UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

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

For the transition period from      to

BENTLEY PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

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

The number of shares of the registrant’s common stock outstanding as of November 8, 2007 was 22,326,135.

 

 

Bentley Pharmaceuticals, Inc. and Subsidiaries
Form 10-Q for the Quarter Ended September 30, 2007

Index

						Page
Part I.		Financial Information
		Item 1.		Unaudited Condensed Consolidated Financial Statements:
				Unaudited Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006			3
				Unaudited Consolidated Income Statements for the three and nine months ended September 30, 2007 and 2006			4
				Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2007 and 2006			5
				Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006			6
				Notes to Unaudited Condensed Consolidated Financial Statements			8
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			37
		Item 4.		Controls and Procedures			38
Part II.		Other Information
		Item 6.		Exhibits			38
EX-10.1 EMPLOYMENT AGREEMENT DATED AS OF AUGUST 20, 2007
EX-31.1 CERTIFICATION OF THE CEO PURSUANT TO SECTION 302
EX-31.2 CERTIFICATION OF THE CFO PURSUANT TO SECTION 302
EX-32.1 CERTIFICATION OF CEO PURSUANT TO SECTION 906
EX-32.2 CERTIFICATION OF CFO PURSUANT TO SECTION 906

Bentley Pharmaceuticals, Inc. and Subsidiaries

(in thousands, except per share data)		September 30,				December 31,
		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	38,452			$	12,424
Marketable securities			560				3,177
Receivables, net			31,469				32,963
Inventories			15,043				16,279
Deferred taxes			1,579				1,049
Prepaid expenses and other			2,437				1,798
Total current assets			89,540				67,690
Non-current assets:
Fixed assets, net			55,821				48,556
Drug licenses and related costs, net			17,147				16,026
Restricted cash			1,000				1,000
Deferred taxes			195				240
Other			945				844
Total non-current assets			75,108				66,666
		$	164,648			$	134,356
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	15,582			$	14,566
Accrued expenses			11,276				9,704
Short-term borrowings			—				247
Current portion of long-term debt			—				307
Deferred income			998				1,045
Other current liabilities			1,571				1,518
Total current liabilities			29,427				27,387
Non-current liabilities:
Long-term debt			15,559				—
Deferred income			4,757				3,899
Other			4,055				2,739
Total non-current liabilities			24,371				6,638
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $1.00 par value, authorized 2,000 shares, issued and outstanding, none			—				—
Common stock, $0.02 par value, authorized 100,000 shares, issued and outstanding, 22,323 and 22,262 shares			446				445
Additional paid-in capital			142,092				140,030
Accumulated deficit			(46,952	)			(49,016	)
Accumulated other comprehensive income			15,264				8,872
Total stockholders’ equity			110,850				100,331
		$	164,648			$	134,356

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

Bentley Pharmaceuticals, Inc. and Subsidiaries

		For the Three Months Ended								For the Nine Months Ended
(in thousands, except per share data)		September 30,								September 30,
		2007				2006				2007				2006
Revenues:
Net product sales		$	24,131			$	22,873			$	81,598			$	75,900
Licensing and collaboration revenues			3,217				2,283				8,320				6,517
Total revenues			27,348				25,156				89,918				82,417
Cost of net product sales			14,451				11,778				46,138				37,182
Gross profit			12,897				13,378				43,780				45,235
Operating expenses:
Selling and marketing			4,080				3,495				13,338				11,876
General and administrative			4,098				3,751				12,016				11,320
Research and development			3,017				2,447				9,194				7,850
Litigation settlement			—				8,932				—				10,269
Separation costs			846				—				1,153				—
Depreciation and amortization			489				460				1,543				1,341
Total operating expenses			12,530				19,085				37,244				42,656
Income (loss) from operations			367				(5,707	)			6,536				2,579
Other income (expenses):
Interest income			339				223				706				661
Interest expense			(247	)			(15	)			(348	)			(109	)
Other, net			(149	)			—				84				36
Income (loss) before income taxes			310				(5,499	)			6,978				3,167
Provision for income taxes			911				1,730				4,509				6,607
Net (loss) income		$	(601	)		$	(7,229	)		$	2,469			$	(3,440	)
Net (loss) income per common share:
Basic		$	(0.03	)		$	(0.33	)		$	0.11			$	(0.16	)
Diluted		$	(0.03	)		$	(0.33	)		$	0.11			$	(0.16	)
Weighted average common shares outstanding:
Basic			22,354				22,194				22,322				22,107
Diluted			22,354				22,194				22,829				22,107

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

Bentley Pharmaceuticals, Inc. and Subsidiaries

																		Accumulated
		$0.02 Par Value								Additional								Other
(in thousands)		Common Stock								Paid-In				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Income				Total
Balance at December 31, 2006			22,262			$	445			$	140,030			$	(49,016	)		$	8,872			$	100,331
Cumulative effect change in accounting from the implementation of FIN 48			—				—				—				(405	)			—				(405	)
Comprehensive income:
Net income			—				—				—				2,469				—				2,469
Other comprehensive income:
Foreign currency translation adjustment			—				—				—				—				6,392				6,392
Comprehensive income																						$	8,861
Exercise of stock options			46				1				191				—				—				192
Purchase of treasury shares			(4	)			—				(52	)			—				—				(52	)
Stock-based compensation			19				—				1,923				—				—				1,923
Balance at September 30, 2007			22,323			$	446			$	142,092			$	(46,952	)		$	15,264			$	110,850

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

Bentley Pharmaceuticals, Inc. and Subsidiaries

		For the Nine Months Ended
(in thousands)		September 30,
		2007				2006
Cash flows from operating activities:
Net income (loss)		$	2,469			$	(3,440	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			4,959				4,038
Non-cash charge for inventory write-down and reserves			416				—
Foreign currency gains			(56	)			—
Stock-based compensation expense			1,923				1,633
Change in fair value of derivative instrument			131				—
Loss on disposal of assets			429				50
Other non-cash items			8				8
(Increase) decrease in assets and increase (decrease) in liabilities:
Receivables, net			3,507				(3,805	)
Inventories			1,883				(2,118	)
Deferred income taxes			(358	)			(694	)
Prepaid expenses and other current assets			(548	)			229
Other assets			(58	)			(6	)
Accounts payable and accrued expenses			978				1,331
Deferred income			399				1,351
Other liabilities			511				7,546
Net cash provided by operating activities			16,593				6,123
Cash flows from investing activities:
Additions to fixed assets			(7,489	)			(12,070	)
Additions to drug licenses and related costs			(1,780	)			(1,803	)
Proceeds from the sale of fixed assets			30				—
Purchase of investments			(2	)			(2,402	)
Proceeds from investments			2,659				—
Net cash used in investing activities			(6,582	)			(16,275	)

(Continued on following page)

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

Bentley Pharmaceuticals, Inc. and Subsidiaries

		For the Nine Months Ended
(in thousands)		September 30,
		2007				2006
Cash flows from financing activities:
Proceeds from the exercise of stock options		$	192			$	150
Remittance of employee tax liabilities in exchange for common stock tendered to the Company			(52	)			(1,907	)
Proceeds from borrowings			14,807				1,404
Repayment of borrowings			(554	)			(3,700	)
Net cash provided by (used) in financing activities			14,393				(4,053	)
Effect of exchange rate changes on cash			1,624				21
Net increase (decrease) in cash and cash equivalents			26,028				(14,184	)
Cash and cash equivalents at beginning of period			12,424				32,384
Cash and cash equivalents at end of period		$	38,452			$	18,200
Supplemental Disclosures of Cash Flow Information
The Company paid cash during the period for:
Interest		$	22			$	110
Foreign income taxes		$	4,099			$	4,372
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			19				14
Amount		$	191			$	182
Amounts included in accounts payable at end of period for fixed asset and drug license purchases		$	2,202			$	3,796

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

Bentley Pharmaceuticals, Inc. and Subsidiaries

History and Operations

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

	•		Specialty Generics: development, licensing and sales of generic and branded generic pharmaceutical products and active pharmaceutical ingredients (API) and the manufacturing of pharmaceuticals for others; and
	•		Drug Delivery: research, development and licensing/commercialization of advanced drug delivery technologies and pharmaceutical products.

     Bentley’s pharmaceutical product sales and licensing activities are based primarily in Spain, where it has a significant commercial presence and manufactures and markets approximately 180 product presentations (stock keeping units, or SKUs) through three wholly-owned Spanish subsidiaries: Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. Bentley’s products are in four primary therapeutic areas: cardiovascular, gastrointestinal, central nervous system and infectious diseases. Although the majority of the Company’s sales of these products are currently in the Spanish market, it has recently focused on increasing sales in other European countries and other geographic regions through strategic alliances with companies in these territories. The Company continually adds to its product portfolio in response to increasing market demand for generic and branded generic therapeutic agents and, when appropriate, divests portfolio products considered to be redundant or that have become non-strategic. The Company manufactures its finished dosage pharmaceutical products in its Spanish manufacturing facility which received approval from the U.S. Food and Drug Administration (“FDA”) in late 2006 for the manufacture of its first U.S. generic product. The Company owns a manufacturing facility in Spain that specializes in the manufacturing of several API products. This facility has also been approved by the FDA for the manufacture of one ingredient for marketing and sale in the U.S. The Company markets its API products through its Spanish subsidiary, Bentley A.P.I. The Company also has an Irish subsidiary, Bentley Pharmaceuticals Ireland Limited, which launched its first product in late 2006.

     The Company has U.S. and international patents and other proprietary rights to technologies that facilitate the absorption of drugs. Bentley is developing products that incorporate its drug delivery technologies and has licensed applications of its proprietary CPE-215^® drug delivery technology to Auxilium Pharmaceuticals, Inc., which launched Testim^® in the U.S. market in February 2003. Testim, which incorporates Bentley’s CPE-215 drug delivery technology, is a gel indicated for testosterone replacement therapy. Bentley continues to seek other pharmaceutical and biotechnology companies to form additional strategic alliances to facilitate the development and commercialization of other products using its drug delivery technologies, including the delivery of insulin to diabetic patients intranasally and the treatment of nail fungus infections topically. In addition, Bentley continues to seek alliances with academic organizations to explore the delivery of macromolecules.

     On October 23, 2007 the Company announced a plan to spin-off its drug delivery business, which is subject to a number of conditions. Management expects that shares of the new specialty pharmaceutical drug delivery company, CPEX Pharmaceuticals, Inc. (which may be referred to as CPEX), will be distributed to Bentley stockholders by means of a stock dividend. On the record date, which has not yet been set, each Bentley stockholder will be entitled to receive shares of CPEX in connection with the spin-off of the drug delivery businesses. The spin-off would result in CPEX operating as an independent entity with publicly traded common stock. Bentley would not have any ownership interest in CPEX subsequent to the spin-off.

     In connection with the spin-off, CPEX and Bentley expect to enter into a series of agreements, including a separation and distribution agreement, a transition services agreement, an employee matters agreement and a tax allocation agreement. Consummation of the separation is subject to certain conditions, including final approval by the Bentley Board of Directors, approval for listing of CPEX common stock on an exchange, and the effectiveness of the registration statement filed with the Securities and Exchange Commission in connection with the separation. Approval by Bentley’s stockholders is not required as a condition to the consummation of the proposed separation.

     The Company has incurred and is expected to continue to incur legal, tax and other strategic consulting costs specifically associated with the planned spin-off. These costs totaled $846,000 and $1,153,000 in the three and nine months ended September 30, 2007, respectively, and have been reported as separation costs within operating expenses in the Company’s Unaudited Consolidated Income Statements. Approximately $307,000 of separation costs incurred during the first two quarters of 2007 were reclassified from general and administrative expenses to separation costs to conform with the current period presentation.

Basis of Unaudited Condensed Consolidated Financial Statements

     The Unaudited Condensed Consolidated Financial Statements of Bentley as of September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006, included herein, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted insofar as such information was disclosed in the Company’s consolidated financial statements for the year ended December 31, 2006. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the summary of significant accounting policies and the audited consolidated financial statements and notes thereto included in Bentley’s Annual Report on Form 10-K for the year ended December 31, 2006, referred to as our 2006 Form 10-K.

     In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements as of September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006 are presented on a basis consistent with the audited consolidated financial statements for the year ended December 31, 2006 and contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly Bentley’s financial position as of September 30, 2007 and December 31, 2006 and the results of its operations for the three and nine months ended September 30, 2007 and 2006 and cash flows for the nine months ended September 30, 2007 and 2006. The results of operations for the three and nine months ended September 30, 2007 should not necessarily be considered indicative of the results to be expected for any subsequent period or for the full year ending December 31, 2007.

Cash and cash equivalents

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

     Included in cash and cash equivalents at September 30, 2007 and December 31, 2006 are approximately $23,782,000 and $357,000, respectively, of short-term investments considered to be cash equivalents, as the original maturity dates of such investments were three months or less when purchased.

Fair value of financial instruments

     On January 1, 2007, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which provides guidance for measuring the fair value of assets and liabilities, and requires expanded disclosures about fair value measurements. SFAS No. 157 indicates that fair value should be determined based on the assumptions marketplace participants would use in pricing the asset or liability, and provides additional guidelines to consider in determining the market-based measurement. The adoption of SFAS No. 157 did not have a material impact on the Company’s Unaudited Condensed Consolidated Financial Statements.

Receivables

     Receivables consist of the following (in thousands):

		September 30, 2007				December 31, 2006
Trade receivables (of which $0 and $247, respectively, collateralize short-term borrowings with Spanish financial institutions)		$	26,443			$	27,880
VAT receivable			2,453				3,151
Royalties receivable			3,065				2,261
Other			123				82
			32,084				33,374
Less-allowance for doubtful accounts			(615	)			(411	)
		$	31,469			$	32,963

Inventories

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

     Balances are comprised of the following (in thousands):

		September 30, 2007				December 31, 2006
Raw materials		$	10,034			$	8,669
Finished goods			5,818				7,621
			15,852				16,290
Less allowance for slow moving inventory			(809	)			(11	)
		$	15,043			$	16,279

     Included in the Company’s inventories at September 30, 2007 and December 31, 2006 are $137,000 and $1,338,000, respectively, related to the Company’s first U.S. generic product which was launched in late December 2006. The Company has accounted for these goods as consigned inventories that have been shipped to the Company’s collaborator. Market price conditions and demand for this product are less favorable than originally estimated. As a result, in the nine months ended September 30, 2007, the Company recorded net adjustments totaling $1,010,000 to write-down these inventories to their net realizable value and reserve for slow moving inventories. In accordance with its collaboration agreement, the Company is liable for a portion of these adjustments and has therefore recorded a net charge of approximately $416,000 to cost of net product sales in the Unaudited Consolidated Income Statement, reflecting its share of these adjustments.

     The Company has received certain payments from its collaborator in anticipation of future sales of the consigned products. As of September 30, 2007 and December 31, 2006, the Company has recorded $311,000 and $481,000, respectively, as payments from its collaborator net of adjustments, which have been recorded in other current liabilities on the Unaudited Consolidated Balance Sheets.

Fixed assets

     Fixed assets consist of the following (in thousands):

		September 30, 2007				December 31, 2006
Land		$	3,035			$	2,875
Buildings and improvements			25,194				17,538
Equipment			25,432				20,591
Furniture and fixtures			2,310				2,138
Other			338				394
			56,309				43,536
Capital in-progress			19,539				20,213
			75,848				63,749
Less accumulated depreciation			(20,027	)			(15,193	)
		$	55,821			$	48,556

     Depreciation expense of approximately $271,000 and $234,000 has been charged to operations as a component of depreciation and amortization expense in the Unaudited Consolidated Income Statements for the nine months ended September 30, 2007 and 2006, respectively. Depreciation expense totaling approximately $3,416,000 and $2,697,000 has been included in cost of net product sales in the Unaudited Consolidated Income Statement during the nine months ended September 30, 2007 and 2006, respectively.

Long-term debt

     Long-term debt consists of the following (in thousands):

		September 30, 2007				December 31, 2006
Loans payable		$	15,559			$	307
Less-current portion of long-term debt			—				(307	)
		$	15,559			$	—

     On June 29, 2007, the Company’s subsidiary, Laboratorios Belmac (“Belmac”), entered into a loan agreement with a Spanish financial institution, pursuant to which Belmac borrowed 11,000,000 Euros (approximately $15,559,000 at September 30, 2007). In accordance with the loan agreement, Belmac will be charged interest on the loan at a variable rate, reset quarterly, equal to the Euro Interbank Offered Rate, plus 0.5%, plus a single, up-front fee of 0.2%. The interest rate under the loan at September 30, 2007 was 5.02%. The principal of the loan will be repaid in quarterly installments of 412,500 Euros (approximately $583,000) beginning December 31, 2008, with the balance due on December 31, 2013. Maturities on the long-term debt are as follow (in thousands):

	Year		Principal Payment
	2007		$	—
	2008			583
	2009			2,334
	2010			2,334
	2011			2,334
	2012 and 2013			7,974
	Total		$	15,559

     Pursuant to financial covenants in the loan agreement, Belmac must (i) maintain a net financial debt to net equity ratio of less than 0.33 to 1; (ii) maintain a net financial debt to operating profit ratio of less than 2.75 to 1; and (iii) not have either such ratio increase in any fiscal year by more than 20% over the respective ratio from the prior fiscal year. In addition, Belmac’s obligations under the loan agreement have been guaranteed by Bentley and Bentley’s other subsidiaries in Spain. Belmac has agreed to pledge assets at the request of the financial institution if Belmac fails to comply with these financial covenants and Belmac has also agreed to not pledge any assets to any other party. The loan may be prepaid at any time without a fee.

     In previous years, the Company entered into loan agreements with the Spanish government as a part of government-sponsored research-funding programs. The loans were non-interest bearing and payable in annual installments beginning in 2005. These loans were repaid in full in the nine months ended September 30, 2007.

Stockholders’ equity

     A substantial amount of the Company’s business is conducted in Europe and is therefore influenced by fluctuations in the U.S. Dollar’s value in relation to other currencies, specifically the Euro. The exchange rates at September 30, 2007 and December 31, 2006 are as follows:

	U.S. Dollars per Euro		September 30, 2007		December 31, 2006
	YTD weighted average exchange rate		1.34		1.26
	Exchange rate		1.41		1.31

     The net effect of foreign currency translation on the Company’s Unaudited Consolidated Balance Sheet for the three and nine months ended September 30, 2007 was a net increase of $4,374,000 and $6,392,000, respectively, and the cumulative historical effect as of September 30, 2007 was an increase of $15,264,000, as reflected in accumulated other comprehensive income. The carrying value of assets and liabilities can be materially affected by changes in foreign currency exchange rates, as can the revenues and expenses.

Supplemental disclosures related to Unaudited Consolidated Statements of Cash Flows

     During the nine months ended September 30, 2007, the Chief Executive Officer (“CEO”), the President, and the Chief Medical Officer (“CMO”) of the Company were issued an aggregate of 11,150 shares of Bentley Common Stock, before tax withholdings, upon vesting of their respective restricted stock unit awards. At the request of the recipients, the Company withheld approximately 3,783 shares of Common Stock, with a fair market value of approximately $45,000, in order to satisfy minimum federal and statutory tax withholding requirements. The shares of Common Stock withheld were recorded at fair market value and are held by the Company as treasury shares. As of September 30, 2007 and December 31, 2006, the Company has recorded approximately 853,000 and 849,100 shares, respectively, as treasury stock, with an historical cost of $10,833,300 and $10,781,700, respectively, which has been accounted for as a reduction of additional paid in capital in the Unaudited Condensed Consolidated Financial Statements.

     During the nine months ended September 30, 2006, the CEO and the CMO of the Company and the former CFO of the Company exercised stock options to purchase an aggregate of 650,400 shares of the Company’s Common Stock. In satisfaction of the option exercise prices, the Company received an aggregate of approximately 254,300 shares of previously acquired Bentley Common Stock, with a fair market value of approximately $3,314,000. The Company withheld a total of approximately 144,400 shares of Common Stock, with a fair market value of approximately $1,900,000, from these employees in order to satisfy minimum federal and statutory tax withholding requirements. The shares of Common Stock acquired by the Company in connection with these stock option exercises were recorded at fair market value and are held by the Company as treasury shares. In addition, in accordance with the separation agreement with the Former CFO, an additional 1,604 shares of Common Stock associated with a grant of restricted stock units became vested and issuable to the Former CFO on September 30, 2006. The Company withheld a total of 584 shares of Common Stock with a fair market value of approximately $7,000 from the issuance of those shares in order to satisfy minimum federal and statutory tax withholding requirements.

Revenue recognition

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

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

     The Company has deferred the recognition of approximately $5,755,000 and $4,944,000 of revenues as of September 30, 2007 and December 31, 2006, respectively, for which the earnings process has not been completed.

     The Company earns royalty revenues on Auxilium’s sales of Testim, which incorporates the Company’s CPE-215 permeation enhancement technology. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalers and chain drug stores, which have the right to return purchased product prior to the units being dispensed through patient prescriptions. Historically, customer returns were not able to be reasonably estimated. Therefore, in accordance with SFAS No. 48, the Company deferred the recognition of royalty revenues on product shipments of Testim until the units were dispensed through patient prescriptions. In June 2006, the Company determined that it could reasonably estimate future product returns on sales of Testim based on historical return experience. As a result the Company recorded a change in estimate and recognized its deferred Testim royalties. The Company recognized royalty revenues of $7,879,000 and $6,089,000 in the nine months ended September 30, 2007 and 2006, respectively.

Provision for income taxes

     On January 1, 2007, the Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109, Accounting for Income Taxes, (“SFAS No. 109”). The purpose of FIN 48 is to clarify and set forth consistent rules for accounting for uncertain tax positions in accordance with SFAS No. 109 by requiring the application of a “more likely than not” threshold for the recognition and derecognition of tax positions. As a result of the implementation of FIN 48, the Company recorded a $405,000 increase in its non-current liabilities during the quarter ended March 31, 2007 for uncertain tax positions which was accounted for as an increase to the January 1, 2007 accumulated deficit. In order to conform with the balance sheet disclosure requirements of FIN 48, the Company also reclassified its previously recorded liabilities of $546,000 for uncertain tax positions from accrued expenses to other non-current liabilities during the quarter ended March 31, 2007. The Company had $935,000 of unrecognized tax benefits at the adoption date, all of which would affect its effective tax rate if recognized. The Company’s unrecognized tax benefits decreased by $272,000 during the nine months ended September 30, 2007 as a result of the expiration of certain foreign tax contingencies. The Company recognizes interest and penalties related to uncertain tax positions as a component of the provision for income taxes. As of the date of adoption, the Company had approximately $249,000 of accrued penalties and $51,000 of accrued interest related to its uncertain tax positions. Tax years ranging from 2002 to 2006 remain open to examination by the major taxing authorities in jurisdictions where the Company is subject to taxation, principally the U.S. and Spain.

     As a result of reporting taxable income in Spain, the Company recorded provisions for foreign income taxes totaling $4,509,000 and $6,607,000 for the nine months ended September 30, 2007 and 2006, respectively. The provisions represented 31% and 57% of the pre-tax income reported in Spain for the nine months ended September 30, 2007 and 2006, respectively. The provisions represented 65% and 209% of consolidated pre-tax income for the nine months ended September 30, 2007 and 2006, respectively.

     The Company maintains various agreements by and between Bentley Pharmaceuticals, Inc. and its subsidiaries. Income and expenses resulting from these agreements are eliminated in consolidation; however, the related transactions affect the Company’s consolidated income tax provision.

     As future operating profits in the U.S. and Ireland cannot be reasonably assured, no tax benefit has been recorded in the Unaudited Consolidated Income Statement for the related losses, which totaled approximately $7,775,000 and $8,474,000 for the nine months ended September 30, 2007 and 2006, respectively. The Company has established valuation allowances equal to the full amount of the U.S. and Irish deferred tax assets. Should the Company determine that it is more likely than not that it will realize certain of its net deferred tax assets for which it has previously provided a valuation allowance, an adjustment would be required to reduce the existing valuation allowance.

Basic and diluted net income (loss) per common share

     Basic net income (loss) per common share is based on the weighted average number of shares of Common Stock outstanding during each period. The Company included the dilutive effect of outstanding stock options, as calculated using the treasury stock method and restricted stock units, when determining the diluted net income per common share for the three and nine months ended September 30, 2007 and 2006.

     The following is a reconciliation between basic and diluted net income per common share for the nine months ended September 30, 2007. There is no dilutive effect of equity securities on the Company’s earnings per share for the three months ended September 30, 2007 and the three and nine months ended September 30, 2006 due to the net losses reported in those periods. Dilutive securities issuable for the nine months ended September 30, 2007 include approximately 507,000 dilutive incremental shares issuable as a result of various stock options and unvested restricted stock units that are outstanding.

     For the Nine Months Ended September 30, 2007 (in thousands, except per share data):

							Effect of Dilutive
			Basic EPS				Securities				Diluted EPS
	Net Income		$	2,469			$	—			$	2,469
	Weighted Average Common
	Shares Outstanding			22,322				507				22,829
	Net Income Per Common
	Share		$	0.11			$	—			$	0.11

     Excluded from the diluted EPS presentation for the three months ended September 30, 2007 were approximately 3,890,000 shares underlying outstanding stock options and 218,000 shares underlying outstanding restricted stock units as the incremental effect of those shares would be anti-dilutive in that period.

     Excluded from the diluted EPS presentation for the nine months ended September 30, 2007 were approximately 1,902,000 shares underlying outstanding stock options at exercise prices greater than the average fair value of the Common Stock for the nine months ended September 30, 2007 as the incremental effect of those shares would be anti-dilutive in that period.

     Excluded from the diluted EPS presentation for the three and nine months ended September 30, 2006 were approximately 3,699,000 shares underlying outstanding stock options and 111,000 shares

underlying outstanding restricted stock units as the incremental effect of those shares would be anti-dilutive in those periods.

Share-based compensation

     The Company has in effect equity incentive plans (the “Plans”), pursuant to which directors, officers, employees and consultants of the Company have been awarded grants of restricted stock units and options to purchase the Company’s Common Stock. As of September 30, 2007, approximately 4,420,000 shares of Common Stock have been reserved for issuance under the Plans. Approximately 4,108,000 of the shares are outstanding, excluding 50,000 shares underlying restricted stock units, contingently issuable to non-employee directors pursuant to the terms and conditions of the respective restricted stock unit agreements. The balance of approximately 311,000 shares is available for future issuance for any type of award allowed under the plan.

     During the nine months ended September 30, 2007, the Company issued approximately 20,200 shares of Common Stock upon the vesting of restricted stock units, approximately 26,000 shares of Common Stock upon exercise of stock options and approximately 18,800 shares of Common Stock as share-based compensation in lieu of cash contributions to the Company’s 401(k) Plan. The Company also withheld approximately 4,300 shares upon the vesting of restricted stock units in order to satisfy minimum federal and statutory tax withholding requirements, which were recorded as treasury stock. An additional 30,000 restricted stock units vested during the period and are contingently issuable to non-employee directors pursuant to the terms and conditions of the respective restricted stock unit agreements.

     Share-based compensation expense recorded for stock option and restricted stock unit awards to employees and non-employee directors for the three months ended September 30, 2007 and 2006 was approximately $666,000 and $598,000, respectively. Share-based compensation expense recorded for stock option and restricted stock unit awards to employees and non-employee directors for the nine months ended September 30, 2007 and 2006 was approximately $1,670,000 and $1,424,000, respectively.

     The related expenses were recorded in the Company’s Unaudited Consolidated Income Statements as follows (in thousands):

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Cost of net product sales		$	10			$	4			$	25			$	19
Selling and marketing expenses			5				2				13				10
General and administrative expenses			410				392				1,029				913
Research and development expenses			241				200				603				482
		$	666			$	598			$	1,670			$	1,424

     No related compensation expense was capitalized as the cost of an asset and there was no impact on net cash provided by operating activities or net cash used in financing activities as a result of these share-based transactions.

     The Company issued 18,800 and 13,900 shares in the nine months ended September 30, 2007 and 2006, respectively, as matching contributions for the Company’s 401(k) Plan. General and administrative expenses include approximately $92,000 and $87,000 of such non-cash share-based compensation for the nine months ended September 30, 2007 and 2006, respectively. Research and development expenses include approximately $99,000 and $120,000 of such non-cash share-based compensation for the nine months ended September 30, 2007 and 2006, respectively.

Business segment information

     SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, defines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company’s operating segments. The Company, headquartered in the U.S., is an international specialty pharmaceutical company which operates in two business segments, specialty generics and drug delivery, and two geographical locations (Europe and the U.S.).

     The Company’s specialty generics segment is based in Europe and develops and manufactures a growing portfolio of generic and branded generic pharmaceuticals in Europe for the treatment of cardiovascular, gastrointestinal, infectious and central nervous system diseases through its subsidiary, Laboratorios Belmac, and markets these pharmaceutical products through its subsidiaries, Laboratorios Belmac, Laboratorios Davur, Laboratorios Rimafar and Bentley Pharmaceuticals Ireland. The U.S. operations of this segment include any sales of generic pharmaceuticals in the U.S. and continued research and development activities to bring additional generic pharmaceutical products into the U.S. This segment also manufactures and sells active pharmaceutical ingredients through its subsidiary, Bentley A.P.I.

     The Company’s drug delivery segment is based in both the U.S. and Europe and is focused on the advancement of proprietary drug delivery technologies that enhance or facilitate the absorption of pharmaceutical compounds across various membranes. In the U.S., the Company’s activities consist primarily of licensing, product research and development, business development activities, corporate management and administration.

     Set forth in the tables below is certain financial information with respect to the Company’s business and geographical segments for the three and nine months ended September 30, 2007 and 2006 and as of September 30, 2007 and December 31, 2006. These segments use the same accounting policies as those described in the summary of significant accounting policies in Note 2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”).

     For the Three Months Ended September 30, 2007 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Net product sales		$	23,930			$	201			$	—			$	—			$	24,131
Licensing and collaboration revenues			148				—				—				3,069				3,217
Total revenues			24,078				201				—				3,069				27,348
Cost of net product sales			14,291				160				—				—				14,451
Gross Profit			9,787				41				—				3,069				12,897
Selling and marketing expense			4,080				—				—				—				4,080
General and administrative expense			2,021				(8	)			—				2,085				4,098
Research and development expense			341				—				1,338				1,338				3,017
Separation costs			—				—				—				846				846
Depreciation and amortization expense			290				39				—				160				489
Income (loss) from operations			3,055				10				(1,338	)			(1,360	)			367
Interest income			188				—				—				151				339
Interest expense			(246	)			—				—				(1	)			(247	)
Other income (expense), net			(147	)			—				—				(2	)			(149	)
Income (loss) before income taxes			2,850				10				(1,338	)			(1,212	)			310
Provision for income taxes			911				—				—				—				911
Net income (loss)			1,939				10				(1,338	)			(1,212	)			(601	)
Expenditures for fixed assets			3,174				—				—				57				3,231
Expenditures for drug licenses			575				—				—				—				575

     For the Three Months Ended September 30, 2006 (in thousands):

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

     For the Nine Months Ended September 30, 2007 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Net product sales		$	80,997			$	601			$	—			$	—			$	81,598
Licensing and collaboration revenues			433				—				—				7,887				8,320
Total revenues			81,430				601				—				7,887				89,918
Cost of net product sales			45,134				1,004				—				—				46,138
Gross profit (loss)			36,296				(403	)			—				7,887				43,780
Selling and marketing expense			13,338				—				—				—				13,338
General and administrative expense			6,689				(36	)			—				5,363				12,016
Research and development expense			1,341				—				3,926				3,927				9,194
Separation costs			—				—				—				1,153				1,153
Depreciation and amortization expense			848				117				—				578				1,543
Income (loss) from operations			14,080				(484	)			(3,926	)			(3,134	)			6,536
Interest income			323				—				—				383				706
Interest expense			(339	)			—				—				(9	)			(348	)
Other income (expense), net			89				—				—				(5	)			84
Income (loss) before income taxes			14,153				(484	)			(3,926	)			(2,765	)			6,978
Provision for income taxes			4,509				—				—				—				4,509
Net income (loss)			9,644				(484	)			(3,926	)			(2,765	)			2,469
Expenditures for fixed assets			7,404				—				—				85				7,489
Expenditures for drug licenses			1,591				32				—				157				1,780

     For the Nine Months Ended September 30, 2006 (in thousands):

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

     As of September 30, 2007 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Receivables, net		$	28,345			$	—			$	—			$	3,124			$	31,469
Other current assets			44,042				55				—				13,974				58,071
Fixed assets			53,174				—				—				2,647				55,821
Drug licenses and related costs			12,357				1,746				—				3,044				17,147
Other non-current assets			993				—				—				1,147				2,140
Total assets			138,911				1,801				—				23,936				164,648
Current liabilities			25,105				398				—				3,924				29,427
Long term debt			15,559				—				—				—				15,559
Other non-current liabilities			8,812				—				—				—				8,812
Total liabilities			49,476				398				—				3,924				53,798

     As of December 31, 2006 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Receivables, net		$	30,558			$	39			$	—			$	2,366			$	32,963
Other current assets			21,758				1,338				—				11,631				34,727
Fixed assets			45,738				—				—				2,818				48,556
Drug licenses and related costs			10,697				1,833				—				3,496				16,026
Other non-current assets			885				—				—				1,199				2,084
Total assets			109,636				3,210				—				21,510				134,356
Current liabilities			24,651				—				—				2,736				27,387
Non-current liabilities			6,638				—				—				—				6,638
Total liabilities			31,289				—				—				2,736				34,025

Subsequent event

     In accordance with the Company’s litigation settlement with Ethypharm S.A. Spain and Ethypharm S.A. France (or Ethypharm) in late 2006, the Company made its first scheduled $1,000,000 annual payment to Ethypharm in October of 2007. The remaining three annual payments of $1,000,000 are scheduled to be made in the fourth quarters of 2008, 2009 and 2010.

Recently issued accounting pronouncements

     On January 1, 2007, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which provides guidance for measuring the fair value of assets and liabilities, and requires expanded disclosures about fair value measurements. SFAS No. 157 indicates that fair value should be determined based on the assumptions marketplace participants would use in pricing the asset or liability, and provides additional guidelines to consider in determining the market-based measurement. The adoption of SFAS No. 157 did not have a material impact on the Company’s Unaudited Condensed Consolidated Financial Statements.

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 becomes effective for the Company as of January 1, 2008. The Company is currently evaluating the impact of SFAS No. 159 on the Company’s consolidated financial statements.

     In June 2007, the FASB ratified the consensus reached by the EITF on Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (EITF Issue No. 07-3”). EITF Issue No. 07-3 states that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. EITF Issue No. 07-3 is effective for fiscal years beginning after December 15, 2007 and earlier application is not permitted. The Company often enters into agreements for research and development goods and service. As such, the Company is evaluating the impact that the adoption of EITF Issue No. 07-3 will have on its consolidated financial statements.

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

     You should read the following discussion and analysis together with all financial and non-financial information appearing elsewhere in this report and with our consolidated financial statements and related notes included in our 2006 Annual Report on Form 10-K, referred to as our 2006 Form 10-K, which has been previously filed with the SEC. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to competitive factors and other risks discussed in our 2006 Form 10-K under Item 1A, “Risk Factors”.

Planned Spin-off

     On October 23, 2007, we announced a plan to spin-off our drug delivery business, which is subject to a number of conditions. We expect that shares of the new specialty pharmaceutical drug delivery company, CPEX Pharmaceuticals, Inc. (which may be referred to as CPEX), will be distributed to Bentley stockholders by means of a stock dividend. On the record date, which has not yet been set, each Bentley stockholder will be entitled to receive shares of CPEX in connection with the spin-off of the drug delivery businesses. The spin-off would result in CPEX operating as an independent entity with publicly traded common stock. Bentley would not have any ownership interest in CPEX subsequent to the spin-off.

     In connection with the spin-off, CPEX and Bentley expect to enter into a series of agreements, including a separation and distribution agreement, a transition services agreement, an employee matters agreement and a tax allocation agreement. Consummation of the separation is subject to certain conditions, including final approval by the Bentley Board of Directors, approval for listing of CPEX common stock on an exchange, and the effectiveness of the registration statement filed with the Securities and Exchange Commission in connection with the separation. Approval by Bentley’s stockholders is not required as a condition to the consummation of the proposed separation.

     We have incurred and expect to continue to incur legal, tax and other strategic consulting costs specifically associated with the planned spin-off. These costs totaled $846,000 and $1,153,000 in the three and nine months ended September 30, 2007, respectively, and have been reported as separation costs within operating expenses in the Unaudited Consolidated Income Statements.

Overview

We are a specialty pharmaceutical company focused on:

	•		Specialty Generics: development, licensing and sales of generic and branded generic pharmaceutical products and active pharmaceutical ingredients and the manufacturing of pharmaceuticals for ourselves and others in Spain, other parts of Europe and international markets, including the U.S. market; and
	•		Drug Delivery: research, development and licensing/commercialization of advanced proprietary drug delivery technologies for new and existing pharmaceutical products.

Generic Pharmaceuticals

     Our pharmaceutical product sales activities are based in Spain, where we have a significant commercial presence and we manufacture and market approximately 180 product presentations or SKUs in four primary therapeutic areas: cardiovascular, gastrointestinal, central nervous system and infectious diseases. Revenues derived from our top three product lines, represented approximately 30% of our net product revenues in the three months ended September 30, 2007. We market our branded generic and generic products to physicians, pharmacists and hospitals through our three separate sales and marketing

organizations based in Spain: Laboratorios Belmac, Laboratorios Davur and Laboratorios Rimafar. In past years we expanded our geographic sales to countries outside of Spain including the U.S. and several countries in the European Union. As of September 30, 2007 approximately 28% of our net product sales were derived from sales outside of Spain. Our generic simvastatin product, which is manufactured at our FDA approved finish dosage facility in Spain, was launched in the U.S. in December of 2006. The launch of our first U.S. generic product marked a significant strategic milestone for us; however, due to market price conditions and limited demand, sales of our generic simvastatin have been determined to be less favorable than our initial projections. As a result, we have recorded net charges of approximately $416,000 to cost of net product sales for inventory write-downs and obsolescence reserves in the nine months ended September 30, 2007.

     While the pricing of our pharmaceutical products is influenced by market forces (size of the market, number of competitors, etc.), our pricing in Spain and other countries is also subject to governmental price controls. The majority of our products are subject to price controls set in place by the Spanish government. The Spanish government enacted legislation effective March 1, 2007 which reduced the amount reimburses for pharmaceutical products. As a result of the legislation our sales force began marketing our products at lower selling prices in Spain as early as February 2007. We also experienced reduced sales levels in the beginning of the first quarter of 2007 as Spanish wholesalers and pharmacies minimized order quantities until they were able to purchase our products at the new lower prices. Once we began selling at the new prices we experienced an increase in the number of our units sold. While the increased unit volume has substantially offset the impact of the reduced selling prices on our net product sales, our gross margins have decreased from 51% in the nine months ended September 30, 2006 to 44% in the nine months ended September 30, 2007 (excluding inventory write-downs associated with our U.S. generic simvastatin discussed above). We have implemented strategies to mitigate lower selling prices, including strategies to reduce manufacturing costs and increase sales volumes. We are seeking to continue expanding our product sales in other geographic regions, including the U.S., through strategic alliances. We are targeting markets that offer compatible regulatory approval regimes and attractive product margins. In addition, we expect to grow our business by developing and acquiring rights to market additional products to sell through our sales organization and our strategic alliances. We continually acquire rights to new products in response to increasing market demand for generic and branded generic therapeutic products.

     We also manufacture and market active pharmaceutical ingredients, or API, through our subsidiary, Bentley A.P.I. Our API facility has been approved by the FDA for the manufacture of one ingredient for marketing and sale in the U.S. In addition, our Spanish pharmaceutical product manufacturing facility produces pharmaceutical products that are marketed by other pharmaceutical companies both in Spain and in other international markets, including the U.S.

Drug Delivery Technologies and Products

     We develop and co-develop products that incorporate our drug delivery technologies. We have licensed applications of our proprietary CPE-215 drug delivery technology to Auxilium Pharmaceuticals, Inc., which launched Testim, the first product incorporating our CPE-215 drug delivery technology, in the United States in February 2003. Testim is a gel indicated for testosterone replacement therapy. Testim is also approved for marketing in 15 European countries and Canada. On August 29, 2007, we received a new patent from the European Patent Office, effectively extending patent coverage for Testim through April 2023 in covered territories. We are in discussions with other pharmaceutical and biotechnology companies to form additional strategic alliances to facilitate the development and commercialization of other products using our drug delivery technologies, including the delivery of insulin to diabetic patients intranasally and the treatment of nail fungus infections topically. In addition, we continue to seek alliances with academic organizations to explore the delivery of macromolecules.

Research and Development Focus

     Our U.S. research and development activities are primarily focused on the development of Nasulin^TM, our intranasal insulin product candidate. In 2004 we concluded a Phase IIA study of Nasulin in

Type I diabetic patients using our CPE-215 technology. The full results of that trial were published in 2006 in the journal Diabetes Technology & Therapeutics, Volume 8, Number 1. In 2006, we completed an additional Phase I study in Ireland and advanced our Phase IIA studies in the U.S. In the first quarter of 2007 we completed preparations for a Phase II study in India which began in the second quarter of 2007. Portions of the results from our U.S. and Irish studies were presented at the American Diabetes Association 67^th Sessions in Chicago, IL in June 2007. We expect the U.S. clinical development programs for Nasulin to continue and expand both outside and inside the U.S. We are also continuing our clinical programs to support our strategy for the distribution of our generic pharmaceutical products in other countries, including the U.S. We expect to continue to invest our resources to conduct clinical trials and support the required regulatory submissions for our clinical programs. As a result, we expect to incur increased costs for product formulation, research and clinical development efforts.

Effect of Foreign Currency Fluctuations

     A substantial amount of our business is conducted in Europe and, therefore our results, which are measured in U.S. Dollars, are influenced by fluctuations in the U.S. Dollar’s value in relation to other currencies, specifically the Euro. An increase in the weighted average value of the Euro in relation to the U.S. Dollar over the prior year third quarter, had the following impact on the results of our operations when reported in U.S. Dollars: (1) total revenues were increased by approximately $1,835,000, (2) gross profit was increased by approximately $765,000, (3) operating expenses and other income (expense) were increased by approximately $579,000, (4) provision for income taxes was increased by approximately $82,000, which resulted in (5) an aggregate decrease in net loss of approximately $104,000. An increase in the weighted average value of the Euro in relation to the U.S. Dollar over the first nine months of the prior year, had the following impact on the results of our operations when reported in U.S. Dollars: (1) total revenues were increased by approximately $6,100,000, (2) gross profit was increased by approximately $2,745,000, (3) operating expenses and other income (expense) were increased by approximately $1,834,000, (4) provision for income taxes was increased by approximately $357,000, which resulted in (5) an aggregate increase in net income of approximately $554,000.

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

RESULTS OF OPERATIONS:

Three Months Ended September 30, 2007 versus Three Months Ended September 30, 2006

     Revenues by Segment

		For the Three Months Ended September 30,																Change
(in thousands)		2007				%				2006				%				$				%
Specialty Generics
Net product sales		$	24,131				88	%		$	22,873				91	%		$	1,258				5	%
Licensing and collaboration revenues			148				1	%			170				1	%			(22	)			-13	%
			24,279				89	%			23,043				92	%			1,236				5	%
Drug Delivery
Licensing and collaboration revenues			3,069				11	%			2,113				8	%			956				45	%
Total revenues		$	27,348				100	%		$	25,156				100	%		$	2,192				9	%

     Total revenues for the three months ended September 30, 2007 increased $2,192,000, or 9% from the same period in the prior year. Our specialty generics business experienced increased demand when compared to the comparable quarter of 2006. However, price reductions in Spain have resulted in net product sales that are consistent with the comparable period of 2006 when expressed in constant currency. Our drug delivery licensing revenues grew to $3,069,000 in the third quarter of 2007 due to increased royalties earned on sales of Testim. Based on industry sources, Testim was reported to capture approximately 21% of all testosterone gel replacement prescriptions in the U.S. market as of September 30, 2007, compared to approximately 18% as of September 30, 2006.

     Our revenues are generated through our primary sales channels of branded generic pharmaceuticals, generic pharmaceuticals and sales to licensees and others, as well as licensing and collaboration arrangements. The following is a summary of our revenues by sales channel and top-selling product lines:

     For the three months ended September 30, 2007:

(in thousands)		Revenues Within Spain												Revenues
		Branded												Outside of								% of Total
Product Line		Generics				Generics				Other				Spain				Total				Revenues
Omeprazole		$	406			$	4,091			$	—			$	—			$	4,497				16	%
Enalapril			1,227				348				—				—				1,575				6	%
Simvastatin			153				1,041				—				—				1,194				4	%
Lansoprazole			805				294				—				—				1,099				4	%
Paroxetine			297				795				—				—				1,092				4	%
All other products			2,624				2,603				105				426				5,758				21	%
Sales to licensees and others			—				—				3,075				5,841				8,916				33	%
Licensing and collaborations			—				—				148				3,069				3,217				12	%
Total Revenues		$	5,512			$	9,172			$	3,328			$	9,336			$	27,348				100	%
% of Q3 2007 Revenues			20	%			34	%			12	%			34	%			100	%