing new products and increasing
exports outside Spain.

     Licensing and Collaboration Revenues. Licensing and collaboration revenues
totaled $911,000 in the six months ended June 30, 2003. These revenues include
royalties from sales of Testim, the first product containing our CPE-215
technology to be marketed in the U.S., milestone payments from collaboration
agreements, and revenues generated from licensing agreements for certain of our
existing products to market such products in other foreign markets.










                                       20
<PAGE>


     Gross Profit. Gross profit increased by 71% from $11,016,000 in the six
months ended June 30, 2002 to $18,802,000 in the six months ended June 30, 2003.
The $7,786,000 increase was the direct result of the growth in our net product
sales, combined with our first significant U.S. royalty revenues. Our gross
margins on net product sales in the six months ended June 30, 2003 totaled 58%
compared to 57% for the same period of the prior year. We experienced an
increase in gross profit of 45% in local currency in the six months ended June
30, 2003 compared to the same period of the prior year. An increase in the
weighted average value of the Euro, in relation to the U.S. Dollar, had the
effect of increasing gross profit by approximately $2,832,000 during the six
months ended June 30, 2003. Sales of generic products accounted for
approximately 42% of our net product sales for the six months ended June 30,
2003. Although we expect to continue to benefit from economies of scale in the
future as we grow, gross margins may decrease as sales of generic products, with
lower margins, become more significant in the future. Additionally, the Ministry
of Health in Spain levies a tax on pharmaceutical companies for the purpose of
funding rising healthcare costs in Spain. In the six months ended June 30, 2003,
this tax had the effect of reducing gross profit by approximately $397,000 and
gross margins by approximately 1 percentage point.

     Selling and Marketing Expenses. Selling and marketing expenses increased by
34% from $5,218,000 in the six months ended June 30, 2002 to $6,979,000 in the
six months ended June 30, 2003. The $1,761,000 increase was instrumental in
achieving a 63% increase in net product sales during the period, as a result of
our successful sales and marketing programs. The increase in the weighted
average value of the Euro, in relation to the U.S. Dollar, had the effect of
increasing selling and marketing expenses by $1,131,000 in the six months ended
June 30, 2003. Selling and marketing expenses as a percentage of net product
sales decreased to 23% in the six months ended June 30, 2003 compared to 28% of
net product sales in the same period of the prior year.

     General and Administrative Expenses. General and administrative expenses
increased by 39% from $2,409,000 in the six months ended June 30, 2002 to
$3,345,000 in the six months ended June 30, 2003. The $936,000 increase was the
result of increased general and administrative activities required to support
our revenue growth in the six months ended June 30, 2003. General and
administrative expenses as a percent of total revenues decreased to less than
11% in the six months ended June 30, 2003, compared to almost 13% of total
revenues in the same period of the prior year. General and administrative
expenses would have been approximately $292,000 lower in the six months ended
June 30, 2003, absent the increase in the weighted average value of the Euro, in
relation to the U.S. Dollar. We expect that our future expenditures for general
and administrative expenses will continue to increase as we grow. Although we
cannot reasonably estimate the costs associated with implementation of the
internal control provisions of the Sarbanes-Oxley Act of 2002, we are presently
incurring costs and expect to incur additional costs not previously experienced;
however, we do not believe that these costs will be material to our financial
position, results of operations or cash flows.





                                       21
<PAGE>


     Research and Development Expenses. Research and development expenses
increased by 41% from $1,347,000 for the six months ended June 30, 2002 to
$1,897,000 for the six months ended June 30, 2003. The $550,000 increase was the
result of pre-clinical programs underway in collaboration with universities and
with product formulation and testing efforts being performed in the laboratory
in our U.S. headquarters and at our facility in Zaragoza, Spain. We are using
our U.S. laboratory to develop potential product applications using our drug
delivery technologies. The expenditures in research and development reflect our
focus on projects that are necessary for expansion of our portfolio of marketed
products and clinical trials involving our drug delivery technologies. We expect
that our future expenditures for research and development activities will
continue to increase as a result of programs that are necessary to advance new
applications of our technologies.

     Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by 26% from $484,000 for the six months ended June 30, 2002
to $611,000 for the six months ended June 30, 2003. The $127,000 increase was
primarily the result of higher depreciation charges with respect to recent asset
additions and the effect of fluctuations in foreign currency exchange rates.

     Provision for Income Taxes. We generated additional U.S. federal net
operating loss carry-forwards in the six months ended June 30, 2003 and 2002 as
a result of U.S. pretax losses of ($1,465,000) and ($1,476,000), respectively.
However, since we are not assured of future profitable domestic operations, we
have recorded a valuation allowance for any future tax benefit of such losses in
the U.S. Therefore, no tax benefit has been recognized with respect to U.S.
losses reported in the six months ended June 30, 2003 or 2002. We recorded a
provision for foreign income taxes totaling $2,956,000 (approximately 40% of the
Spanish pretax income of $7,482,000) for the six months ended June 30, 2003
compared to a provision for foreign income taxes of $1,483,000 (approximately
41% of the Spanish pretax income of $3,613,000) in the same period of the prior
year. The provision for foreign income taxes for the six months ended June 30,
2003 would have been approximately $506,000 lower than reported, absent the
increase in the weighted average value of the Euro, in relation to the U.S.
Dollar.

     Net Income. We reported income from operations of $5,970,000 for the first
half of 2003 compared to income from operations of $2,150,000 (including
$592,000 of pre-tax gain on sale of drug licenses) in the first half of the
prior year. The combination of income from operations of $5,970,000 and the
non-operating items, primarily the provision for foreign income taxes of
$2,956,000, resulted in net income of $3,061,000, or $.17 per basic common share
($.15 per diluted common share) on 17,495,000 weighted average basic common
shares outstanding (20,617,000 weighted average diluted common shares
outstanding) for the six months ended June 30, 2003, compared to net income for
the six months ended June 30, 2002 of $654,000, or $.04 per basic common share
($.03 per diluted common share) on 15,735,000 weighted average basic common
shares outstanding (19,204,000 weighted average diluted common shares
outstanding).




                                       22
<PAGE>


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

     Total assets increased from $64,692,000 at December 31, 2002 to $77,992,000
at June 30, 2003, while stockholders' equity increased from $48,751,000 at
December 31, 2002 to $55,432,000 at June 30, 2003. The increase in stockholders'
equity reflects primarily net income of $3,061,000 and the positive impact of
the fluctuation of the Euro/U.S. dollar exchange rate, which totaled $2,193,000.

     Working capital decreased by $972,000 or 3% from $30,703,000 at December
31, 2002 to $29,731,000 at June 30, 2003, primarily as a result of investing
activities such as additions to fixed assets and purchase of intellectual
property.

     Cash, cash equivalents and marketable securities decreased by 6% or
$1,718,000 from $26,977,000 at December 31, 2002 to $25,259,000 at June 30,
2003, primarily as a result of additions to fixed assets totaling $4,131,000,
expenditures for drug licenses and related costs totaling $2,054,000, increase
in restricted cash of $1,000,000 and net repayment of borrowings totaling
$179,000, partially offset by cash provided by operating activities of
$3,886,000 and proceeds from option and warrant exercises totaling $962,000.
Included in cash and cash equivalents at June 30, 2003 are approximately
$22,015,000 of short-term liquid investments considered to be cash equivalents.

     Receivables increased by 59% from $10,874,000 at December 31, 2002 to
$17,325,000 at June 30, 2003 as a direct result of the increase in net product
sales. Receivables increased by approximately $4,275,000 in local currency, but
fluctuations in foreign currency exchange rates increased receivables reported
in U.S. dollars by approximately $1,377,000. We have not experienced any
material delinquencies on our receivables that have had a material effect on our
financial position, results of operations or cash flows. Inventories increased
from $5,133,000 at December 31, 2002 to $5,563,000 at June 30, 2003, primarily
as a result of fluctuations in foreign currency exchange rates, which increased
inventories reported in U.S. dollars by approximately $462,000. In local
currency, inventories decreased by approximately $34,000.

     The combined total of accounts payable and accrued expenses increased from
$11,265,000 at December 31, 2002 to $16,812,000 at June 30, 2003, primarily due
to accruals for income taxes, taxes levied by the Ministry of Health in Spain to
fund the rising healthcare costs and VAT taxes payable (approximately
$2,694,000), the net effect of fluctuations in foreign currency exchange rates
(approximately $1,449,000) and additions to fixed assets (approximately
$275,000).

     Short-term borrowings and current portion of long-term debt increased from
$1,725,000 at December 31, 2002 to $1,744,000 at June 30, 2003, as a result of
the effect of fluctuations in foreign currency exchange rates, partially offset
by net repayment of short-term borrowings. The weighted average interest rate on
our short-term borrowings and current portion of long-term debt at June 30, 2003
was 4.1%.



                                       23
<PAGE>

     Long-term debt, which totaled $345,000 at December 31, 2002, was reduced to
$322,000 during the six months ended June 30, 2003. The weighted average
interest rate (including imputed interest) on our long-term debt was 5.6%.

     In addition to our short-term borrowings and long-term debt, we have fixed
contractual obligations under various lease agreements. Our contractual
obligations were comprised of the following as of June 30, 2003:

<TABLE>
<CAPTION>
                                                                               PAYMENTS DUE BY PERIOD
                                                                               ----------------------
                                                                          LESS
                                                                          THAN 1       1-3        4-6      7-10
CONTRACTUAL OBLIGATIONS                                        TOTAL      YEAR        YEARS      YEARS    YEARS
                                                              -------    -------     -------     -----    ------
                                                                                   (in thousands)

<S>                                                           <C>        <C>        <C>          <C>      <C>
Short-term borrowings......................................   $ 1,606    $ 1,606     $     -      $  -     $  -
Long-term debt, including imputed interest of $105.........       550        138          98        177      137
Operating leases...........................................     2,259        873       1,386         -        -
                                                              -------    -------     -------      -----    -----

Total contractual cash obligations.........................   $ 4,415    $ 2,617     $ 1,484      $ 177    $ 137
                                                              =======    =======     =======      =====    =====
</TABLE>


     Operating activities for the six months ended June 30, 2003 provided net
cash of $3,886,000. Investing activities, primarily the purchase of our
corporate office/research and development facility in the U.S. and
pharmaceutical manufacturing equipment in Spain and additions to drug licenses
and related costs used net cash of $6,094,000 during the six months ended June
30, 2003. Financing activities, consisting of proceeds received from the
exercise of stock options and warrants (approximately $962,000), were offset by
cash deposited in a restricted cash account ($1,000,000) and net repayments of
borrowings (approximately $179,000) during the six months ended June 30, 2003.

     Auxilium Pharmaceuticals, Inc. launched its new testosterone replacement
gel, Testim, which contains our patented CPE-215 drug delivery technology,
during the first quarter of 2003. Auxilium paid a milestone payment to us during
the first quarter of 2003, which we recorded as licensing and collaboration
revenues in the three months ended March 31, 2003. In connection with the Testim
product launch, Bentley began earning royalty revenues on a percentage of Testim
sales as defined in the licensing agreement with Auxilium. Royalty revenue on
Testim product sales is recognized based on an estimate of Auxilium's
sell-through of the Testim product based on prescriptions written, until such
time that returns from wholesalers and pharmacies can be reasonably estimated.
For the six months ended June 30, 2003, we recognized royalty revenue of
$208,000 based on an estimate of prescriptions written. The $586,000 difference
between the total amount due from Auxilium under the royalty arrangement and the
amount recognized as royalty revenue has been recorded as deferred income in the
Consolidated Balance Sheet as of June 30, 2003. We will continue to use
available market information to determine the amount and timing of royalty
revenue recognition.



                                       24
<PAGE>


     Seasonality. In the past, we have experienced lower sales in the third
calendar quarter and higher sales in the fourth calendar quarter due to
seasonality. As we market more pharmaceutical products whose sales are seasonal,
seasonality of sales may become more significant.

     Effect of Inflation and Changing Prices. Neither inflation nor changing
prices has materially impacted our net product sales or income from operations
for the periods presented.

     Liquidity. We plan to continue making improvements to our manufacturing
facility in 2003 including the acquisition of additional manufacturing
equipment, in order to accommodate our continuing growth. We expect these
improvements to total approximately $4,337,000 during the balance of 2003.
Additionally, we purchased a 15,700 square foot commercial building situated on
approximately 14 acres of land in Exeter, New Hampshire in January 2003. We
moved our corporate headquarters and research and development laboratory into
this facility in April 2003. We paid approximately $1,776,600 cash for the
property and spent approximately $175,000 in order to expand our research and
development facility and add necessary research equipment. Given our current
liquidity and cash balances, and considering our future strategic plans
(including our planned capital improvements and equipment purchases), we should
have sufficient liquidity to fund operations for at least the next twenty-four
months. As mentioned above, we have cash, cash equivalents and short-term liquid
investments totaling approximately $25,259,000 as of June 30, 2003. We also have
outstanding at June 30, 2003 warrants, including our publicly traded Class B
Warrants, to purchase approximately 3,147,000 shares of Common Stock. There can
be no assurance that any of the warrants will be exercised prior to expiration;
however, if all warrants that are currently outstanding are exercised, we would
receive aggregate cash proceeds of approximately $14,633,000. On October 14,
2002, our Board of Directors extended the expiration date of our Class B
warrants from December 31, 2002 to December 31, 2003. Two Class B Redeemable
Warrants, together, entitle a holder, until December 31, 2003, to purchase one
share of Common Stock at a price of $5.00 per share. There can be no assurance,
however, that changes in our research and development plans, capital
expenditures or other events affecting our net product sales or operating
expenses will not result in the earlier depletion of our funds. We continue to
explore alternative sources for financing our business activities. In
appropriate situations, that will be strategically determined, we may seek
financial assistance from other sources, including contribution by others to
joint ventures and other collaborative or licensing arrangements for the
development, testing, manufacturing and marketing of products under development.



                                       25
<PAGE>


NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

     In December 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. We have adopted the disclosure
requirements of FIN 45 as of December 31, 2002 and determined that no additional
disclosures were required. In addition, we are required to adopt the initial
recognition and measurement of the fair value of the obligation undertaken in
issuing the guarantee on a prospective basis to guarantees issued or modified
after December 31, 2002. The adoption of FIN 45 has not had, nor do we expect it
to have, a material effect on our financial position, results of operations or
cash flows.

     In November 2002, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF
Issue No. 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF Issue No. 00-21 establishes three principles: revenue arrangements with
multiple deliverables should be divided into separate units of accounting,
arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values, and revenue recognition criteria
should be considered individually for each separate unit of accounting. EITF
Issue No. 00-21 is effective for all revenue arrangements entered into in fiscal
periods beginning after June 15, 2003, with early adoption permitted. We do not
believe EITF Issue No. 00-21 will have a material effect on our financial
position, results of operations or cash flows.





                                       26
<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Foreign Currency. A substantial amount of our business is conducted in
Europe and is therefore influenced to the extent to which there are fluctuations
in the U.S. Dollar's value against other currencies, specifically the Euro. The
exchange rate at June 30, 2003 and December 31, 2002 was .88 Euros and .95 Euros
per U.S. Dollar, respectively. The weighted average exchange rate for the three
months ended June 30, 2003 and 2002 was .88 Euros and 1.09 Euros per U.S.
Dollar, respectively. The weighted average exchange rate for the six months
ended June 30, 2003 and 2002 was .91 Euros and 1.11 Euros per U.S. Dollar,
respectively. The effect of foreign currency fluctuations on long lived assets
for the six months ended June 30, 2003 was an increase of $2,193,000 and the
cumulative historical effect on equity was an increase of $1,777,000, as
reflected in our Consolidated Balance Sheets as accumulated other comprehensive
income. Although exchange rates fluctuated significantly in recent years, we do
not believe that the effect of foreign currency fluctuation is material to our
results of operations as the expenses related to much of our foreign currency
revenues are in the same currency as such revenues. However, the carrying value
of assets and reported values can be materially impacted by foreign currency
translation, as can the translated amounts of revenues and expenses.
Nonetheless, we do not plan to modify our business practices.

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

     Interest Rates. The weighted average interest rate on our short-term
borrowings and current portion of long-term debt is 4.1% and the balance
outstanding is $1,744,000 as of June 30, 2003. A portion of our long-term
borrowings is non-interest bearing and the balance outstanding on these
borrowings at June 30, 2003 is $412,000 including imputed interest (ranging from
4.8% to 6.0%) of $105,000. The weighted average interest rate on our long-term
borrowings is 5.6%. The effect of an increase in the interest rate of one
percentage point (one hundred basis points) to 5.1% on short-term borrowings and
to 6.6% on long-term borrowings would have the effect of increasing interest
expense by approximately $22,000 annually.





                                       27
<PAGE>


ITEM 4.  CONTROLS AND PROCEDURES

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

     As of June 30, 2003, Bentley carried out an evaluation, under the
supervision and with the participation of Bentley's management, including the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of Bentley's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation,
Bentley's Chief Executive Officer and Chief Financial Officer concluded that
Bentley's disclosure controls and procedures are effective in timely alerting
them to material information relating to Bentley (including its consolidated
subsidiaries) which is required to be included in its publicly filed reports or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. There have been no significant changes in Bentley's internal
controls or in other factors which could significantly affect internal controls
since that evaluation.


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

     The statements contained in this Quarterly Report on Form 10-Q, which are
not historical facts contain forward looking information with respect to plans,
projections or future performance of Bentley Pharmaceuticals, the occurrence of
which involve certain risks and uncertainties that could cause our actual
results to differ materially from those expected by Bentley, including but not
limited to risks associated with identifying suitable drugs for combination with
our drug delivery technologies, expanding generic and branded drug operations,
development and commercialization of our products, relationships with our
strategic partners, uncertainty of clinical trials results, regulatory approval
process, product sales concentration, unpredictability of patent protection,
technological changes, the effect of economic conditions, and other
uncertainties detailed in Bentley's Annual Report on Form 10-K (SEC File No.
1-10581) for the year ended December 31, 2002.





                                       28
<PAGE>


PART II.   OTHER INFORMATION
           -----------------

ITEM 1. LEGAL PROCEEDINGS

     See Item 1. Legal Proceedings in our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2003.

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     As noted in Item 4. below, at our Annual Meeting of Stockholders on May 21,
2003, the Company's stockholders approved an increase in the number of
authorized shares of the Company's Common Stock from 35,000,000 to 100,000,000.
This increase does not affect the rights of the holders of currently outstanding
Common Stock, except for the effects incidental to increasing the number of
share of Common Stock outstanding should additional shares be issued, such as
dilution of the earnings per share and voting rights of the holders of currently
outstanding Common Stock. The Company has no immediate plans, arrangements,
commitments or understandings with respect to the issuance of any additional
shares of Common Stock authorized by this increase.

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

     Our Annual Meeting of Stockholders was held on May 21, 2003 for the purpose
of electing three directors, approving an increase in the number of authorized
shares of the Company's Common Stock, and approving increases in the number of
shares authorized for issuance under the Company's 2001 Employee Stock Option
Plan and 2001 Directors' Stock Option Plan. Proxies for the meeting were
solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, and there was no solicitation in opposition.

The following members were elected to our Board of Directors.

<TABLE>
<CAPTION>
NOMINEE                         TERM EXPIRING            SHARES VOTED FOR         SHARES VOTED AGAINST
-------                         -------------            ----------------         --------------------

<S>                                 <C>                     <C>                          <C>
Michael McGovern                    2006                    15,731,798                   576,226
Michael D. Price                    2006                    15,731,796                   576,228
John W. Spiegel                     2006                    15,731,698                   576,326

</TABLE>




                                       29
<PAGE>

 Directors whose terms of office continued after the meeting are as follows:

NAME                                  TERM EXPIRING
----                                  -------------

Miguel Fernandez                          2005
James R. Murphy                           2005
Robert M. Stote                           2005
Charles L. Bolling                        2004
Robert J. Gyurik                          2004
William A. Packer                         2004

The proposal to increase the number of authorized shares of the Company's Common
Stock to 100,000,000 was approved by the following vote:

  SHARES VOTED FOR           SHARES VOTED AGAINST             SHARES ABSTAINING
  ----------------           --------------------             -----------------
     13,265,822                    3,020,019                       20,983

The proposal to increase the number of shares authorized for issuance under the
Company's 2001 Employee Stock Option Plan by 1,500,000 was approved by the
following vote:

  SHARES VOTED FOR           SHARES VOTED AGAINST             SHARES ABSTAINING
  ----------------           --------------------             -----------------
      8,883,519                    3,268,876                       71,294

The proposal to increase the number of shares authorized for issuance under the
Company's 2001 Directors' Stock Option Plan by 500,000 was approved by the
following vote:

  SHARES VOTED FOR           SHARES VOTED AGAINST             SHARES ABSTAINING
  ----------------           --------------------             -----------------
      8,677,467                    3,503,861                       42,353



                                       30
<PAGE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits:

          3.1  Certificate of Amendment of Restated Certificate of
               Incorporation.

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

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

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

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


     (b) Reports on Form 8-K filed during the quarter ended June 30, 2003:

          The Company furnished a Current Report on Form 8-K dated April 29,
          2003, announcing earnings for the quarter ended March 31, 2003 and
          attaching a press release related thereto.

     All other items required in Part II have been previously filed or are not
applicable for the quarter ended June 30, 2003.


                                       31
<PAGE>



                                   SIGNATURES
                                   ----------



Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                 BENTLEY PHARMACEUTICALS, INC.
                                 -----------------------------------------------
                                 Registrant



July 31, 2003               By:  /s/ James R. Murphy
                                 -----------------------------------------------
                                 James R. Murphy
                                 Chairman, President and Chief Executive Officer
                                 (Principal Executive Officer)




July 31, 2003               By:  /s/ Michael D. Price
                                 -----------------------------------------------
                                 Michael D. Price
                                 Vice President, Chief Financial Officer,
                                 Treasurer and Secretary (Principal Financial
                                 and Accounting Officer)