**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

** **

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended** March 31, 2006

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                       to**

**CommissionFile Number**  1-10581

**BENTLEY**PHARMACEUTICALS, INC.

(Exact name of registrantas specified in its charter)
| **DELAWARE**                                                    | ** ** | **No. 59-1513162**               |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**Bentley Park, 2 HollandWay, Exeter, New Hampshire  03833**

(Current Address ofPrincipal Executive Offices)

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

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.    YES x  NO o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

Large accelerated filer o   Acceleratedfiler x   Non-accelerated filer o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   YES o   NO x

Thenumber of shares of the registrant’s common stock outstanding as of May 10,2006 was 22,168,626.

 

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**Bentley Pharmaceuticals, Inc. and Subsidiaries****Form 10-Qfor the Quarter Ended March 31, 2006**

**Index**
|                   | ** ** | ** **                                                                                                     | ** ** | **Page**   | ** ** |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **Part I.**  |       | **Unaudited Financial Information**                                                                  |       |       |       |
| Item 1.           |       | Condensed  Consolidated Financial Statements:                                                                  |       |       |       |
|              |       | Consolidated  Balance Sheets as of March 31, 2006 and December 31, 2005                              |       | 3          |       |
|              |       | Consolidated Income Statements for the three months  ended March 31, 2006 and 2005                        |       | 4          |       |
|              |       | Consolidated Statement of Changes in Stockholders’  Equity for the three months ended March 31, 2006 |       | 5          |       |
|              |       | Consolidated Statements of Cash Flows for the three  months ended March 31, 2006 and 2005                 |       | 6          |       |
|              |       | Notes to Condensed Consolidated Financial Statements                                                           |       | 8          |       |
| Item 2.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                    |       | 18         |       |
| Item 3.           |       | Quantitative and Qualitative Disclosures About Market  Risk                                                    |       | 28         |       |
| Item  4.          |       | Controls  and Procedures                                                                                       |       | 29         |       |
|              |       |                                                                                                           |       |       |       |
| **Part II.** | ** ** | **Other  Information**                                                                                         | ** ** | ** ** | ** ** |
| Item 2.           |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                   |       | 29         |       |
| Item 6.           |       | Exhibits                                                                                                       |       | 29         |       |

 

2

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**Bentley Pharmaceuticals, Inc. and SubsidiariesConsolidated Balance Sheets**
| **(in thousands, except per share data)**                                         | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                 | ** ** | ** **               | ** ** | ** **                  | ** ** |
|                                                                                                       |       |                     |       |                        |       |
| Current assets:                                                                                            |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                  |       | $                        | 28,516     |                        | $          | 32,384 |   |
| Marketable securities                                                                                      |       | 472                      |       | 462                         |       |
| Receivables, net                                                                                           |       | 33,867                   |       | 26,916                      |       |
| Inventories, net                                                                                           |       | 14,774                   |       | 12,147                      |       |
| Deferred taxes                                                                                             |       | 1,413                    |       | 1,099                       |       |
| Prepaid expenses and other                                                                                 |       | 1,865                    |       | 2,069                       |       |
| Total current assets                                                                                       |       | 80,907                   |       | 75,077                      |       |
|                                                                                                       |       |                     |       |                        |       |
| Non-current assets:                                                                                        |       |                     |       |                        |       |
| Fixed assets, net                                                                                          |       | 36,283                   |       | 33,366                      |       |
| Drug licenses and related costs, net                                                                       |       | 14,165                   |       | 13,858                      |       |
| Restricted cash                                                                                            |       | 1,000                    |       | 1,000                       |       |
| Other                                                                                                      |       | 937                      |       | 919                         |       |
| Total non-current assets                                                                                   |       | 52,385                   |       | 49,143                      |       |
|                                                                                                       |       | $                        | 133,292    |                        | $          | 124,220 |   |
| **Liabilities and Stockholders’  Equity**                                                             | ** ** | ** **               | ** ** | ** **                  | ** ** |
|                                                                                                       |       |                     |       |                        |       |
| Current liabilities:                                                                                       |       |                     |       |                        |       |
| Accounts payable                                                                                           |       | $                        | 19,841     |                        | $          | 15,462 |   |
| Accrued expenses                                                                                           |       | 12,093                   |       | 9,428                       |       |
| Short-term borrowings                                                                                      |       | 2,463                    |       | 2,608                       |       |
| Current portion of long-term debt                                                                          |       | 332                      |       | 387                         |       |
| Deferred income                                                                                            |       | 1,152                    |       | 795                         |       |
| Total current liabilities                                                                                  |       | 35,881                   |       | 28,680                      |       |
|                                                                                                       |       |                     |       |                        |       |
| Non-current  liabilities:                                                                                  |       |                     |       |                        |       |
| Deferred taxes                                                                                             |       | 1,693                    |       | 1,665                       |       |
| Deferred income                                                                                            |       | 2,970                    |       | 2,286                       |       |
| Total non-current liabilities                                                                              |       | 4,663                    |       | 3,951                       |       |
|                                                                                                       |       |                     |       |                        |       |
| 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, 22,167 and 21,923 shares |       | 443                      |       | 438                         |       |
| Additional paid-in capital                                                                                 |       | 138,321                  |       | 139,381                     |       |
| Accumulated deficit                                                                                        |       | (48,836                  | )          | (49,990                     | )          |
| Accumulated other comprehensive income                                                                     |       | 2,820                    |       | 1,760                       |       |
| Total stockholders’ equity                                                                            |       | 92,748                   |       | 91,589                      |       |
|                                                                                                       |       | $                        | 133,292    |                        | $          | 124,220 |   |

 

*The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of these financialstatements.*

3

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**BentleyPharmaceuticals, Inc. and SubsidiariesConsolidated Income Statements**
| *** ***                                                       | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2006**                                                      | ** ** | **2005** | ** ** |
| Revenues:                                                          |       |                                                          |       |   |   |
| Net product sales                                                  |       | $                                                             | 26,570     |   | $ | 23,279 |   |
| Licensing and collaboration revenues                               |       | 1,708                                                         |       | 965 |   |
| Total revenues                                                     |       | 28,278                                                        |       | 24,244 |   |
| Cost of net  product sales                                         |       | 12,933                                                        |       | 11,452 |   |
|                                                               |       |                                                          |       |   |   |
| Gross profit                                                       |       | 15,345                                                        |       | 12,792 |   |
|                                                               |       |                                                          |       |   |   |
| Operating expenses:                                                |       |                                                          |       |   |   |
| Selling and marketing                                              |       | 4,139                                                         |       | 4,392 |   |
| General and administrative                                         |       | 4,508                                                         |       | 3,018 |   |
| Research and development                                           |       | 2,908                                                         |       | 1,351 |   |
| Depreciation and amortization                                      |       | 436                                                           |       | 384 |   |
| Total operating expenses                                           |       | 11,991                                                        |       | 9,145 |   |
|                                                               |       |                                                          |       |   |   |
| Income from  operations                                            |       | 3,354                                                         |       | 3,647 |   |
|                                                               |       |                                                          |       |   |   |
| Other income  (expenses):                                          |       |                                                          |       |   |   |
| Interest income                                                    |       | 253                                                           |       | 161 |   |
| Interest expense                                                   |       | (60                                                           | )          | (48 | ) |
|                                                               |       |                                                          |       |   |   |
| Income before  income taxes                                        |       | 3,547                                                         |       | 3,760 |   |
|                                                               |       |                                                          |       |   |   |
| Provision for  income taxes                                        |       | 2,393                                                         |       | 1,590 |   |
|                                                               |       |                                                          |       |   |   |
| Net income                                                         |       | $                                                             | 1,154      |   | $ | 2,170 |   |
|                                                               |       |                                                          |       |   |   |
| Net income per common  share:                                      |       |                                                          |       |   |   |
| Basic                                                              |       | $                                                             | 0.05       |   | $ | 0.10 |   |
| Diluted                                                            |       | $                                                             | 0.05       |   | $ | 0.10 |   |
| Weighted average common  shares outstanding:                       |       |                                                          |       |   |   |
| Basic                                                              |       | 21,954                                                        |       | 21,316 |   |
| Diluted                                                            |       | 23,807                                                        |       | 22,531 |   |

 

*The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of thesefinancial statements.*

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* *

**Bentley Pharmaceuticals, Inc. and SubsidiariesConsolidated Statement of Changes in Stockholders’ Equity**
| *** ***                            | ** ** | ** **                   | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|----------------|------------|-----------------|------------|-------------------|------------|-----------------|------------|------------|------------|
| ** **                              | ** ** | **$.02 Par Value** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** **      | ** ** |
| ** **                              | ** ** | **Common Stock**        | ** ** | **Paid-In**    | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **      | ** ** |
| **(in thousands)**                 | ** ** | **Shares**                   | ** ** | **Amount**     | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Income**      | ** ** | **Total**  | ** ** |
| Balance at January 1, 2006         |       | 21,923                       |       | $              | 438        |            | $          | 139,381           |       | $               | (49,990    | )          | $          | 1,760 |   | $ | 91,589 |   |
| Comprehensive  income:                  |       |                         |       |           |       |            |       |              |       |            |       |       |       |
| Net income                              |       | —                       |       | —         |       | —          |       | 1,154             |       | —          |       | 1,154      |       |
| Other  comprehensive income:            |       |                         |       |           |       |            |       |              |       |            |       |       |       |
| Foreign currency translation adjustment |       | —                       |       | —         |       | —          |       | —            |       | 1,060           |       | 1,060      |       |
| Comprehensive income                    |       |                         |       |           |       |            |       |              |       |            |       | $          | 2,214      |   |
| Exercise of stock options               |       | 547                          |       | 11             |       | 2,450           |       |              |       |            |       | 2,461      |       |
| Purchase of treasury shares             |       | (307                         | )          | (6             | )          | (4,054          | )          |              |       |            |       | (4,060     | )          |
| Equity-based compensation               |       | 4                            |       | —         |       | 544             |       | —            |       | —          |       | 544        |       |
| Balance at  March 31, 2006         |       | 22,167                       |       | $              | 443        |            | $          | 138,321           |       | $               | (48,836    | )          | $          | 2,820 |   | $ | 92,748 |   |

 

*The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of thesefinancial statements.*

5

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**Bentley Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements of Cash Flows**
| *** ***                                                                       | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                               |       |   |   |
| Net income                                                                         |       | $                                                                  | 1,154      |   | $ | 2,170 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                               |       |   |   |
| Depreciation and amortization                                                      |       | 1,280                                                              |       | 1,194 |   |
| Equity-based compensation expense                                                  |       | 544                                                                |       | 59 |   |
| Loss on disposal of assets                                                         |       | 29                                                                 |       | — |   |
| Other non-cash items                                                               |       | 1                                                                  |       | 11 |   |
| (Increase)  decrease in assets and increase (decrease) in liabilities:             |       |                                                               |       |   |   |
| Receivables                                                                        |       | (6,440                                                             | )          | (2,778 | ) |
| Inventories                                                                        |       | (2,378                                                             | )          | 103 |   |
| Deferred income taxes                                                              |       | (290                                                               | )          | (36 | ) |
| Prepaid expenses and other current assets                                          |       | 217                                                                |       | (200 | ) |
| Other assets                                                                       |       | (33                                                                | )          | (16 | ) |
| Accounts payable and accrued expenses                                              |       | 6,551                                                              |       | 2,756 |   |
| Deferred income                                                                    |       | 979                                                                |       | 1,259 |   |
| Other liabilities                                                                  |       | —                                                             |       | (4 | ) |
| Net cash provided by operating activities                                          |       | 1,614                                                              |       | 4,518 |   |
|                                                                               |       |                                                               |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                               |       |   |   |
| Additions to fixed assets                                                          |       | (3,282                                                             | )          | (1,702 | ) |
| Additions to drug licenses and related costs                                       |       | (521                                                               | )          | (597 | ) |
| Net cash used in  investing activities                                             |       | (3,803                                                             | )          | (2,299 | ) |
|                                                                                    |            |                                                                    |            |  |  |  |  |

 

(Continued on following page)

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**Bentley Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements of Cash Flows (Concluded)**
| *** ***                                                                                                     | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                                          | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| Cash flows from  financing activities:                                                                           |       |                                                               |       |   |   |
| Proceeds from the exercise of stock options                                                                      |       | $                                                                  | 113        |   | $ | — |   |
| Remittance of employee tax liabilities in exchange  for common stock tendered to the Company                |       | (1,713                                                             | )          | — |   |
| Proceeds from borrowings                                                                                         |       | 536                                                                |       | 185 |   |
| Repayment of borrowings                                                                                          |       | (789                                                               | )          | (330 | ) |
| Net cash used in financing activities                                                                            |       | (1,853                                                             | )          | (145 | ) |
|                                                                                                             |       |                                                               |       |   |   |
| Effect of  exchange rate changes on cash                                                                         |       | 174                                                                |       | (548 | ) |
|                                                                                                             |       |                                                               |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                                                            |       | (3,868                                                             | )          | 1,526 |   |
|                                                                                                             |       |                                                               |       |   |   |
| Cash and cash  equivalents at beginning of period                                                                |       | 32,384                                                             |       | 34,230 |   |
|                                                                                                             |       |                                                               |       |   |   |
| Cash and cash  equivalents at end of period                                                                      |       | $                                                                  | 28,516     |   | $ | 35,756 |   |
|                                                                                                             |       |                                                               |       |   |   |
| **Supplemental Disclosures of  Cash Flow Information**                                                           | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| The Company paid cash  during the period for:                                                                    |       |                                                               |       |   |   |
| Interest                                                                                                         |       | $                                                                  | 51         |   | $ | 49 |   |
|                                                                                                             |       |                                                               |       |   |   |
| **Supplemental Disclosures of  Non-Cash Financing and Investing Activities**                                     | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| The Company has issued  Common Stock as equity-based compensation in lieu of cash during the period  as follows: |       |                                                               |       |   |   |
| Shares                                                                                                           |       | 4                                                                  |       | 8 |   |
| Amount                                                                                                           |       | $                                                                  | 74         |   | $ | 69 |   |
|                                                                                                             |       |                                                               |       |   |   |
| Amounts included in  accounts payable at end of period for fixed asset and drug license purchases           |       | $                                                                  | 1,508      |   | $ | 1,307 |   |

 

*The accompanying Notes toCondensed Consolidated Financial Statements are an integral part of thesefinancial statements.*

 

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**Bentley Pharmaceuticals, Inc.and SubsidiariesNotes to Condensed Consolidated Financial Statements**

**History andOperations**

Bentley Pharmaceuticals, Inc. and Subsidiaries(which may be referred to as Bentley or the Company), headquartered in theU.S., is an international specialty pharmaceutical company, incorporated in theState of Delaware, focused on:

·                  development, licensing and sales of generic andbranded pharmaceutical products and active pharmaceutical ingredients (API) andthe manufacturing of pharmaceuticals for others; and

·                  research, development andlicensing/commercialization of advanced drug delivery technologies andpharmaceutical products.

Bentley’s pharmaceutical product sales and licensingactivities are based primarily in Spain, where it has a significant commercialpresence and manufactures and markets approximately 100 products of variousdosages and strengths through three wholly-owned Spanish subsidiaries:Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. Bentley’sproducts include approximately 155 product presentations in four primarytherapeutic areas: cardiovascular, gastrointestinal, central nervous system andinfectious diseases. Although most of the sales of these products are currentlyin the Spanish market, the Company has experienced increasing sales in otherEuropean countries and other geographic regions through strategic allianceswith companies in these territories. The Company continually adds to itsproduct portfolio in response to increasing market demand for generic andbranded therapeutic agents and, when appropriate, divests portfolio productsconsidered to be redundant or that have become non-strategic. The Company alsoowns a manufacturing facility in Spain that specializes in the manufacture ofAPI. This facility has been approved by the U.S. Food and Drug Administration (“FDA”)for the manufacture of one ingredient for marketing and sale in the U.S. TheCompany markets its API products through its Spanish subsidiary, Bentley A.P.I.The Company also has an Irish subsidiary, Bentley Pharmaceuticals IrelandLimited, which received its first marketing approval by the Irish MedicinesBoard in 2005.

The Company has U.S. and international patents andother proprietary rights to technologies that facilitate the absorption ofdrugs. Bentley is developing products that incorporate its drug deliverytechnologies and has licensed applications of its proprietary CPE-215®drug delivery technology to Auxilium Pharmaceuticals, Inc., which launchedTestim® in the U.S. market in February 2003. Testim, which incorporatesBentley’s CPE-215 drug delivery technology, is a gel indicated fortestosterone replacement therapy. Bentley continues to seek otherpharmaceutical and biotechnology companies to form additional strategic alliancesto facilitate the development and commercialization of other products using itsdrug delivery technologies.

**Basis of CondensedConsolidated Financial Statements**

The condensed consolidated financial statements ofBentley as of March 31, 2006 and for the three months ended March 31,2006 and 2005, included herein, have been prepared by the Company, withoutaudit, pursuant to the rules and regulations of the Securities andExchange Commission. Certain information and footnote disclosures normally includedin financial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted insofar as such information was disclosed in the Company’s consolidatedfinancial statements for the year ended December 31, 2005. These condensedconsolidated financial statements should be read in conjunction with thesummary of significant accounting policies and the audited consolidatedfinancial statements and notes thereto included in Bentley’s Annual Report on Form 10-Kfor the year ended December 31, 2005.

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In the opinion of management, the accompanyingunaudited condensed consolidated financial statements as of March 31, 2006and for the three months ended March 31, 2006 and 2005 are presented on abasis consistent with the audited consolidated financial statements for theyear ended December 31, 2005 and contain all adjustments, consisting onlyof normal recurring adjustments, necessary to present fairly Bentley’sfinancial position as of March 31, 2006 and the results of its operationsand cash flows for the three months ended March 31, 2006 and 2005. Theresults of operations for the three months ended March 31, 2006 should notnecessarily be considered indicative of the results to be expected for the fullyear ending December 31, 2006.

**Cash and cashequivalents**

The Company considers all highly liquid investmentswith remaining maturities of three months or less when purchased to be cashequivalents for purposes of classification in the Consolidated Balance Sheetsand the Consolidated Statements of Cash Flows. Investments in securities thatdo not meet the definition of cash equivalents are classified as *marketable securities* in the ConsolidatedBalance Sheets.

Included in *cash and cash equivalents*at March 31, 2006 and December 31, 2005 are approximately $11,835,000and $11,513,000 respectively, of short-term investments considered to be cashequivalents, as the original maturity dates of such investments were threemonths or less when purchased.

**Receivables**

Receivablesconsist of the following (in thousands):

|                                                                                                                                         | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Trade  receivables (of which $2,463 and $2,595, respectively, collateralize  short-term Borrowings with Spanish financial institutions) |       | $                            | 27,583     |                            | $          | 21,293 |   |
| VAT receivable                                                                                                                          |       | 2,373                        |       | 2,270                           |       |
| Royalties  receivable                                                                                                                   |       | 3,001                        |       | 2,861                           |       |
| Other                                                                                                                                   |       | 1,153                        |       | 694                             |       |
|                                                                                                                                    |       | 34,110                       |       | 27,118                          |       |
| Less-allowance  for doubtful accounts                                                                                                   |       | (243                         | )          | (202                            | )          |
|                                                                                                                                    |       | $                            | 33,867     |                            | $          | 26,916 |   |

 

**Inventories**

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

Balances are comprised ofthe following (in thousands):

|                                           | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw materials                             |       | $                            | 7,851      |                            | $          | 6,414 |   |
| Finished goods                            |       | 7,004                        |       | 5,869                           |       |
|                                      |       | 14,855                       |       | 12,283                          |       |
| Less allowance  for slow moving inventory |       | (81                          | )          | (136                            | )          |
|                                      |       | $                            | 14,774     |                            | $          | 12,147 |   |

 

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**Fixedassets**

Fixed assetsconsist of the following (in thousands):

|                                | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Land                           |       | $                            | 2,706      |                            | $          | 2,673 |   |
| Buildings and  improvements    |       | 17,260                       |       | 14,151                          |       |
| Equipment                      |       | 17,542                       |       | 16,742                          |       |
| Furniture and  fixtures        |       | 2,038                        |       | 1,974                           |       |
| Other                          |       | 109                          |       | 148                             |       |
|                           |       | 39,655                       |       | 35,688                          |       |
| Capital  in-progress           |       | 7,768                        |       | 7,748                           |       |
|                           |       | 47,423                       |       | 43,436                          |       |
| Less accumulated  depreciation |       | (11,140                      | )          | (10,070                         | )          |
|                           |       | $                            | 36,283     |                            | $          | 33,366 |   |

 

In order to support the Company’s growth in Europe andprepare for prescription sales in the U.S., management is adding additionalcapacity to its manufacturing facilities through a series of improvements. TheCompany invested approximately $3,200,000 in capital additions during the threemonths ended March 31, 2006, primarily for building and improvements.

Depreciation expense of approximately $70,000 and$84,000 has been charged to operations as a component of *depreciation and amortization expense* inthe Consolidated Income Statements for the three months ended March 31,2006 and 2005, respectively. Depreciation totaling approximately $844,000 and$810,000 has been included in *cost of netproduct sales* during the three months ended March 31, 2006 and2005, respectively.

**Stockholders’equity**

A substantial amount of the Company’s business isconducted in Europe and is therefore influenced by fluctuations in the U.S.Dollar’s value in relation to other currencies, specifically the Euro. Theexchange rates at March 31, 2006 and December 31, 2005 were .83 Eurosand .84 Euros per U.S. Dollar, respectively. The weighted average exchangerates for the three month periods ended March 31, 2006 and 2005 were .83Euros and .76 Euros per U.S. Dollar, respectively. The net effect of foreigncurrency translation on the Company’s Condensed Consolidated FinancialStatements for the three months ended March 31, 2006 was a net increase of$1,060,000 and the cumulative historical effect as of March 31, 2006totaled $2,820,000, as reflected in the Consolidated Balance Sheets as *accumulated other**comprehensive income*. The carrying valueof assets and liabilities can be materially affected by foreign currencytranslation, as can the translated amounts of revenues and expenses.Nonetheless, management does not plan to modify its business practices.

**Supplementaldisclosures related to Consolidated Statements of Cash Flows**

During the three months ended March 31, 2006, theChief Executive Officer (“CEO”) and the Chief Medical Officer (“CMO”) of theCompany exercised stock options to purchase an aggregate of 533,300 shares ofthe Company’s Common Stock. In satisfaction of the option exercise prices, theCompany received an aggregate of approximately 177,800 shares of previouslyacquired Bentley Common Stock, with a fair market value of approximately$2,347,500. The Company also received a total of approximately 129,600 sharesof Common Stock, with a fair market value of approximately $1,712,800, fromthese employees in order to satisfy minimum federal and statutory taxwithholding requirements. The shares of Common Stock acquired by the Company inconnection with these stock option exercises were recorded at fair market valueand are held by the Company as treasury shares. As of March 31, 2006 andDecember 31, 2005, the Company has recorded approximately 738,200 and430,800 shares, respectively, as treasury stock, with a historical cost of$9,377,000 and $5,323,000, respectively, which has been accounted for as areduction to *additional paid-in capital.*

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**Revenuerecognition**

Revenue on product sales is recognized when persuasiveevidence of an arrangement exists, the price is fixed and final, delivery hasoccurred and there is a reasonable assurance of collection of the salesproceeds. The Company generally obtains purchase authorizations from itscustomers for a specified amount of product at a specified price and considersdelivery to have occurred when the customer takes possession of the product.The Company provides its customers with a limited right of return. Revenue isrecognized upon delivery and a reserve for sales returns is recorded whenconsidered appropriate. The Company has demonstrated the ability to makereasonable and reliable estimates of product returns in accordance with SFAS No. 48,*Revenue Recognition When Right of Return Exists,*and of allowances for doubtful accounts based on significant historicalexperience.

Revenue from service, research and development, andlicensing agreements is recognized when the service procedures have beencompleted or as revenue recognition criteria have been met for each separateunit of accounting as defined in Emerging Issues Task Force (EITF) Issue No. 00-21,*Accounting for Revenue Arrangements withMultiple Deliverables*. The Company has deferred the recognition ofapproximately $3,395,000 and $2,594,000 of licensing revenues as of March 31,2006 and December 31, 2005, respectively, for which the earnings processhas not been completed.

Royalty revenues on Testim product sales are currentlyrecognized based on an estimate of Auxilium’s sell-through of the Testim productbased on prescriptions dispensed. The Company recognized royalty revenues of$1,628,000 and $870,000 for the three months ended March 31, 2006 and 2005, respectively. Under SFAS No. 48,the Company cannot recognize all of the royalty revenues earned on productshipments of Testim until product returns related to those shipments can bereasonably estimated. The difference between the total amount earned fromAuxilium under the royalty arrangement and the amount recognized as a componentof *licensing and collaboration revenues* isrecorded as a component of current *deferred income*in the Consolidated Balance Sheets. Once returns can be reasonably estimated,the Company expects to record a one-time increase in *licensingand collaboration revenues* related to the recognition of previouslydeferred royalty revenues. As of March 31, 2006 and December 31, 2005, deferred incomefrom Testim royalties totaled $372,000 and $348,000, respectively.

**Provision forincome taxes**

As a result of reporting taxable income in Spain, theCompany recorded provisions for foreign income taxes totaling $­2­,393,000 and$1,590,000 for the three months ended March 31, 2006 and 2005,respectively. The provisions represented 35% and 34% of the pre-tax incomereported in Spain of $6,898,000 and $4,678,000 for the three months ended March 31,2006 and 2005, respectively. The provisions represented 67% and 42% ofconsolidated pre-tax income for the three months ended March 31, 2006 and2005, respectively.

Effective October 2005, the Company executedintercompany agreements between Bentley Pharmaceuticals, Inc. and BentleyPharmaceuticals Ireland Limited to license non-U.S. rights of certaintechnologies owned by Bentley Pharmaceuticals, Inc. and provide forcost-sharing of subsequent development efforts on those technologies. Thesearrangements are intercompany in nature, and the resulting income and expensesbetween the entities are eliminated in consolidation; however, the relatedtransactions affect the Company’s consolidated income tax provision.

As future operating profits in the U.S. and Irelandcannot be reasonably assured, no tax benefit has been recorded for the relatedlosses, which totaled approximately $3,351,000 and $918,000 for the threemonths ended March 31, 2006 and 2005, respectively. Accordingly, theCompany has established valuation allowances equal to the full amount of theU.S. and Irish deferred tax assets.

11

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Should the Company determine that it is more likelythan not that it will realize certain of its net deferred tax assets for whichit has previously provided a valuation allowance, an adjustment would berequired to reduce the existing valuation allowance. In addition, the Companyoperates within multiple taxing jurisdictions and is subject to audit in thosejurisdictions. These audits can involve complex issues, which may require anextended period of time for resolution. No additional potential taxcontingencies were considered to be probable and reasonably estimable as of March 31,2006. However, there is the possibility that the ultimate resolution of suchpotential contingencies could have an adverse effect on the CondensedConsolidated Financial Statements in the future.

**Basic and dilutednet income per common share**

Basic net income per common share is based on theweighted average number of shares of common stock outstanding during eachperiod. The Company included the dilutive effect of outstanding stock options,as calculated using the treasury stock method, when determining the diluted netincome per common share for the three months ended March 31, 2006 and2005.

The following is a reconciliation between basic anddiluted net income per common share for the three months ended March 31,2006 and 2005. Dilutive securities issuable for the three months ended March 31,2006 and 2005 include approximately 1,853,000 and 1,215,000 dilutiveincremental shares, respectively issuable as a result of various stock optionsthat are outstanding.

For the Three Months Ended March 31, 2006 (inthousands, except per share data):

|                                             | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive  Securities** | ** ** | **Diluted EPS** | ** ** |
|---------------------------------------------|------------|--------------------|------------|----------------------------------------------|------------|----------------------|------------|
| Net Income                                  |       | $                  | 1,154      | * *                                     | $          | *—*             |       | $ | 1,154 |   |
| Weighted Average  Common Shares Outstanding |       | 21,954             |       | 1,853                                        |       | 23,807               |       |
| Net Income Per Common  Share                |       | $                  | 0.05       | * *                                     | $          | *—*             |       | $ | 0.05 |   |

 

For the Three Months Ended March 31, 2005 (inthousands, except per share data):

|                                             | ** ** | **Basic EPS** | ** ** | **Effect of Dilutive  Securities** | ** ** | **Diluted EPS** | ** ** |
|---------------------------------------------|------------|--------------------|------------|----------------------------------------------|------------|----------------------|------------|
| Net Income                                  |       | $                  | 2,170      | * *                                     | $          | *—*             |       | $ | 2,170 |   |
| Weighted Average  Common Shares Outstanding |       | 21,316             |       | 1,215                                        |       | 22,531               |       |
| Net Income Per Common  Share                |       | $                  | 0.10       | * *                                     | $          | *—*             |       | $ | 0.10 |   |

 

All of the Company’s 3,369,000 outstanding stockoptions in the quarter ended March 31, 2006 were included in the dilutedEPS presentation, as the exercise prices were less than the average fair valueof the Common Stock for the three months ended March 31, 2006.

Excluded from the diluted EPS presentation for thequarter ended March 31, 2005 were options to purchase an aggregate ofapproximately 1,558,000 shares of Common Stock at exercise prices greater thanthe average fair value of the Common Stock for the three months ended March 31,2005.

**Equity-basedcompensation — required change in accounting principle**

In December 2004, the Financial AccountingStandards Board (“the FASB”) issued SFAS No. 123 (Revised),*Share-Based Payment.* This Statement is a revision of SFAS No. 123,*Accounting for Stock-Based Compensation*,and supersedes APB Opinion No. 25, *Accounting for StockIssued to Employees*, and its related implementation guidance. SFAS No. 123(Revised) focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions and requires thatthe cost

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resulting from those transactions be recognized in thefinancial statements. The Company has equity-based employee compensation plansthat are described more fully in Note 11 ofthe Notes to Consolidated Financial Statements included in the Annual Report onForm 10-K for the year ended December 31, 2005. TheCompany adopted SFAS No. 123 (Revised) effective January 1, 2006using the modified-prospective transition method. The Company uses theaccelerated expense attribution method pursuant to FASB Interpretation No. 28for all options previously accounted for under APB Opinion No 25. Equity-basedcompensation attributable to equity awards granted subsequent to December 31,2005 will be recognized under the straight-line method pursuant to SFAS No. 123(Revised). There were no equity awards issued during the three months ended March 31,2006.

The Company has in effect stock option and equityincentive plans (the “Plans”), pursuant to which directors, officers, employeesand consultants of the Company have been awarded grants of options to purchasethe Company’s Common Stock. Approximately 3,936,700 shares of Common Stock havebeen reserved for issuance under the Plans, of which approximately 361,200 areoutstanding that were issued under the 1991 Plan, approximately 2,617,900 areoutstanding that were issued under the 2001 Employee and Director Plans and390,000 are outstanding that were issued under the 2005 Equity and IncentivePlan as of March 31, 2006. The balance of 567,600 shares is available forissuance under the 2005 Equity and Incentive Plan, which is now the successorto all the other Plans. The fair value of each option award is estimated on thedate of grant using the Black-Scholes option valuation model. Options aregranted for terms not exceeding ten years from the date of grant. Options shallnot be granted at a price that is less than 100% of the fair market value onthe date the options are granted. Options granted under the Plans generallyvest over one to three years, commensurate with the related requisite serviceperiods. At the discretion of the Compensation Committee of the Board ofDirectors, the Company may grant shares of its Common Stock to employees inlieu of cash compensation. The Company also sponsors a 401(k) Plan foreligible employees and matches eligible contributions with shares of theCompany’s common stock. The Company issued 4,255 shares and 7,321 shares ofcommon stock to its 401(k) Plan as matching contributions during the threemonths ended March 31, 2006 and 2005, respectively. These shares arerecorded at their fair value on the last day of each payroll period in whichthey are earned. All Company matching contributions vest 25% each year for thefirst four years of each employee’s employment in which the employee works forthe Company at least 1,000 hours.

In the first quarter of 2006, the adoption of SFAS No. 123(Revised) resulted in incremental stock-based compensation expense of $463,000,of which approximately $10,000 is included in cost of sales, approximately$5,000 in selling and marketing, approximately $304,000 in general andadministrative expenses and approximately $144,000 in research and development.The incremental stock-based compensation expense resulted in a reduction in netincome of $463,000, or $0.02 per basic and diluted share. No relatedcompensation expense was capitalized and there was no impact on net cashprovided by operating activities or net cash used in financing activities.

General and administrative expenses for the threemonths ended March 31, 2006 and 2005 include approximately $34,000 and$13,000, respectively, and research and development expenses includeapproximately $47,000 and $46,000, respectively, of other non-cash,equity-based compensation. The non-cash equity-based compensation expenseis primarily related to matching contributions to the Company’s 401(k) Plan.

As the Company previously adopted only the pro formadisclosure provisions of SFAS No. 123, compensation cost relating to theunvested portion of awards granted prior to the date of adoption will continueto be recognized using the same estimate of the grant-date fair value and thesame accelerated attribution method used to determine the pro forma disclosuresunder SFAS No. 123, except that the unamortized compensation expenserelated to those awards will be reduced for estimated forfeitures, as requiredby SFAS No. 123 (Revised).

The followingtable details the reported effect that stock-based compensation expense had onnet income and earnings per share for the three months ended March 31,2006 and the pro forma effect

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that stock-basedcompensation expense would have had on net income and earnings per share forthe three months ended March 31, 2005. The reported and pro forma netincome and earnings per share for the three months ended March 31, 2006 inthe table below include the stock-based compensation expense actually recordedin the three months ended March 31, 2006 under the provisions ofSFAS No. 123 (Revised). The amounts for the three months ended March 31,2006 are included in the table below only to provide a comparative presentationto the prior year required disclosure (in thousands, except per share data),which was prepared in accordance with SFAS No. 123, as originally issued.

|                                                                                                              | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| Net income, as  reported                                                                                     |       | $                                                                  | 1,154      |   | $ | 2,170 |   |
| Add:  Equity-based employee compensation expense included in reported net income                             |       | 544                                                                |       | 59 |   |
| Deduct: Total  equity-based employee compensation expense determined under fair value method  for all awards |       | (544                                                               | )          | (569 | ) |
| Pro forma net  income                                                                                        |       | $                                                                  | 1,154      |   | $ | 1,660 |   |
| Net income per  common share:                                                                                |       |                                                               |       |   |   |
| Basic—as reported                                                                                       |       | $                                                                  | 0.05       |   | $ | 0.10 |   |
| Basic—pro forma                                                                                         |       | $                                                                  | 0.05       |   | $ | 0.08 |   |
| Diluted—as reported                                                                                     |       | $                                                                  | 0.05       |   | $ | 0.10 |   |
| Diluted—pro  forma                                                                                      |       | $                                                                  | 0.05       |   | $ | 0.07 |   |

 

A summary of award activity under the Plans as of March 31,2006 and changes during the three month period then ended is presented below(shares and aggregate intrinsic values in thousands).
| ** **                                    | ** ** | **For the Three Months Ended March 31, 2006** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Number of  Options**                                                           | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| Options  outstanding, beginning of the period |       | 3,916                                                                            |       | $ | 8.72 |   |   |   |   |   |
| Granted                                       |       | —                                                                           |       | — |   |   |   |   |   |
| Exercised                                     |       | (547                                                                             | )          | 4.50 |   |   |   |   |   |
| Forfeited                                     |       | —                                                                           |       | — |   |   |   |   |   |
| Expired                                       |       | —                                                                           |       | — |   |   |   |   |   |
| Options  outstanding, end of the period       |       | 3,369                                                                            |       | $ | 9.40 |   | 6.97 |   | $ | 6,323 |   |
|                                          |       |                                                                             |       |   |   |   |   |   |   |
| Options  exercisable, end of the period       |       | 2,883                                                                            |       | $ | 9.53 |   | 5.66 |   | $ | 4,096 |   |

 

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The table belowsummarizes options outstanding and exercisable at December 31, 2005(number of options in thousands):

|                     | ** ** | **Options Outstanding** | ** ** | **Options Currently Exercisable** | ** ** |
|---------------------|------------|------------------------------|------------|---------------------------------------------|------------|
| ** **          | ** ** | ** **                   | ** ** | **Weighted**                                | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of**   | ** ** | ** **                   | ** ** | **Average**                                 | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Exercise**        | ** ** | **Number**                   | ** ** | **Exerise**                                 | ** ** | **Remaining** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Prices**          | ** ** | **Outstanding**              | ** ** | **Price**                                   | ** ** | **Life (Years)** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $ 2.00 - $3.00 |       | 71                           |       | $                                           | 2.74       |   | 2.7 |   | 71 |   | $ | 2.74 |   |
| 5.70 - 5.88         |       | 142                          |       | 5.84                                        |       | 4.1 |   | 142 |   | 5.84 |   |
| 6.00 - 6.33         |       | 316                          |       | 6.01                                        |       | 5.1 |   | 316 |   | 6.01 |   |
| 7.10 - 7.39         |       | 182                          |       | 7.31                                        |       | 7.1 |   | 80 |   | 7.20 |   |
| 7.50                |       | 370                          |       | 7.50                                        |       | 9.0 |   | 124 |   | 7.50 |   |
| 8.00 - 8.93         |       | 323                          |       | 8.27                                        |       | 6.8 |   | 323 |   | 8.27 |   |
| 9.00 - 9.80         |       | 498                          |       | 9.70                                        |       | 5.8 |   | 498 |   | 9.70 |   |
| 10.04               |       | 298                          |       | 10.04                                       |       | 7.1 |   | 298 |   | 10.04 |   |
| 10.38 - 10.79       |       | 200                          |       | 10.76                                       |       | 8.5 |   | 155 |   | 10.76 |   |
| 11.00 - 11.98       |       | 400                          |       | 11.36                                       |       | 7.7 |   | 349 |   | 11.28 |   |
| 12.01 - 12.55       |       | 153                          |       | 12.39                                       |       | 8.4 |   | 112 |   | 12.49 |   |
| 13.30               |       | 373                          |       | 13.30                                       |       | 7.8 |   | 373 |   | 13.30 |   |
| 13.48 - 15.83       |       | 43                           |       | 14.07                                       |       | 7.7 |   | 42 |   | 14.08 |   |
| $13.48-$15.83       |       | 3,369                        |       | $                                           | 9.40       |   | 7.0 |   | 2,883 |   | $ | 9.53 |   |

 

The fair value of each option award is estimated onthe date of grant using the Black-Scholes option valuation model. There were nooption grants during the first three months of 2006. Assumptions and theresulting fair value for option awards during the first three months of 2005are provided below (results may vary depending on the assumptions appliedwithin the model):

|                                       | ** ** | **For the Three Months Ended  March 31, 2005** | ** ** |
|---------------------------------------|------------|------------------------------------------------------------------------------|------------|
|                                  |       |                                                                         |       |
| Risk-free  interest rate              |       | 4.03%                                                                        |       |
| Dividend yield                        |       | 0.0%                                                                         |       |
| Expected life                         |       | 5  years                                                                     |       |
| Expected/Weighted  average volatility |       | 45.43%                                                                       |       |
| Fair value of options  granted        |       | $3.38                                                                        |       |

 

The expected life (estimated period of timeoutstanding) of options granted has historically been estimated to be fiveyears. Historical exercise behaviors will be used to determine the expectedlife and grant date fair values of options granted in the future. Thevolatility of the Company’s stock is calculated on the grant date of eachequity award using daily price observations over a period of time commensuratewith the related requisite service period. The risk-free interest rate is basedon the yield curve of U.S. Treasury securities in effect at the date of thegrant, having a duration commensurate with the estimated life of the award.

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A summary of the activity for nonvested share awardsas of March 31, 2006 and 2005 is provided below with changes during thethree month periods ended March 31, 2006 and 2005 (shares in thousands).
| ** **                                              | ** ** | **For the Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                                               | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | **Number of  Options**                                            | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
| Nonvested  options outstanding, beginning of the period |       | 840                                                                    |       | $ | 4.35 |   | 748 |   | $ | 5.58 |   |
| Granted                                                 |       | —                                                                 |       | — |   | 370 |   | 3.38 |   |
| Vested                                                  |       | (354                                                                   | )          | (5.01 | ) | (360 | ) | (5.19 | ) |
| Forfeited                                               |       | —                                                                 |       | — |   | — |   | — |   |
| Nonvested options  outstanding, end of the period       |       | 486                                                                    |       | $ | 3.87 |   | 758 |   | $ | 4.51 |   |

 

As of March 31, 2006, unrecognized compensationexpense related to the unvested portion of the Company’s stock options wasapproximately $846,000 and is expected to be recognized over a weighted averageperiod of approximately 1.1 years.

Options to purchase approximately 547,000 shares ofCommon Stock were exercised during the quarter ended March 31, 2006. Therewere no exercises during the first quarter of 2005. Net cash proceeds to theCompany from the 2006 exercises totaled approximately $113,000, while the totalintrinsic value (the excess of the market price over the exercise price) ofthose option exercises was approximately $4,785,000. As future operatingprofits in the U.S. cannot be reasonably assured, no tax benefit resulting fromthe settlement of U.S. awards has been recorded. The total fair value of stockoptions that vested during the three months ended March 31, 2006 and 2005was approximately $1,774,000 and $1,866,000, respectively.

The Company generally issues previously unissuedshares for the exercise of stock options and to match eligible 401(k) Plancontributions; however, the Company is not precluded from reissuing previouslyacquired treasury shares to satisfy these issuances in the future. The Companydoes not have a policy of repurchasing shares on the open market to satisfyoption exercises and matching contributions to the 401(k) Plan.

**Business segmentinformation**

SFAS No. 131, *DisclosuresAbout Segments of an Enterprise and Related Information,* defines howoperating segments are determined and requires disclosure of certain financialand descriptive information about a company’s operating segments. The Companyis headquartered in the U.S. and operates in two business segments, specialtygenerics and drug delivery, and two geographical locations (Europe and theU.S.).

The Company’s specialty generics segment is based inEurope and manufactures a growing portfolio of generic and brandedpharmaceuticals in Europe for the treatment of cardiovascular,gastrointestinal, infectious and central nervous system diseases through itssubsidiary, Laboratorios Belmac, and markets these pharmaceutical productsthrough its subsidiaries, Laboratorios Belmac, Laboratorios Davur, LaboratoriosRimafar and Bentley Pharmaceuticals Ireland Limited.

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The Company’s drug delivery segment is based in boththe U.S. and Europe and is focused on the advancement of proprietary drugtechnologies that enhance or facilitate the absorption of pharmaceuticalcompounds across various membranes. The drug delivery activities consistprimarily of licensing, product research and development, business developmentactivities, corporate management and administration.

Set forth in the tables below is certain financialinformation with respect to the Company’s business and geographical segmentsfor the three months ended March 31, 2006 and 2005. These segments use thesame accounting policies as those described in the summary of significantaccounting policies in Note 2 of the Company’s Annual Report onForm 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”).

As of and for the Three Months Ended March 31,2006 (in thousands):
| ** **                         | ** ** | **Specialty Generics** | ** ** | **Drug Delivery** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                         | ** ** | **Europe**                  | ** ** | **U.S.**               | ** ** | **Europe** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| Total revenues                     |       | $                           | 26,643     |                   | $          | —     |       | $ | — |   | $ | 1,635 |   | $ | 28,278 |   |
| Income (loss) before  income taxes |       | 6,872                       |       | 148                    |       | (1,256     | )          | (2,217 | ) | 3,547 |   |
| Provision for  income taxes        |       | 2,393                       |       | —                 |       | —     |       | — |   | 2,393 |   |
| Net income  (loss)                 |       | 4,479                       |       | 148                    |       | (1,256     | )          | (2,217 | ) | 1,154 |   |
| Fixed assets                       |       | 34,070                      |       | —                 |       | **—** |       | 2,213 |   | 36,283 |   |
| Drug licenses  and related costs   |       | 9,202                       |       | 1,611                  |       | —     |       | 3,352 |   | 14,165 |   |
| Total assets                       |       | 104,697                     |       | 2,098                  |       | —     |       | 26,497 |   | 133,292 |   |
| Total liabilities                  |       | 37,791                      |       | —                 |       | 10         |       | 2,743 |   | 40,544 |   |
|                                    |            |                             |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |

 

As of and for the Three Months Ended March 31,2005 (in thousands):
| ** **                         | ** ** | **Specialty Generics** | ** ** | **Drug Delivery** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                         | ** ** | **Europe**                  | ** ** | **U.S.**               | ** ** | **Europe** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| Total revenues                     |       | $                           | 23,374     |                   | $          | —     |       | $ | — |   | $ | 870 |   | $ | 24,244 |   |
| Income (loss) before  income taxes |       | 4,678                       |       | 535                    |       | —     |       | (1,453 | ) | 3,760 |   |
| Provision for  income taxes        |       | 1,590                       |       | —                 |       | —     |       | — |   | 1,590 |   |
| Net income  (loss)                 |       | 3,088                       |       | 535                    |       | —     |       | (1,453 | ) | 2,170 |   |
| Fixed assets                       |       | 27,866                      |       | —                 |       | —     |       | 2,221 |   | 30,087 |   |
| Drug licenses  and related costs   |       | 10,041                      |       | 1,077                  |       | —     |       | 3,481 |   | 14,599 |   |
| Total assets                       |       | 86,641                      |       | 1,112                  |       | —     |       | 35,417 |   | 123,170 |   |
| Total liabilities                  |       | 31,624                      |       | —                 |       | —     |       | 2,845 |   | 34,469 |   |
|                                    |            |                             |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |

 

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**Item**   2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysistogether with all financial and non-financial information appearing elsewherein this report and with our consolidated financial statements and related notesincluded in our 2005 Form 10-K, which has been previously filed withthe SEC. In addition to historical information, the following discussion andother parts of this report contain forward-looking information that involvesrisks and uncertainties. Our actual results could differ materially from thoseanticipated by such forward-looking information due to competitive factors andother risks discussed in our 2005 Form 10-K under Item 1A, “RiskFactors”.

**Overview**

We are a specialty pharmaceutical company focused on:

·                  development, licensingand sales of generic and branded pharmaceutical products and activepharmaceutical ingredients and the manufacturing of pharmaceuticals for othersin Spain, other parts of Europe and international markets, including the U.S.market; and

·                  research, developmentand licensing/commercialization of advanced proprietary drug deliverytechnologies for new and existing pharmaceutical products.

*Branded andGeneric Pharmaceuticals*

Our pharmaceutical product sales activities are basedin Spain, where we have a significant commercial presence and we manufactureand market approximately 100 pharmaceutical products of various dosages andstrengths. These products include approximately 155 product presentations infour primary therapeutic areas: cardiovascular, gastrointestinal, centralnervous system and infectious diseases. We market our branded and genericproducts to physicians, pharmacists and hospitals through our three separatesales and marketing organizations based in Spain: Laboratorios Belmac,Laboratorios Davur and Laboratorios Rimafar. We target markets that offercompatible regulatory approval regimes and attractive product margins. In August 2005,we formed an Irish subsidiary, Bentley Pharmaceuticals Ireland Limited, toassist in our European expansion strategy. Bentley Pharmaceuticals IrelandLimited received its first marketing approval by the Irish Medicines Board in November 2005.There have been no significant revenues generated in Bentley PharmaceuticalsIreland since its inception in 2005; however, we are currently evaluatingseveral alternatives for the eventual sale and distribution of certain of ourproducts through this entity.

We expect to grow our business by acquiring rights tomarket additional products to sell through our organization and our strategicalliances. We continually acquire rights to new products in response toincreasing market demand for generic and branded therapeutic products. Forexample, in November 2004, we entered into a collaboration agreement withPerrigo Company, the largest U.S. manufacturer of over-the-counterpharmaceutical and nutritional products for the store brand market, toco-develop and market in the U.S. and potentially other markets a genericpharmaceutical product that we produce in Spain. When appropriate, we divestproducts that we consider to be redundant or that have become non-strategic.

We also own a manufacturing facility located in Zaragoza,Spain that specializes in the manufacture of certain active pharmaceuticalingredients. The facility has been approved by the FDA for the manufacture ofone ingredient for marketing and sale in the U.S. Our facility manufacturesingredients for pharmaceutical products that are marketed by otherpharmaceutical companies both in Spain and in other international markets,including the U.S. We manufacture and market these ingredients through oursubsidiary, Bentley A.P.I.

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*Proprietary DrugDelivery Technologies and Products*

We develop products that incorporate our drug deliverytechnologies that we have developed in the United States. We have licensedapplications of our proprietary CPE-215 drug delivery technology toAuxilium Pharmaceuticals, Inc., which launched Testim, the first productincorporating our CPE-215 drug delivery technology, in the United Statesin February 2003. Testim is a gel indicated for testosterone replacementtherapy. Testim is approved for marketing in Belgium, Denmark, Finland,Germany, Greece, Iceland, Ireland, Luxembourg, the Netherlands, Norway,Portugal, Spain, Sweden and the United Kingdom, and has received scientificapproval in Italy. We are in discussions with other pharmaceutical andbiotechnology companies to form additional strategic alliances to facilitatethe development and commercialization of other products using our drug deliverytechnologies.

*Research andDevelopment Focus*

In 2005 we reported the results of our Phase II studyfor the intranasal delivery of insulin in type I diabetes patients using ourCPE-215 technology, which we had concluded in December 2004. Wereported the results of that trial in an abstract titled “Intranasal InsulinAdministration in Type I Diabetic Patients Utilizing CPE-215 Technology”at the American Diabetes Association 65th Scientific Sessions, June 10-14,2005, in San Diego, California. The full results of that trial were published inFebruary 2006 in the journal Diabetes Technology & Therapeutics,Volume 8, Number 1. Those development and clinical programs will continue andexpand both outside and inside the U.S. We are continuing our clinical programsto support our strategy for the eventual distribution of certain of our Spanishgeneric pharmaceutical products in other countries, including the U.S. throughour collaboration agreement with Perrigo Company. We expect to continue toinvest our resources to conduct clinical trials and support the requiredregulatory submissions for our clinical programs. We expect to incur increasedcosts for product formulation and testing efforts. We also expect to incurcosts associated with the acquisition and/ordevelopment of new or improved drug delivery technologies such as our thermodynamicallystable, biodegradable Nanocaplet technology for the delivery of macromoleculetherapeutics.

*Effect of ForeignCurrency Fluctuations*

A substantial amount of our business is conducted inEurope and is therefore influenced by fluctuations in the U.S. Dollar’s valuein relation to other currencies, particularly the Euro. A decrease in theweighted average value of the Euro over the past year, in relation to the U.S. Dollar, hadthe following impact on the results of our operations for the three monthsended March 31, 2006 when reported in U.S. Dollars: (1) totalrevenues were decreased by approximately $1,712,000, (2) gross profit wasdecreased by approximately $894,000, (3) operating expenses were decreasedby approximately $419,000, (4) provision for income taxes was decreased byapproximately $150,000, and (5) net income was decreased by approximately$325,000. At the present time, we do not anticipate altering our business plansand practices to compensate for future currency fluctuations.

This section includes “constant currency” measures.Constant currency removes from financial data the impact of changes in exchangerates between the U.S. Dollar and other currencies, particularly the Euro, bytranslating current period financial data into U.S. Dollars using the sameforeign currency exchange rates that were used to translate the financial datafor the previous period. We believe presenting certain results on a constantcurrency basis is useful to investors because it allows a more meaningfulcomparison of the performance of our European operations from period to period.

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**RESULTSOF OPERATIONS:**

**Three Months EndedMarch 31, 2006 versus Three Months Ended March 31, 2005**

*Revenues*
| ** **                             | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------------|------------|------------|------------|
| **(in thousands)**                | ** ** | **2006**                                                               | ** ** | **2005**   | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Revenues*                             | * *   | * *                                                               | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Net product sales*                    | * *   | *$  26,570*                                                  | * *   | *94*       | *%*        | *$  23,279* | * * | *96* | *%* | *$    3,291* | * * | *14* | *%* |
| *Licensing and collaboration revenues* | * *   | *1,708*                                                                | * *   | *6*        | *%*        | *965* | * * | *4* | *%* | *743* | * * | *77* | *%* |
| *Total  revenues*                      | * *   | *$  28,278*                                                  | * *   | *100*      | *%*        | *$  24,244* | * * | *100* | *%* | *$    4,034* | * * | *17* | *%* |

 

Total revenues for the three months ended March 31,2006 increased 24% from the same period in the prior year when expressed inconstant currency; however, fluctuations in foreign currency exchange rates hadthe effect of reducing revenues by approximately $1,712,000, resulting in 17%growth in total revenues. Our current period growth was primarily driven byincreased sales to licensees of approximately $2,600,000, increased royaltiesrecognized from sales of Testim of approximately $758,000 and sales of newdrugs launched over the past year of approximately $600,000.

Our revenues are generated through our primary saleschannels of branded pharmaceuticals, generic pharmaceuticals, sales tolicensees and others, as well as licensing and collaboration arrangements. Thefollowing is a summary of our revenues by sales channel and top-selling productlines:

For the threemonths ended March 31, 2006:
| **(in thousands)**          | ** ** | **Revenues Within Spain**        | ** ** | ** **                 | ** ** | ** **                                                      | ** ** | ** **                                                      | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                       | ** ** | ** **                                 | ** ** | ** **                 | ** ** | ** **                                                      | ** ** | **Revenues**                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Branded**                                | ** ** | **Generic**                | ** ** | ** **                                                      | ** ** | **Outside of**                                             | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**            | ** ** | **Products**                               | ** ** | **Products**               | ** ** | **Other**                                                       | ** ** | **Spain**                                                       | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$      629* | * *   | *$   4,383* | * *   | *$         —* | * *   | *$         —* | * *   | *$   5,012* | * * | *18* | *%* |
| *Simvastatin*                    | * *   | *444*                                      | * *   | *1,471*                    | * *   | *—*                                                        | * *   | *—*                                                        | * *   | *1,915* | * * | *7* | *%* |
| *Enalapril*                      | * *   | *918*                                      | * *   | *723*                      | * *   | *—*                                                        | * *   | *—*                                                        | * *   | *1,641* | * * | *6* | *%* |
| *Paroxetine*                     | * *   | *377*                                      | * *   | *816*                      | * *   | *—*                                                        | * *   | *—*                                                        | * *   | *1,193* | * * | *4* | *%* |
| *Lansoprazole*                   | * *   | *660*                                      | * *   | *241*                      | * *   | *—*                                                        | * *   | *—*                                                        | * *   | *901* | * * | *3* | *%* |
| *All  other products*            | * *   | *2,807*                                    | * *   | *2,983*                    | * *   | *310*                                                           | * *   | *357*                                                           | * *   | *6,457* | * * | *23* | *%* |
| *Sales  to licensees and others* | * *   | *—*                                   | * *   | *—*                   | * *   | *2,626*                                                         | * *   | *6,825*                                                         | * *   | *9,451* | * * | *33* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                                   | * *   | *—*                   | * *   | *73*                                                            | * *   | *1,635*                                                         | * *   | *1,708* | * * | *6* | *%* |
| *Total  Revenues*                | * *   | *$   5,835*                 | * *   | *$ 10,617*            | * *   | *$   3,009*                                      | * *   | *$   8,817*                                      | * *   | *$ 28,278* | * * | *100* | *%* |
| *% of Q-1 2006 Revenues*         | * *   | *21*                                       | *%*        | *37*                       | *%*        | *11*                                                            | *%*        | *31*                                                            | *%*        | *100* | *%* | * * | * * |

 

For the threemonths ended March 31, 2005:
| **(in thousands)**          | ** ** | **Revenues Within Spain**        | ** ** | ** **                 | ** ** | ** **                                                      | ** ** | ** **                                                      | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                       | ** ** | ** **                                 | ** ** | ** **                 | ** ** | ** **                                                      | ** ** | **Revenues**                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Branded**                                | ** ** | **Generic**                | ** ** | ** **                                                      | ** ** | **Outside of**                                             | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Product Line**            | ** ** | **Products**                               | ** ** | **Products**               | ** ** | **Other**                                                       | ** ** | **Spain**                                                       | ** ** | **Total** | ** ** | **Revenues** | ** ** |
| *Omeprazole*                     | * *   | *$      716* | * *   | *$   4,120* | * *   | *$         —* | * *   | *$         —* | * *   | *$   4,836* | * * | *20* | *%* |
| *Simvastatin*                    | * *   | *448*                                      | * *   | *1,240*                    | * *   | *—*                                                        | * *   | *—*                                                        | * *   | *1,688* | * * | *7* | *%* |
| *Enalapril*                      | * *   | *925*                                      | * *   | *465*                      | * *   | *—*                                                        | * *   | *—*                                                        | * *   | *1,390* | * * | *6* | *%* |
| *Paroxetine*                     | * *   | *364*                                      | * *   | *836*                      | * *   | *—*                                                        | * *   | *—*                                                        | * *   | *1,200* | * * | *5* | *%* |
| *Lansoprazole*                   | * *   | *461*                                      | * *   | *118*                      | * *   | *—*                                                        | * *   | *—*                                                        | * *   | *579* | * * | *2* | *%* |
| *All  other products*            | * *   | *3,536*                                    | * *   | *2,521*                    | * *   | *112*                                                           | * *   | *576*                                                           | * *   | *6,745* | * * | *28* | *%* |
| *Sales  to licensees and others* | * *   | *—*                                   | * *   | *—*                   | * *   | *3,678*                                                         | * *   | *3,163*                                                         | * *   | *6,841* | * * | *28* | *%* |
| *Licensing  and collaborations*  | * *   | *—*                                   | * *   | *—*                   | * *   | *95*                                                            | * *   | *870*                                                           | * *   | *965* | * * | *4* | *%* |
| *Total  Revenues*                | * *   | *$   6,450*                 | * *   | *$   9,300* | * *   | *$   3,885*                                      | * *   | *$   4,609*                                      | * *   | *$ 24,244* | * * | *100* | *%* |
| *% of Q-1 2005 Revenues*         | * *   | *27*                                       | *%*        | *38*                       | *%*        | *16*                                                            | *%*        | *19*                                                            | *%*        | *100* | *%* | * * | * * |

 

* *

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*Spanish Operations.**  **The increase in first quarter 2006product sales was primarily driven by increased sales to licensees ofapproximately $2,600,000 and sales of new drugs launched over the past year,totaling approximately $600,000. A decrease in the weighted average value ofthe Euro, in relation to the U.S. Dollar had the effect of decreasing netproduct sales by approximately $1,712,000.*

In recent years, our business was negatively impactedby price reductions mandated by the Spanish government to help control risinghealthcare costs. The Spanish government is currently contemplating a new proposed medicines bill to help control healthcarecosts. The proposed bill states that when a doctor writes a prescription byactive ingredient, rather than brand name, the pharmacist would dispense thelowest-priced product. If several products have equally low prices, thepharmacist should favor the generic product. If approved, all drugs which havebeen reimbursed for at least ten years, or eleven years if they have gained anew indication, would be placed into a reference-price group with productscontaining the same active pharmaceutical ingredients and delivery form. Thereference price would be calculated as an average of the three lowest prices inthe group. Where the reference price would result in price cuts of more than30% to a product, companies would be able to reduce the price of that productgradually. Where a brand has held a marketing authorization for at least tenyears, its current price would be cut by 20%, providing an equivalent genericproduct is at a lower price in another European Union member state. Any productpriced below €2.00 (or approximately $2.49) would be exempt from the referenceprice provisions. We cannot predict whether this proposal will be enacted or,if it is, what its final provisions may be and, therefore, we cannot asses whatimpact it may have on our business.

We have furthered our expansion into markets outsideof Spain, increased the number of drugs in our portfolio and purchasedefficient high speed manufacturing equipment to increase efficiencies andcapacities. Additionally, we purchased a manufacturing facility during 2004,located in Zaragoza, Spain, which specializes in the manufacture of activepharmaceutical ingredients. The ability to manufacture active pharmaceuticalingredients has diversified our revenue base and is expected to benefit grossmargins of certain of the products we sell in the future. We will continue tofocus on acquiring, developing and launching new products that will improve ourproduct mix. Products launched over the past year contributed approximately$600,000 to our net product sales in the first quarter of 2006. We will alsocontinue our efforts to increase sales outside of Spain through additionalregistration, marketing, and supply agreements. Our revenues outside of Spainrepresented 31% of our total revenues in the first quarter of 2006 compared to19% in the first quarter of 2005. We will also continue to make significantinvestments in renovating and increasing capacity in manufacturing facilitiesand investments in new high speed, high volume equipment during the balance of2006.

*Branded Pharmaceutical Products*

|                              | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|------------------------------|------------|------------------------------------------------------------------------|------------|------------|------------|
| **(in thousands)**      | ** ** | **2006**                                                               | ** ** | **%**      | ** ** | **2005** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Branded  Product Sales:*    | * *   | * *                                                               | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Enalapril*                  | * *   | *$      918*                             | * *   | *16*       | *%*        | *$      925* | * * | *14* | *%* | *$         (7* | *)* | *-1* | *%* |
| *Codeisan*                   | * *   | *852*                                                                  | * *   | *15*       | *%*        | *1,369* | * * | *21* | *%* | *(517* | *)* | *-38* | *%* |
| *Lansoprazole*               | * *   | *660*                                                                  | * *   | *11*       | *%*        | *461* | * * | *7* | *%* | *199* | * * | *43* | *%* |
| *Omeprazole*                 | * *   | *629*                                                                  | * *   | *11*       | *%*        | *716* | * * | *11* | *%* | *(87* | *)* | *-12* | *%* |
| *Simvastatin*                | * *   | *444*                                                                  | * *   | *8*        | *%*        | *448* | * * | *7* | *%* | *(4* | *)* | *-1* | *%* |
| *All other branded products* | * *   | *2,332*                                                                | * *   | *39*       | *%*        | *2,531* | * * | *40* | *%* | *(199* | *)* | *-8* | *%* |
| *Total  branded sales*       | * *   | *$   5,835*                                             | * *   | *100*      | *%*        | *$   6,450* | * * | *100* | *%* | *$     (615* | *)* | *-10* | *%* |

 

Sales of our branded pharmaceutical products decreasedby 4% in constant currency during the three months ended March 31, 2006compared to the three months ended March 31, 2005, primarily as the resultof a mild cough, cold and flu season. Sales of Codeisan, our leading coughproduct, decreased by 38% when compared to the same quarter in 2005, andaccounted for 84% of the decrease in our branded

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pharmaceutical revenues. We experienced similarreductions in sales of our other products used to treat cold and sinuscongestion, such as Senioral®, and products used to treat infections, such asour generic versions of amoxicillin and ciprofloxacin. A decrease in theweighted average value of the Euro over the past year, in relation to the U.S. Dollar, had theeffect of further decreasing branded product sales by approximately $342,000in the first quarter of 2006. While we expect to continue to develop, acquire,launch and support new and existing branded products, our growth strategy isfocused on sales of generic products and sales outside of Spain.

*Generic Pharmaceutical Products*

|                              | ** ** | **For the Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|------------------------------|------------|------------------------------------------------------------------------|------------|------------|------------|
| **(in thousands)**      | ** ** | **2006**                                                               | ** ** | **%**      | ** ** | **2005** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| *Generic  Product Sales:*    | * *   | * *                                                               | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| *Omeprazole*                 | * *   | *$     4,383*                                 | * *   | *41*       | *%*        | *$     4,120* | * * | *44* | *%* | *$        263* | * * | *6* | *%* |
| *Simvastatin*                | * *   | *1,471*                                                                | * *   | *14*       | *%*        | *1,240* | * * | *13* | *%* | *231* | * * | *19* | *%* |
| *Enalapril*                  | * *   | *723*                                                                  | * *   | *7*        | *%*        | *465* | * * | *5* | *%* | *258* | * * | *55* | *%* |
| *Paroxetine*                 | * *   | *816*                                                                  | * *   | *8*        | *%*        | *836* | * * | *9* | *%* | *(20* | *)* | *-2* | *%* |
| *Pentoxifylline*             | * *   | *603*                                                                  | * *   | *6*        | *%*        | *633* | * * | *7* | *%* | *(30* | *)* | *-5* | *%* |
| *All other generic products* | * *   | *2,621*                                                                | * *   | *24*       | *%*        | *2,006* | * * | *22* | *%* | *615* | * * | *31* | *%* |
| *Total  generic sales*       | * *   | *$   10,617*                                            | * *   | *100*      | *%*        | *$     9,300* | * * | *100* | *%* | *$     1,317* | * * | *14* | *%* |

 

Sales of our generic pharmaceutical products increasedby 22% in constant currency during the three months ended March 31, 2006,compared to the three months ended March 31, 2005; however, a decrease inthe weighted average value of the Euro over the past year, in relation to theU.S. Dollar, had the effect of decreasing our generic product sales byapproximately $707,000 in the first quarter of 2006. Strong sales of ourgeneric omeprazole accounted for 20% of our increase in generic pharmaceuticalsales in the first quarter of 2006. Increased sales of our generic simvastatinand enalapril products represented 18% and 20%, respectively, of the growth inour generic pharmaceutical product sales in the first quarter of 2006. Weexpect to continue to increase our generic drug portfolio and increase ourgeneric drug sales in Spain as products’ patent protection rights expire in thefuture.

*Sales to Licensees and Others*

|                                  | ** ** | **For the Three Months Ended March 31,**                             | ** ** | **Change**                                                                                         | ** ** |
|----------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| **(in thousands)**          | ** ** | **2006**                                                                                           | ** ** | **2005**                                                                                           | ** ** | **$** | ** ** | **%** | ** ** |
| *Sales  to licensees and others* | * *   | *$               9,451* | * *   | *$               6,841* | * *   | *$               2,610* | * * | *38* | *%* |

 

In addition to manufacturing and selling our ownbranded and generic products, we license the right to market products to otherswithin and outside of Spain. These license agreements are usually accompaniedby long-term exclusive supply agreements, whereby our licensees purchase thelicensed products from our manufacturing company. As of March 31, 2006,our Spanish operations have executed 157 license agreements for productregistrations, of which 19 with customers in Spain and 81 with customersoutside of Spain, cover actively marketed products that are generating revenues.The remaining licenses (one with a customer in Spain, three with customers inIreland and 53 with customers outside of Spain and Ireland) are for productsthat are awaiting regulatory approvals. Additionally, we have 16 contractmanufacturing agreements in effect in Spain and six contract manufacturingagreements in effect for international customers. Our clients market theseproducts under their own names and with their own labeling. Many of theproducts we manufacture for others use the same active ingredients that areused in our own marketed products. Sales under our license agreements in thethree months ended March 31, 2006 increased 47% in constant currency whencompared to the prior year period; however, a decrease in the weighted averagevalue of the Euro over the past year, in relation to the U.S. Dollar, had theeffect of decreasing our revenues from sales to licensees and others byapproximately $608,000.

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*Licensing andCollaboration Revenues.*   Licensing and collaboration revenues increased to 6% oftotal revenues in the three month period ended March 31, 2006 compared to4% in the same period of 2005. These revenues include royalties from thecontinued sales of Testim, the first productincorporating our CPE-215 drug delivery technology, totaling $1,628,000in the first quarter of 2006, compared to $870,000 in the first quarter of2005. Testim is currently reported to have captured approximately 18% of allnew testosterone replacement prescriptions in the market.

*Gross Profit.**  *Grossprofit increased by approximately $2,553,000, or 20%, in the three months endedMarch 31, 2006, when compared to the three months ended March 31,2005. Gross margins on net product sales remain consistent at 51% in the threemonths ended March 31, 2006 when compared to the three months ended March 31,2005.

*Selling and Marketing Expenses*

|                          | ** ** | **For the Three Months Ended March 31,**                             | ** ** | **Change**                                                                                         | ** ** |
|--------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| **(in thousands)**  | ** ** | **2006**                                                                                           | ** ** | **2005**                                                                                           | ** ** | **$** | ** ** | **%** | ** ** |
| *Selling  and marketing* | * *   | *$               4,139* | * *   | *$               4,392* | * *   | *$                 (253* | *)* | *-6* | *%* |

 

Selling and marketing expenses for the three monthsended March 31, 2006 increased less than 1% from the same period in theprior year when expressed in constant currency; however, the decrease in the weighted average value ofthe Euro over the past year, in relation to the U.S. Dollar, had the effect ofdecreasing selling and marketing expenses by approximately $264,000 inthe three months ended March 31, 2006. As a percentage of net productsales, selling and marketing expenses decreased from 19% in the three monthsended March 31, 2005, to 16% in the three months ended March 31,2006.

*General and Administrative Expenses*

|                               | ** ** | **For the Three Months Ended March 31,**                             | ** ** | **Change**                                                                                         | ** ** |
|-------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| **(in thousands)**       | ** ** | **2006**                                                                                           | ** ** | **2005**                                                                                           | ** ** | **$** | ** ** | **%** | ** ** |
| *General  and administrative* | * *   | *$               4,508* | * *   | *$               3,018* | * *   | *$               1,490* | * * | *49* | *%* |

 

General and administrative expenses for the threemonths ended March 31, 2006 increased 49% over the same period in theprior year. The $1,490,000 increase was the result of increased general andadministrative activities required to support our continued growth and includeincreased costs for: (1) costs incurred to defend against legal actionbrought by Ethypharm, (2) additional employees, (3) outside servicesto support the Company’s growth and (4) non-cash equity-based compensationexpense of approximately $304,000 related to stock options not required to berecorded in previous periods. General and administrative expenses as a percentof total revenues increased to approximately 15.9% in the three months ended March 31,2006, compared to approximately 12.4% of total revenues in the three monthsended March 31, 2005. General and administrative expenses would have beenapproximately $112,000 higher, absent the increase in the weighted averagevalue of the Euro, in relation to the U.S. Dollar over the past year. We expectthat our future expenditures for general and administrative expenses willcontinue to increase as we grow.

*Research and Development Expenses*

|                             | ** ** | **For the Three Months Ended March 31,**                             | ** ** | **Change**                                                                                         | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| **(in thousands)**     | ** ** | **2006**                                                                                           | ** ** | **2005**                                                                                           | ** ** | **$** | ** ** | **%** | ** ** |
| *Research  and development* | * *   | *$               2,908* | * *   | *$               1,351* | * *   | *$               1,557* | * * | *115* | *%* |

 

Research and development expenses have increased toapproximately $2.9 million in the first quarter of 2006 compared to $1.4million in the same period of the prior year. The increased expenses wereprimarily directed toward the advancement of our intranasal insulin program. Researchand development expenses also include approximately $144,000 of non-cash,equity-based compensation

23

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expense related to stock options, for which there wasno comparable expense recorded in previous periods. We plan to continue to makeinvestments in research and development in 2006 to help us build on theclinical progress of CPE-215 and advance the early-stage research on ourNanocaplet technology. We expect overall 2006 research and development costs toincrease by 50% or more when compared to 2005.

*Provision for Income Taxes*

|                                         | ** ** | **For the Three Months Ended March 31, 2006** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **(in thousands)**                 | ** ** | **Spain**                                                                        | ** ** | **Ireland** | ** ** | **U.S.** | ** ** | **Consolidated** | ** ** |
| *Income  (loss) before income taxes*    | * *   | *$      6,898*                                     | * *   | *$    (1,282* | *)* | *$    (2,069* | *)* | *$      3,547* | * * |
| * *                                | * *   | * *                                                                         | * *   | * * | * * | * * | * * | * * | * * |
| *Provision  (benefit) for income taxes* | * *   | *2,393*                                                                          | * *   | *(160* | *)* | *(758* | *)* | *1,475* | * * |
| *Valuation  allowance*                  | * *   | *—*                                                                         | * *   | *160* | * * | *758* | * * | *918* | * * |
| * *                                | * *   | * *                                                                         | * *   | * * | * * | * * | * * | * * | * * |
| *Net  provision for income taxes*       | * *   | *2,393*                                                                          | * *   | *—* | * * | *—* | * * | *2,393* | * * |
| * *                                | * *   | * *                                                                         | * *   | * * | * * | * * | * * | * * | * * |
| *Net  income (loss)*                    | * *   | *$      4,505*                                     | * *   | *$    (1,282* | *)* | *$    (2,069* | *)* | *$      1,154* | * * |
| * *                                | * *   | * *                                                                         | * *   | * * | * * | * * | * * | * * | * * |
| *Effective tax rate*                    | * *   | *35*                                                                             | *%*        | *0* | *%* | *0* | *%* | *67* | *%* |

 

As a result of reporting taxable income in Spain, werecorded provisions for foreign income taxes totaling $­2­,393,000 and$1,590,000 for the three months ended March 31, 2006 and 2005,respectively. The provisions represented 35% and 34% of the pre-tax incomereported in Spain of $6,898,000 and $4,678,000 for the three months ended March 31,2006 and 2005, respectively. The provisions represented 67% and 42% ofconsolidated pre-tax income for the three months ended March 31, 2006 and2005, respectively.

As future operating profits in the U.S and Irelandcannot be reasonably assured, no tax benefit has been recorded for the relatedlosses, which totaled approximately $3,351,000 and $918,000 for the threemonths ended March 31, 2006 and 2005, respectively. Accordingly, theCompany has established valuation allowances equal to the full amount of theU.S. and Irish deferred tax assets.

Should we determine that it is more likely than notthat we will realize certain of our net deferred tax assets for which we havepreviously provided a valuation allowance, an adjustment would be required toreduce the existing valuation allowance. In addition, we operate withinmultiple taxing jurisdictions and are subject to audit in those jurisdictions.These audits can involve complex issues, which may require an extended periodof time for resolution. No additional potential tax contingencies wereconsidered to be probable and reasonably estimable as of March 31, 2006.However, there is the possibility that the ultimate resolution of suchpotential contingencies could have an adverse effect on the ConsolidatedFinancial Statements in the future.

*Net Income*

|                                                                    | ** ** | **For the Three Months  Ended March 31,** | ** ** | **Change**                            | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2006**                                                           | ** ** | **2005**                              | ** ** | **$** | ** ** | **%** | ** ** |
| *Net  income*                                                      | * *   | *$  1,154*                                               | * *   | *$  2,170*                  | * *   | *$ (1,016* | *)* | *-47* | *%* |
| * *                                                           | * *   | * *                                                           | * *   | * *                              | * *   | * * | * * | * * | * * |
| *Net income per common share:*                                     | * *   | * *                                                           | * *   | * *                              | * *   | * * | * * | * * | * * |
| *Basic*                                                            | * *   | *$     0.05*                              | * *   | *$     0.10* | * *   | *$   (0.05* | *)* | *-50* | *%* |
| *Diluted*                                                          | * *   | *$     0.05*                              | * *   | *$     0.10* | * *   | *$   (0.05* | *)* | *-50* | *%* |
| * *                                                           | * *   | * *                                                           | * *   | * *                              | * *   | * * | * * | * * | * * |
| *Weighted average common shares  outstanding:*                     | * *   | * *                                                           | * *   | * *                              | * *   | * * | * * | * * | * * |
| *Basic*                                                            | * *   | *21,954*                                                           | * *   | *21,316*                              | * *   | *638* | * * | *3* | *%* |
| *Diluted*                                                          | * *   | *23,807*                                                           | * *   | *22,531*                              | * *   | *1,276* | * * | *6* | *%* |

 

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We reported income from operations of $3,354,000 inthe three months ended March 31, 2006 compared to $3,647,000 in the threemonths ended March 31, 2005. The combination of income from operations of$3,354,000 and the non-operating items, primarily the provision for incometaxes of $2,393,000, resulted in net income of $1,154,000, or $0.05 per basiccommon share ($0.05 per diluted common share) on 21,954,000 weighted averagebasic common shares outstanding (23,807,000 weighted average diluted commonshares outstanding) in the three months ended March 31, 2006, compared tonet income of $2,170,000, or $0.10 per basic common share ($0.10 per dilutedcommon share) on 21,316,000 weighted average basic common shares outstanding(22,531,000 weighted average diluted common shares outstanding) in the sameperiod of the prior year.

**LIQUIDITY ANDCAPITAL RESOURCES:**

Total assets increased from $124,220,000 at December 31,2005 to $133,292,000 at March 31, 2006, and stockholders’ equity increasedfrom $91,589,000 at December 31, 2005 to $92,748,000 at March 31,2006. The increase in stockholders’ equity during the three months ended March 31,2006 primarily reflects the exercise of stock options totaling $2,461,000, netincome during the quarter of $1,154,000 and the effect of fluctuations in theEuro/U.S. Dollar exchange rate, which resulted in a net increase of $1,060,000in our balance sheet. These increases were partially offset by the acquisitionof approximately 307,400 shares of Common Stock with a fair market value ofapproximately $4,060,000, which were tendered to us by certain employees asconsideration for the exercise of stock options and to satisfy minimum federaland statutory tax withholding requirements.

Cash and cash equivalents decreased by approximately12% or $3,868,000 from $32,384,000 at December 31, 2005 to $28,516,000 at March 31,2006. Uses of cash included additions to fixed assets totaling $3,282,000,additions to drug licenses totaling $521,000 and the $1,853,000 net effect offinancing activities detailed below. These uses were partially offset by cashflow from operations, which totaled $1,614,000 and included net income of$1,154,000. Cash and cash equivalents at March 31, 2006 includeapproximately $11,835,000 of short-term liquid investments considered to becash equivalents.

Receivables increased by approximately 26% from$26,916,000 at December 31, 2005 to $33,867,000 at March 31, 2006. Whenexpressed in constant currency receivables increased $6,439,000, primarily dueto increased net product sales outside of Spain, which generally have longernegotiated collection terms. Changes in foreign currency exchange ratesincreased receivables by approximately $512,000. Furthermore, receivables fromone international customer totaled $3,393,000 at March 31, 2006 and we owethe same customer approximately $2,825,000 for co-marketing expenses at March 31,2006. We have not experienced any material delinquencies on any of ourreceivables that have had a material effect on our financial position, resultsof operations or cash flows.

Inventory balances increased by approximately$2,627,000 from $12,147,000 at December 31, 2005 to $14,774,000 at March 31,2006. Excluding fluctuations in foreign currency, which had the effect ofincreasing inventories by approximately $249,000, the increase of $2,378,000was due to increases in raw materials and finished goods balances needed tomeet projected future demand.

The combined total of accounts payable and accruedexpenses increased from $24,890,000 at December 31, 2005 to $31,934,000 atMarch 31, 2006. The $7,044,000 increase was primarily attributed to: (1) increasesin inventory purchases of approximately $3,160,000, (2) increased accruedincome taxes payable of approximately $2,760,000, (3) an increase ofapproximately $1,532,000 in payables to an international customer from whichthe Company has receivables in excess of its payables, and (4) fluctuationsin foreign currency exchange rates, which increased the balances byapproximately $493,000. These increases were partially offset by a $1,282,000reduction in payables related to fixed assets and drug licenses.

 

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Short-term borrowings and current portion of long-termdebt decreased from $2,995,000 at December 31, 2005 to $2,795,000 at March 31,2006, primarily as a result of net repayment of short-term borrowings and theeffect of fluctuations in foreign currency exchange rates. The weighted averageinterest rate on our short-term borrowings at March 31, 2006 was 4.0%.

Operating activities for the three months ended March 31,2006 provided net cash of $1,614,000, which is a decrease of $2,925,000 whencompared to the three months ended March 31, 2005. This changed isprimarily due to a $1,016,000 decrease in net income and other changes toworking capital that resulted in a net use of cash when compared to the prioryear.

Investing activities, primarily capital expendituresto upgrade the capacity of our manufacturing facilities in Spain and toincrease our manufacturing and packaging capabilities with new high speedequipment, along with additions to drug licenses and related costs, resulted ina $3,803,000 use of cash during the three months ended March 31, 2006.

Financing activities during the three months ended March 31,2006 used net cash of $1,853,000, and primarily represented: (1) theremittance of employee tax withholding liabilities of approximately $1,713,000resulting from cashless stock option exercises, and (2) net repayment ofborrowings totaling $253,000. These activities were partially offset by cashproceeds from the exercise of stock options of approximately $113,000.

Long-term debt, which totaled $332,000 at March 31,2006, has been classified as current in anticipation of repayment during 2006.

Our royalty revenues on Testim product sales byAuxilium Pharmaceuticals, Inc., our licensee, are recognized based on anestimate of Auxilium’s sell-through of the Testim product derived fromprescriptions dispensed. For the three months ended March 31, 2006 and2005, we recognized royalty revenues of approximately $1,628,000 and $870,000,respectively, on this basis. The difference between the total amount earnedfrom Auxilium under the royalty arrangement and the amount recognized as acomponent of *licensing and collaboration revenues*is recorded as a component of current *deferred income*in the Consolidated Balance Sheets. As of March 31, 2006 and December 31,2005, deferred income from Testim royalties was approximately $372,000 and$348,000, respectively. We will continue to use available market information todetermine the amount and timing of royalty revenue recognition until such timethat returns from wholesalers and pharmacies can be reasonably estimated.

*Seasonality.**  *In the past, we have experienced lower sales in thethird calendar quarter and higher sales in the fourth calendar quarter due toseasonality. However, a mild cough, cold and flu season could moderate theimpact of the seasonality on our revenues. As we market more pharmaceuticalproducts whose sales are seasonal, seasonality of sales may become moresignificant.

*Effectof Inflation and Changing Prices.**  *Neitherinflation nor changing prices has materially impacted our net product sales orincome from operations for the periods presented.

*Liquidity.*   Weplan to continue making improvements to our manufacturing facilities during2006 that include the acquisition of additional manufacturing equipment andexpansion of our manufacturing facilities, in order to accommodate our expectedgrowth. Our 2006 capital expenditure plan totals $22.6 million andwe invested approximately $3,282,000 in equipment and improvements during thethree months ended March 31, 2006. We plan to finance the remainingcapital expenditures planned for 2006 from a combination of cash flows fromoperations, borrowings and existing cash balances. As mentioned above, we have cash and cashequivalents totaling approximately $28,516,000 as of March 31, 2006, whichis sufficient to fund our operations for the foreseeable future. Although theCompany is generating positive cash flow from operations, (approximately$1,614,000 in the three months ended March 31, 2006), there can

26

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be no assurance that changes in our research anddevelopment plans, capital expenditures and/or acquisitions, or other eventsaffecting our net product sales or operating expenses will not result in theearlier depletion of our funds. However, we continue to explore alternativesources for financing our business activities. In appropriate situations, whichwill be strategically determined, we may seek financial assistance from othersources, including contribution by others to joint ventures and othercollaborative or licensing arrangements for the development, testing,manufacturing and marketing of products under development.

**CriticalAccounting Policies and Estimates**

Our significant accounting policies are more fullydescribed in Note 2 to our consolidated financial statements in our 2005 Form 10-K.Certain of our accounting policies are particularly important to the portrayalof our financial position, results of operations and cash flows and require theapplication of significant judgment by our management; as a result they aresubject to an inherent degree of uncertainty. In applying those policies, ourmanagement uses its judgment to determine the appropriate assumptions to beused in the determination of certain estimates. Those estimates are based onour historical experience, terms of existing contracts, our observation oftrends in the industry, information provided by our customers and informationavailable from other outside sources, as appropriate. We have reviewed ourcritical accounting policies and estimated discussed in our 2005 Form 10-Kand have determined that, with the exception of additional critical accountingpolicy and estimates noted below, those policies remain our most criticalaccounting policies for the quarter ended March 31, 2006. We did not makeany changes those policies during the quarter ended March 31, 2006.

*Equity-basedcompensation*

Commencing January 1, 2006, we began accountingfor stock-based compensation in accordance with the fair value recognitionprovisions of SFAS No. 123 (Revised). Under the fair valuerecognition provisions of SFAS No. 123 (Revised), stock-basedcompensation cost is measured at the grant date based on the fair value of theaward and is recognized as expense over the requisite service period.Determining the fair value of equity awards at the grant date requiresjudgment. We estimate the grant date fair value of stock options using theBlack-Scholes option valuation model. This option valuation model requires theinput of subjective assumptions including: (1) Expected life - theexpected life (estimated period of time outstanding) of options granted isestimated based on historical exercise behaviors; (2) Volatility - thevolatility of the Company’s stock is calculated on the grant date of eachequity award using daily price observations over a period of time commensuratewith the related requisite service period; (3) Risk-free rate - therisk-free interest rate is based on the yield curve of U.S. Treasury securitiesin effect at the date of the grant, having a duration commensurate with theestimated life of the award; and (4) Dividends - as we have not declareddividends, and we do not expect to declare dividends in the future, we includean annual dividend rate of 0% when calculating the grant date fair value ofequity awards. Because stock-based compensation expense is based on awardsultimately expected to vest, it is reduced for estimated forfeitures. SFAS No. 123(Revised) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Forfeitures are estimated based on historical experience.While we recognize stock-based compensation under the accelerated expenseattribution method pursuant to FASB Interpretation No. 28 for all optionspreviously accounted for under APB Opinion No. 25, we have elected torecognize equity-based compensation attributable to equity awards grantedsubsequent to December 31, 2005 under the straight-line method which is anoption allowed for under SFAS No. 123 (Revised). Had we elected torecognize compensation expense for new equity awards under the acceleratedexpense attribution method, recognition of the related compensation expensewould be front-loaded in the requisite service period as opposed to beingrecognized evenly over the period.

**Important FactorsThat May Affect Future Results**

This Quarterly Report on Form 10-Q containsforward-looking statements. These forward-looking statements appear principallyin the section entitled “Management’s Discussion and Analysis of Financial

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Condition and Results of Operations.” Forward-lookingstatements may appear in other sections of this report, as well. Generally, theforward-looking statements in this report include such words as “expect,” “believe,”“continue,” “anticipate,” “estimate,” “may,” “will,” “could,” “opportunity,” “future,”“project,” and similar expressions.

The forward-looking statements include statementsabout our:

·                  Strategic plans;

·                  Sales growth;

·                  Anticipated sources offuture revenues;

·                  Anticipated 2006expenses, margins and operating performance;

·                  Expected launch of newproducts;

·                  Anticipated expenses andspending;

·                  Planned and continuingclinical trials;

·                  Anticipated regulatorychanges and approvals; and

·                  The sufficiency ofcapital resources to fund our operations.

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

**Item 3.**                          Quantitativeand Qualitative Disclosures About Market Risk

*ForeignCurrency.**  *Asubstantial amount of our business is conducted in Europe and is thereforeinfluenced to the extent to which there are fluctuations in the U.S. Dollar’svalue in relation to other currencies, specifically the Euro. The exchangerates at March 31, 2006 and December 31, 2005 were .83 Euros and .84Euros per U.S. Dollar, respectively. The weighted average exchange rate for thethree months ended March 31, 2006 and 2005 was .83 Euros and .76 Euros perU.S. Dollar, respectively. The net effect of foreign currency translation onour Condensed Consolidated Financial Statements for the three months ended March 31,2006 was a net increase of $1,060,000 and the cumulative historical effect asof March 31, 2006 was an increase of $2,820,000, as reflected in ourConsolidated Balance Sheets as *accumulatedother**comprehensive income*.The carrying value of assets and liabilities can be materially impacted byforeign currency translation, as can the translated amounts of revenues andexpenses. Nonetheless, we do not plan to modify our business practices.

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

*InterestRates.**  *Theweighted average interest rate on our short-term borrowings is 4.0% and theamount of borrowings outstanding is $2,795,000 as of March 31, 2006. Theeffect of an increase in interest rates of one percentage point (one hundredbasis points) to an average of 5.0% on short-term borrowings would have theeffect of increasing interest expense by approximately $28,000 annually.

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**Item 4.**                          Controlsand Procedures

Bentley maintains disclosure controls and proceduresthat are designed to ensure that information required to be disclosed inBentley’s reports that are filed or submitted under the Securities Exchange Actof 1934, as amended (the “Exchange Act”) with the Securities and ExchangeCommission is recorded, processed, summarized and reported within the time periodsrequired for each report and that such information is reported to Bentley’smanagement, including its principal executive officer and principal financialofficer, as appropriate, to allow timely decisions regarding requireddisclosure.

Bentley’s management carried out an evaluation, withthe participation of Bentley’s principal executive officer and principalfinancial officer, of the effectiveness of Bentley’s disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of the end of the period covered by this quarterly report.Based on that evaluation, Bentley’s principal executive officer and principalfinancial officer concluded that Bentley’s disclosure controls and procedureswere effective as of March 31, 2006.

There was no change in Bentley’s internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) identified in connection with the evaluation of Bentley’sinternal controls that occurred during the quarter ended March 31, 2006that has materially affected, or is reasonably likely to materially affect,Bentley’s internal control over financial reporting.

**PART II.   OTHERINFORMATION**

**Item 2.**                          UnregisteredSales of Equity Securities and Use of Proceeds

**Issuer Repurchases**
| ** **                                            | ** ** | **(a)  Total Number  of Shares  (or Units)  Purchased (1)** | ** ** | **(b)  Average  Price Paid  per Share  (or Unit)(2)** | ** ** | **(c)  Total Number  of Shares  (or Units)  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **(d)  Maximum  Number  (or approximate  dollar value)  of Shares (or  Units) that  may yet be  Purchased  under the Plans  or Programs** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1,  2006 through January 31, 2006   |       | —                                                                          |       | $                                                                    | —     |                                                                                                                                           | —     |                                                                                                                                                                                        | —     |   |
| February 1,  2006 through February 28, 2006 |       | —                                                                          |       | —                                                               |       | —                                                                                                                                         |       | —                                                                                                                                                                                      |       |
| March 1,  2006 through March 31, 2006       |       | 307,401                                                                         |       | 13.208                                                               |       | —                                                                                                                                         |       | —                                                                                                                                                                                      |       |
|                                                  |       |                                                                            |       |                                                                 |       |                                                                                                                                           |       |                                                                                                                                                                                        |       |
| Total                                                 |       | 307,401                                                                         |       | $                                                                    | 13.208     |                                                                                                                                           | —     |                                                                                                                                                                                        | —     |   |

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(1)**            **Representsshares tendered to the Company at fair market value from option holders usingmature stock to exercise vested stock options and satisfy minimum taxwithholding liabilities.

(2)**            **Weightedaverage of the high and low prices on the NYSE on the dates of exercise.

**Item 6.**                          Exhibits

The Exhibits filed as part of this report are listedon the Exhibit Index immediately preceding the exhibits, which Exhibit Indexis incorporated herein by reference.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                   |   |   |   | BENTLEY PHARMACEUTICALS, INC.                |
|-------------------|--------|--------|--------|----------------------------------------------|
|              |   |   |   | Registrant                                   |
| May 10, 2006 |   | By:    |   | /s/ JAMES R. MURPHY                          |
|              |   |   |   | James R. Murphy                              |
|              |   |   |   | Chairman of the Board of Directors           |
|              |   |   |   | and Chief Executive Officer                  |
|              |   |   |   | (Principal Executive Officer)                |
| May 10, 2006 |   | By:    |   | /s/ MICHAEL D. PRICE                         |
|              |   |   |   | Michael D. Price                             |
|              |   |   |   | Vice President, Chief Financial Officer,     |
|              |   |   |   | Treasurer and Secretary (Principal Financial |
|              |   |   |   | and Accounting Officer)                      |

 

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**Exhibit Index**
| Exhibit  Number | ** ** | **Description of Exhibit**                                                                                                                                                        |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                              |
| 31.1            |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed  herewith.                                                    |
|            |       |                                                                                                                                                                              |
| 31.2            |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed  herewith.                                                    |
|            |       |                                                                                                                                                                              |
| 32.1            |       | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
|            |       |                                                                                                                                                                              |
| 32.2            |       | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. |

 

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