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 March 31, 2008

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		No. 59-1513162
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer: o		Accelerated filer: þ		Non-accelerated filer: o		Smaller reporting company: o
				(Do not check if a smaller reporting company)

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 May 7, 2008 was 22,452,165.

 

 

Bentley Pharmaceuticals, Inc. and Subsidiaries
Form 10-Q for the Quarter Ended March 31, 2008

Index

		Page
Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements:
Unaudited Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007			3
Unaudited Consolidated Income Statements for the three months ended March 31, 2008 and 2007			4
Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2008			5
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007			6
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			35
Part II. Other Information
Item 1. Legal Proceedings			36
Item 6. Exhibits			36
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

Bentley Pharmaceuticals, Inc. and Subsidiaries

		March 31,				December 31,
(in thousands, except per share data)		2008				2007
Assets
Current assets:
Cash and cash equivalents		$	33,279			$	33,706
Marketable securities			1,084				1,010
Receivables, net			46,137				39,324
Inventories			19,536				17,658
Deferred taxes			1,038				1,067
Prepaid expenses and other			1,827				1,915
Total current assets			102,901				94,680
Non-current assets:
Fixed assets, net			63,620				59,191
Drug licenses and related costs, net			17,613				16,624
Restricted cash			1,000				1,000
Deferred taxes			348				676
Other			1,016				925
Total non-current assets			83,597				78,416
Total assets		$	186,498			$	173,096
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	18,664			$	19,413
Accrued expenses			13,643				10,623
Short-term borrowings			186				116
Current portion of long-term debt			1,304				608
Deferred income			1,296				1,186
Other current liabilities			1,206				1,137
Total current liabilities			36,299				33,083
Non-current liabilities:
Long-term debt			16,076				15,595
Deferred income			6,620				5,976
Other			2,645				2,470
Total non-current liabilities			25,341				24,041
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, 22,450 and 22,376 shares			448				447
Additional paid-in capital			144,533				143,269
Accumulated deficit			(45,672	)			(46,736
Accumulated other comprehensive income			25,549				18,992
Total stockholders’ equity			124,858				115,972
Total liabilities and stockholders’ equity		$	186,498			$	173,096

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

Bentley Pharmaceuticals, Inc. and Subsidiaries

Unaudited Consolidated Income Statements

		For the Three Months Ended
		March 31,
(in thousands, except per share data)		2008				2007
Revenues:
Net product sales		$	36,364			$	29,114
Licensing and collaboration revenues			3,649				2,277
Total revenues			40,013				31,391
Cost of net product sales			19,947				15,897
Gross profit			20,066				15,494
Operating expenses:
Selling and marketing			5,763				4,445
General and administrative			4,213				3,577
Research and development			2,804				2,675
Separation costs			3,834				69
Depreciation and amortization			526				508
Total operating expenses			17,140				11,274
Income from operations			2,926				4,220
Other income (expenses):
Interest income			260				182
Interest expense			(279	)			(50	)
Other, net			99				89
Income before income taxes			3,006				4,441
Provision for income taxes			1,942				2,081
Net income		$	1,064			$	2,360
Net income per common share:
Basic		$	0.05			$	0.11
Diluted		$	0.05			$	0.10
Weighted average common shares outstanding:
Basic			22,469				22,293
Diluted			23,588				22,534

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
		Common Stock								Paid-In				Accumulated				Comprehensive
(in thousands, except per share data)		Shares				Amount				Capital				Deficit				Income				Total
Balance at January 1, 2008			22,376			$	447			$	143,269			$	(46,736	)		$	18,992			$	115,972
Comprehensive income:
Net income			—				—				—				1,064				—				1,064
Other comprehensive income:
Foreign currency translation adjustment			—				—				—				—				6,557				6,557
Comprehensive income																						$	7,621
Exercise of stock options			66				1				454				—				—				455
Stock-based compensation			8				—				810				—				—				810
Balance at March 31, 2008			22,450			$	448			$	144,533			$	(45,672	)		$	25,549			$	124,858

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

Bentley Pharmaceuticals, Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

		For the Three Months Ended
		March 31,
(in thousands)		2008				2007
Cash flows from operating activities:
Net income		$	1,064			$	2,360
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,744				1,548
Non-cash charge for inventory write-down and reserves			—				302
Non-cash charge for write-down of intangible assets			195				47
Foreign currency gains			(206	)			(74	)
Stock-based compensation expense			810				559
Change in fair value of derivative instrument			129				9
Loss on disposal of assets			44				63
Other non-cash items			3				3
(Increase) decrease in assets and increase (decrease) in liabilities:
Receivables, net			(3,907	)			(88	)
Inventories			(555	)			(447	)
Deferred income taxes			451				46
Prepaid expenses and other current assets			166				(288	)
Other assets			(51	)			(24	)
Accounts payable and accrued expenses			401				2,756
Deferred income			214				98
Other liabilities			60				998
Net cash provided by operating activities			562				7,868
Cash flows from investing activities:
Additions to fixed assets			(1,628	)			(1,954	)
Additions to drug licenses and related costs			(661	)			(515	)
Proceeds from maturity of investments			—				2,661
Net cash (used in) provided by investing activities			(2,289	)			192

(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
Unaudited Consolidated Statements of Cash Flows (Concluded)

		For the Three Months Ended
		March 31,
(in thousands)		2008				2007
Cash flows from financing activities:
Proceeds from the exercise of stock options		$	455			$	—
Proceeds from borrowings			172				—
Repayment of borrowings			(116	)			(554	)
Net cash provided by (used in) financing activities			511				(554	)
Effect of exchange rate changes on cash			789				151
Net (decrease) increase in cash and cash equivalents			(427	)			7,657
Cash and cash equivalents at beginning of period			33,706				12,424
Cash and cash equivalents at end of period		$	33,279			$	20,081
Supplemental Disclosures of Cash Flow Information
The Company paid cash during the period for:
Interest		$	240			$	—
Supplemental Disclosures of Non-Cash Financing and Investing Activities
The Company has issued Common Stock as stock-based compensation in lieu of cash during the period as follows:
Shares			8				9
Amount		$	113			$	75
Amounts included in accounts payable at end of period for fixed asset and drug license purchases		$	434			$	1,267

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 Pharmaceuticals, 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 200 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 most 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, through its Spanish subsidiary, Bentley A.P.I., 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.

          Bentley is also in the business of development, licensing and commercialization of pharmaceutical products utilizing its validated drug delivery technology. Bentley has U.S. and international patents and other proprietary rights to technologies that facilitate the absorption of drugs. Bentley develops and co-develops products that incorporate its drug delivery technologies. Bentley’s platform drug delivery technology utilizes CPE-215® to enhance permeation and absorption of pharmaceutical molecules across biological membranes such as the skin, nasal mucosa and eye. Bentley has licensed applications of its proprietary CPE-215 drug delivery technology to Auxilium Pharmaceuticals, Inc., which launched Testim in the United States in February 2003. Testim, which is the first product incorporating Bentley’s CPE-215 drug delivery technology, is a gel indicated for testosterone replacement therapy.

Planned Spin-off

           On October 23, 2007, the Company announced a plan to spin-off its drug delivery business in a transaction that is subject to certain conditions. Management expects that shares of the new specialty pharmaceutical drug delivery company, CPEX Pharmaceuticals, Inc. (“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 business. 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 sharing agreement. Consummation of the spin-off is subject to several conditions, including final approval of the spin-off by the Bentley Board of Directors, receipt of an opinion to the effect that Bentley and CPEX each will be solvent and adequately capitalized immediately after the distribution of the CPEX common stock, and that Bentley has sufficient surplus under Delaware law to declare the dividend of CPEX common stock to Bentley stockholders, and the effectiveness of the Form 10 filed with the Securities and Exchange Commission for the registration of the securities of CPEX. Approval by Bentley’s stockholders is not required as a condition to the consummation of the proposed spin-off.

Merger Agreement with Teva Pharmaceutical Industries Ltd.

          On March 31, 2008, the Company announced that it had entered into a definitive agreement with Teva Pharmaceutical Industries Ltd. (“Teva”) whereby Teva will acquire Bentley following the spin-off of Bentley’s drug delivery business to its stockholders. The boards of directors of both companies have unanimously approved the transaction. Closing is subject to certain conditions, including completion of the proposed spin-off of Bentley’s drug delivery business, antitrust approvals, the approval of Bentley’s stockholders and other customary closing conditions. Mr. James Murphy, Bentley’s Chairman and Chief Executive Officer, Mr. Michael McGovern, Bentley’s Vice Chairman and Mr. McGovern’s wife, who currently hold an aggregate of approximately 13.8% of the outstanding Bentley shares, have agreed to vote their shares in favor of the transaction. Approval by Teva’s stockholders is not required. The transaction is expected to close by the third quarter of 2008. Teva will fund the acquisition from its internal resources.

          Based on the exercise price and number of outstanding shares and options of Bentley as of the signing, and prior to any potential tax or options adjustments as a result of the spin-off, the purchase price per share of Bentley common stock to be paid by Teva in the acquisition is approximately $15.02. If the value of the CPEX stock distributed to Bentley stockholders in the spin-off described above exceeds the thresholds set forth in the merger agreement, then the per share price would be reduced by a percentage of that excess. This reduction is designed to compensate Teva for tax liabilities it may assume as a result of the spin-off. In addition, in order to account for the equitable adjustment to the exercise price and number of Bentley options and restricted stock units that will be made in connection with the spin-off of CPEX, the per share price to Bentley stockholders will be recalculated prior to the stockholders’ meeting in order to spread the aggregate purchase price across all shares of Bentley common stock and restricted stock units then outstanding and all options for Bentley common stock with an exercise price less than the price per share to be paid in the acquisition. The final price per share, reflecting any potential adjustments as a result of the spin-off, will be announced by Bentley at least 14 days prior to its stockholders’ meeting relating to the transaction.

          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 of its drug delivery business and merger with Teva. These costs totaled approximately $3,834,000 and $69,000 for the three months ended March 31, 2008 and 2007, respectively, and have been reported as separation costs within operating expenses in the Company’s Unaudited Consolidated Income Statements. Separation costs totaling $69,000 for the three months ended March 31, 2007 were reclassified from general and administrative expenses to separation costs to conform to the current period presentation.

Basis of Unaudited Condensed Consolidated Financial Statements

          The Unaudited Condensed Consolidated Financial Statements of Bentley as of March 31, 2008 and for the three months ended March 31, 2008 and 2007, 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, 2007. 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, 2007, referred to as our 2007 Form 10-K.

          In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 are presented on a basis consistent with the audited consolidated financial statements for the year ended December 31, 2007 and contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly Bentley’s financial position as of March 31, 2008 and the results of its operations and cash flows for the three months ended March 31, 2008 and 2007. The results of operations for the three months ended March 31, 2008 should not necessarily be considered indicative of the results to be expected for any subsequent period or for the full year ending December 31, 2008.

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 March 31, 2008 and December 31, 2007 are approximately $10,463,000 and $9,704,000, 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 measurements

          The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2008 and the amounts as they correspond to the respective level within the fair value hierarchy established by SFAS No. 157.

						Fair Value Measurements at March 31, 2008 Using:
						Quoted Prices in								Significant
						Active Markets for				Significant Other				Unobservable
		Total at				Identical Assets				Observable Inputs				Inputs
(In Thousands)		March 31, 2008				(Level 1)				(Level 2)				(Level 3)
Assets:
Marketable Securities		$	1,084			$	1,084			$	—			$	—
Liabilities:
Cash flow hedges		$	571			$	—			$	—			$	571

		Fair Value Measurements at
		March 31, 2008 Using
		Significant Unobservable Inputs
		(Level 3)
(In Thousands)		Cash Flow Hedges
Beginning Balance at January 1, 2008		$	374
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)			197
Included in other comprehensive income			—
Purchases, issuances, and settlements			—
Transfers in and/or out of Level 3			—
Ending balance at March 31, 2008		$	571
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2008		$	—

          Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the three months ended March 31, 2008 are reported in Other income (expenses) in the Company’s Unaudited Consolidated Income Statements.

		Other income (expenses)
Total gains or losses included in earnings (or changes in net assets) for the three months ended March 31, 2008		$	197
Changes in unrealized gains or losses relating to assets held at March 31, 2008		$	—

          The following table presents the Company’s assets measured at fair value on a nonrecurring basis as of March 31, 2008 and the amounts as they correspond to the respective level within the fair value hierarchy established by SFAS No. 157.

(In Thousands)

Fair Value Measurements at March 31, 2008 Using:

Quoted Prices in

Significant

Active Markets

Other

Significant

Total at

for Identical

Observable

Unobservable

Total

March 31,

Assets

Inputs

Inputs

Gains

Assets:

2008

(Level 1)

(Level 2)

(Level 3)

(Losses)

Drug licenses and related costs, net

$

17,613

$

—

$

—

$

17,613

$

(195

)

     In accordance with the recognition and measurement provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-Lived Assets, drug licenses and related costs are reviewed at least annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired, comparing the carrying amounts to their estimated future undiscounted cash flows and adjusting for any diminution in value. During the quarter ended March 31, 2008, the Company recorded impairment losses of approximately $195,000 in research and development on the Company’s Unaudited Consolidated Income Statement. These impairment losses relate to the specialty generics business.

Receivables

          Receivables consist of the following (in thousands):

		March 31, 2008				December 31, 2007
Trade receivables		$	38,112			$	32,279
VAT, income and social security taxes receivable			5,369				4,333
Royalties receivable			3,291				3,237
Other			171				161
			46,943				40,010
Less-allowance for doubtful accounts			(806	)			(686	)
		$	46,137			$	39,324

     Inventories

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

          Balances are comprised of the following (in thousands):

		March 31, 2008				December 31, 2007
Raw materials		$	13,364			$	11,802
Finished goods			6,324				6,798
			19,688				18,600
Less allowance for slow moving inventory			(152	)			(942	)
		$	19,536			$	17,658

          At December 31, 2007, the Company’s inventories included raw materials and consigned inventories related to the Company’s first U.S. generic product launched in late December 2006. Market price conditions and demand for this product were less favorable than originally estimated and these inventories, which had a gross value of approximately $480,000 in raw materials and $321,000 in finished goods, were fully reserved as of December 31, 2007 and subsequently written-off in the first quarter of 2008.

Fixed assets

          Fixed assets consist of the following (in thousands):

		March 31, 2008				December 31, 2007
Land		$	3,298			$	3,128
Buildings and improvements			28,158				26,185
Equipment			29,126				26,813
Furniture and fixtures			2,602				2,537
Other			372				350
			63,556				59,013
Capital in-progress			25,131				22,314
			88,687				81,327
Less accumulated depreciation			(25,067	)			(22,136	)
		$	63,620			$	59,191

          Depreciation expense of approximately $98,000 and $91,000 has been charged to operations as a component of depreciation and amortization expense in the Unaudited Consolidated Income Statements for the three months ended March 31, 2008 and 2007, respectively. Depreciation totaling approximately $1,218,000 and $1,040,000 has been included in cost of net product sales in the Unaudited Consolidated Income Statements for the three months ended March 31, 2008 and 2007, respectively.

Debt

          Short-term borrowings consist of the following:

		March 31,				December 31,
		2008				2007
		(In Thousands)
Revolving lines of credit payable to Spanish financial institutions, weighted average interest rate is 5.06% and 5.05%, respectively		$	186			$	116

          The Company maintains revolving line of credit facilities with Spanish financial institutions, which entitled the Company to borrow up to $7,743,000 and $7,218,000 at March 31, 2008 and December 31, 2007, respectively, at interest rates ranging from 4.92% to 5.12%. The facilities are scheduled to mature on various dates through December 15, 2008 and are renewable.

          Long-term debt consists of the following:

		March 31,				December 31,
		2008				2007
		(In Thousands)
Loans payable		$	17,380			$	16,203
Less-current portion of long-term debt			(1,304	)			(608	)
Total long-term debt		$	16,076			$	15,595

          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 (equal to approximately $17,380,000 at March 31, 2008). In accordance with the loan agreement, Belmac is charged interest on the loan at a variable rate, reset quarterly, equal to the Euro Interbank Offered Rate, plus 0.5%. The interest rate under the loan at March 31, 2008 was 5.2%. The principal of the loan will be repaid in quarterly installments of 412,500 Euros (equal to approximately $652,000 at March 31, 2008) beginning December 31, 2008, with the balance due on December 31, 2013. Maturities on the long-term debt, as expressed in U.S. dollars as of March 31, 2008 are as follows (in thousands):

Year		Principal Payment
2008		$	652
2009			2,607
2010			2,607
2011			2,607
2012			2,607
2013			6,300
Total		$	17,380

          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.

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 March 31, 2008 and December 31, 2007 are as follows:

U.S. Dollars per Euro		March 31, 2008				December 31, 2007
YTD weighted average exchange rate			1.50				1.37
Exchange rate			1.58				1.47

          The net effect of foreign currency translation on the Company’s net assets for the three months ended March 31, 2008 was an increase of $6,557,000 which has been included in other comprehensive income. The cumulative historical effect of foreign currency translation as of March 31, 2008 and December 31, 2007 totaled $25,549,000 and $18,992,000, respectively, as reflected in accumulated other comprehensive income.

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 Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return Exists (“SFAS No. 48”), and of allowances for doubtful accounts based on significant historical experience.

          The Company earns royalty revenues on Auxilium’s sales of Testim, which incorporates the Company’s CPE-215 permeation enhancement technology. Total royalty revenues recognized for the three months ended March 31, 2008 and 2007 were $3,300,000 and $2,157,000, respectively.

          The Company enters into licensing and supply agreements with certain customers that provide for the supply of specified products at specified prices. The Company’s two deliverables in these agreements (the license and the product sales) do not meet the criteria for separation under EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, and are therefore accounted for as one unit of account in accordance with EITF 00-21. Specifically, the license agreements contain contractual restrictions whereby the licensees are obligated to purchase the licensed products exclusively from the Company for the entire term of the related supply agreement. Additionally, licensees are precluded from being able to sell, sub-lease or transfer their rights or from being able to manufacture the product in-house. The Company’s product sales under the agreements are recognized in the same manner as its normal product sales. The license fees, which are due and payable upfront, are refundable to the customer until the customer has received marketing authorization to sell the licensed product. Accordingly, the Company defers the revenue recognition of the license fees until the customer obtains marketing authorization. The Company then recognizes the license fees as revenue on a straight line basis over the term of the related supply agreement. The Company has deferred recognition of approximately $5,607,000 and $5,424,000 of license fees as of March 31, 2008 and December 31, 2007, respectively.

Provision for income taxes

          The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities relating to the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements and tax returns. As permitted by Accounting Principles Board (“APB”) Opinion No. 23, Accounting for Income Taxes — Special Areas, provisions for income taxes on undistributed earnings of foreign subsidiaries that are considered permanently invested are not recognized in the Company’s consolidated financial statements. The cumulative amount of foreign earnings that have been permanently reinvested is approximately $72,500,000.

          The Company had $487,000 and $763,000 of unrecognized tax benefits as of March 31, 2008 and December 31, 2007, respectively, all of which relate to the Company’s Spanish subsidiaries and all of which would affect its effective tax rate if recognized.

The Company realized a decrease of approximately $181,000 in its unrecognized tax benefits during the first quarter of 2008 as a result of the expiration of uncertain foreign tax positions resulting from the lapse of statute of limitations. 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. As of March 31, 2008, the Company had approximately $86,000 of accrued penalties and $57,000 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.

     As a result of reporting taxable income in Spain, the Company recorded provisions for foreign income taxes totaling $1,942,000 and $2,081,000 for the three months ended March 31, 2008 and 2007, respectively. The provisions represented 32% of the pre-tax income reported in Spain for each of the three months ended March 31, 2008 and 2007. The provisions represented 65% and 47% of consolidated pre-tax income for the three months ended March 31, 2008 and 2007, 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.

     The Company generated U.S. federal net operating losses of approximately $3,127,000 and $723,000 in the three months ended March 31, 2008 and 2007, respectively. As future operating profits cannot be reasonably assured, no tax benefit has been recorded for these losses. The Company has established valuation allowances equal to the full amount of the U.S. 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 per common share

     Basic and diluted net income per common share is based on the weighted average number of shares of common stock outstanding during each period in accordance with SFAS No. 128, Earnings per Share. The effects on the Company’s outstanding stock options were considered in the diluted net income per share calculation for the three months ended March 31, 2008 and 2007.

     The following is a reconciliation between basic and diluted net income per common share for the three months ended March 31, 2008 and 2007. Dilutive securities issuable for the three months ended March 31, 2008 and 2007 include approximately 1,119,000 and 241,000 dilutive incremental shares, respectively, issuable as a result of various stock options and unvested restricted stock units that are outstanding.

     For the Three Months Ended March 31, 2008 (in thousands, except per share data):

						Effect of Dilutive
		Basic EPS				Securities				Diluted EPS
Net income		$	1,064			$	—			$	1,064
Weighted average common shares outstanding			22,469				1,119				23,588
Net income per common share		$	0.05			$	—			$	0.05

     For the Three Months Ended March 31, 2007 (in thousands, except per share data):

						Effect of Dilutive
		Basic EPS				Securities				Diluted EPS
Net income		$	2,360			$	—			$	2,360
Weighted average common shares outstanding			22,293				241				22,534
Net income per common share		$	0.11			$	—			$	0.10

     For the three months ended March 31, 2008 and 2007, options to purchase 10,000 and 2,434,000 shares, respectively, of Common Stock were excluded from the diluted EPS presentation as determined under the treasury stock method, because their exercise prices were greater than the average market value of the common stock during the period.

Share-based compensation plans

     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 March 31, 2008, approximately 4,307,000 shares of Common Stock have been reserved for issuance under the Plans of which approximately 3,796,000 of the shares are subject to outstanding stock options and approximately 186,000 shares are subject to outstanding restricted stock units. The balance of approximately 325,000 shares is available for future issuance under the Amended and Restated 2005 Equity and Incentive Plan (the “Amended Plan”), which is the successor to all the Company’s other equity Plans. Of the shares available for future issuance, approximately 2,100 are available only for future grants of stock options, while the remainder are available for any type of award allowed under the Amended Plan.

     The Company also sponsors a 401(k) Plan for eligible employees and matches eligible contributions with shares of the Company’s Common Stock. In March 2008, the Company’s Board of Directors authorized an increase of 50,000 shares in the number of shares of Common Stock reserved for issuance pursuant to the 401(k) Plan.

Common stock and restricted stock unit transactions

     During the three months ended March 31, 2008, the Company issued approximately 42,100 shares of Common Stock upon the exercise of stock options and approximately 7,700 shares of Common Stock as share-based compensation in lieu of cash contributions to the Company’s 401(k) Plan. Additionally, during the three months ended March 31, 2008, the Company issued 24,000 shares of Common Stock to non-employee directors from vested but contingently issuable restricted stock units pursuant to an issuance election made by those non-employee directors.

Stock-based compensation

     Stock-based compensation expense recorded for stock option and restricted stock unit awards to employees, non-employee directors and one consultant for the three months ended March 31, 2008 and 2007 was approximately $697,000 and $484,000, respectively. The related expenses were recorded in the Company’s Unaudited Consolidated Income Statements as follows (in thousands):

		For the Three Months Ended March 31,
		2008				2007
Cost of net product sales		$	10			$	8
Selling and marketing expenses			5				5
General and administrative expenses			409				310
Research and development expenses			273				161
		$	697			$	484

     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.

     Stock-based compensation expense recorded for matching contributions for the Company’s 401(k) Plan totaled $113,000 and $75,000 for the three months ended March 31, 2008 and 2007, respectively. The related expenses were recorded in the Company’s Unaudited Consolidated Income Statements as follows (in thousands):

		For the Three Months Ended March 31,
		2008				2007
General and administrative expenses		$	57			$	31
Research and development expenses			56				44
		$	113			$	75

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 was 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. The Company ceased its European drug delivery activities effective December 31, 2007. As a result, the Company’s drug delivery activities are now solely based in the U.S. The Company’s activities consist primarily of licensing, product research and development, business development activities, corporate management and administration. The Company plans on spinning-off its drug delivery business pursuant to which shares of the new specialty pharmaceutical drug delivery company, CPEX, will be distributed to Bentley stockholders by means of a stock dividend. See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     Set forth in the tables below is certain financial information with respect to the Company’s business and geographical segments for the three months ended March 31, 2008 and 2007 and as of March 31, 2008 and December 31, 2007. The 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, 2007 (the “2007 Form 10-K”).

     For the Three Months Ended March 31, 2008 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Net product sales		$	36,364			$	—			$	—			$	—			$	36,364
Licensing and collaboration revenues			199				—				—				3,450				3,649
Total revenues			36,563				—				—				3,450				40,013
Cost of net product sales			19,913				34				—				—				19,947
Gross profit			16,650				(34	)			—				3,450				20,066
Selling and marketing expense			5,763				—				—				—				5,763
General and administrative expense			2,703				(17	)			—				1,527				4,213
Research and development expense			692				—				—				2,112				2,804
Separation Costs			1,960				—				—				1,874				3,834
Depreciation and amortization expense			334				20				—				172				526
Income from operations			5,198				(37	)			—				(2,235	)			2,926
Interest income			113				—				—				147				260
Interest expense			(277	)			—				—				(2	)			(279	)
Other income (expense), net			99				—				—				—				99
Income before income taxes			5,133				(37	)			—				(2,090	)			3,006
Provision for income taxes			1,942				—				—				—				1,942
Net income (loss)			3,191				(37	)			—				(2,090	)			1,064
Expenditures for fixed assets			1,590				—				—				38				1,628
Expenditures for drug licenses			661				—				—				—				661

     For the Three Months Ended March 31, 2007 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Net product sales		$	28,906			$	208			$	—			$	—			$	29,114
Licensing and collaboration revenues			114				—				—				2,163				2,277
Total revenues			29,020				208				—				2,163				31,391
Cost of net product sales			15,396				501				—				—				15,897
Gross profit			13,624				(293	)			—				2,163				15,494
Selling and marketing expense			4,445				—				—				—				4,445
General and administrative expense			2,275				—				—				1,302				3,577
Research and development expense			481				—				1,097				1,097				2,675
Separation Costs			—				—				—				69				69
Depreciation and amortization expense			274				39				—				195				508
Income from operations			6,149				(332	)			(1,097	)			(500	)			4,220
Interest income			65				—				—				117				182
Interest expense			(45	)			—				—				(5	)			(50	)
Other income (expense), net			92				—				—				(3	)			89
Income before income taxes			6,261				(332	)			(1,097	)			(391	)			4,441
Provision for income taxes			2,081				—				—				—				2,081
Net income (loss)			4,180				(332	)			(1,097	)			(391	)			2,360
Expenditures for fixed assets			1,934				—				—				20				1,954
Expenditures for drug licenses			336				32				—				147				515

     As of March 31, 2008 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Receivables, net		$	42,866			$	—			$	—			$	3,271			$	46,137
Other current assets			36,358				—				—				20,406				56,764
Fixed assets			60,851				—				—				2,769				63,620
Drug licenses and related costs			14,320				455				—				2,838				17,613
Other non-current assets			1,280				—				—				1,084				2,364
Total assets			155,675				455				—				30,368				186,498
Current liabilities			32,401				—				—				3,898				36,299
Long term debt			16,076				—				—				—				16,076
Non-current liabilities			9,265				—				—				—				9,265
Total liabilities			57,742				—				—				3,898				61,640

     As of December 31, 2007 (in thousands):

		Specialty Generics								Drug Delivery
		Europe				U.S.				Europe				U.S.				Consolidated
Receivables, net		$	36,071			$	—			$	—			$	3,253			$	39,324
Other current assets			32,707				274				—				22,375				55,356
Fixed assets			56,391				—				—				2,800				59,191
Drug licenses and related costs			13,206				476				—				2,942				16,624
Other non-current assets			1,514				—				—				1,087				2,601
Total assets			139,889				750				—				32,457				173,096
Current liabilities			28,282				315				—				4,486				33,083
Long term debt			15,595				—				—				—				15,595
Non-current liabilities			8,446				—				—				—				8,446
Total liabilities			52,323				315				—				4,486				57,124

     The majority of the Company’s revenues are generated from products sold in Spain. Revenues from products sold in Spain totaled $24,969,000 and $21,734,000 in the three months ended March 31, 2008 and 2007, respectively. Revenues from licensing and collaboration revenues in Spain totaled $199,000 and $114,000 in the three months ended March 31, 2008 and 2007, respectively.

     Set forth in the table below is a summary of our revenues from external customers including a breakout of our revenues for our major product lines for the three months ended March 31, 2008 and 2007 (in thousands):

						% of								% of
						Total								Total
		March 31, 2008				Revenues				March 31, 2007				Revenues
Omeprazole		$	5,830				15	%		$	4,421				14	%
Simvastatin			1,796				4	%			1,705				6	%
Enalapril			1,754				4	%			1,705				6	%
Lansoprazole			1,402				4	%			1,170				4	%
Paroxetine			1,280				3	%			1,346				4	%
All other products			8,435				21	%			8,560				27	%
Sales to licensees and others			15,867				40	%			10,207				32	%
Total net product sales			36,364				91	%			29,114				93	%
Licensing and collaborations			3,649				9	%			2,277				7	%
Total Revenues		$	40,013				100	%		$	31,391				100	%

Recently issued accounting pronouncements

     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. The Company has adopted SFAS No. 159 as of January 1, 2008 through March 31, 2008 and has not elected to measure any of its financial instruments or other items at fair value that are not currently required to be measured at fair value.

     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. The Company adopted EITF Issue No. 07-3 as of January 1, 2008. The Company often enters into agreements for research and development goods and service, however the adoption of EITF 07-03 did not have a material impact on the Company’s consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Company has not determined the effect that the application of SFAS No. 141(R) will have on its consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”) which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company has not determined the effect that the application of SFAS No. 160 will have on its consolidated financial statements.

     In December 2007, the FASB ratified the consensus reached by the EITF on Issue No. 07-1, Accounting for Collaborative Agreements (“EITF Issue No. 07-1”). EITF Issue No. 07-1 provides the definition of a collaborative agreement and guidelines to assist an entity in determining whether or not it is a party in a collaborative agreement. EITF Issue No. 07-1 states that costs incurred and revenues generated from transactions with third parties shall be reported in accordance with EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. EITF Issue No. 07-1 also provides minimum disclosure requirements for an entity’s collaboration agreements and transition guidance. EITF Issue No. 07-1 is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the impact that the adoption of EITF Issue No. 07-1 will have on its consolidated financial statements.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, as an amendment to SFAS No. 133, Accounting for Derivative Instruments and

Hedging Activities (“SFAS No. 161”). SFAS No. 161 required that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of adopting this pronouncement.

Reclassifications

     Certain costs included in general and administrative expenses in prior periods associated with the planned spin-off have been reclassified from general and administrative expenses to separation costs to conform with the Company’s current presentation.

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 2007 Annual Report on Form 10-K, which has been previously filed with the SEC. Except for the historical information contained herein, the foregoing discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected in the forward-looking statements discussed herein due to competitive factors and other risks discussed in our 2007 Annual Report on Form 10-K under Item 1A, “Risk Factors”.

Planned Spin-off

     On October 23, 2007, the Company announced a plan to spin-off its drug delivery business. The transaction is subject to certain conditions. Management expects that shares of the new specialty pharmaceutical drug delivery company, CPEX Pharmaceuticals, Inc. (“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 business. 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 sharing agreement. Consummation of the spin-off is subject to several conditions, including final approval of the spin-off by the Bentley Board of Directors, receipt of an opinion to the effect that Bentley and CPEX each will be solvent and adequately capitalized immediately after the distribution of the CPEX common stock, and that Bentley has sufficient surplus under Delaware law to declare the dividend of CPEX common stock to Bentley stockholders, and the effectiveness of the Form 10 filed with the Securities and Exchange Commission for the registration of the securities of CPEX. Approval by Bentley’s stockholders is not required as a condition to the consummation of the proposed spin-off.

Merger Agreement with Teva Pharmaceutical Industries Ltd.

     On March 31, 2008, the Company announced that it had entered into a definitive agreement with Teva Pharmaceutical Industries Ltd. (“Teva”) whereby Teva will acquire Bentley following the spin-off of Bentley’s drug delivery business to its stockholders. The boards of directors of both companies have unanimously approved the transaction. Closing is subject to certain conditions, including completion of the proposed spin-off of Bentley’s drug delivery business, antitrust approvals, the approval of Bentley’s stockholders and other customary closing conditions. Mr. James Murphy, Bentley’s Chairman and Chief Executive Officer, Mr. Michael McGovern, Bentley’s Vice Chairman and Mr. McGovern’s wife, who currently hold an aggregate of approximately 13.8% of the outstanding Bentley shares, have agreed to vote their shares in favor of the transaction. Approval by Teva’s stockholders is not required. The transaction is expected to close by the third quarter of 2008. Teva will fund the acquisition from its internal resources.

     Based on the exercise price and number of outstanding shares and options of Bentley as of the signing, and prior to any potential tax or options adjustments as a result of the spin-off, the purchase price per share of Bentley common stock to be paid by Teva in the acquisition is approximately $15.02. If the value of the CPEX stock distributed to Bentley stockholders in the spin-off described above exceeds the thresholds set forth in the merger agreement, then the per share price would be reduced by a percentage of that excess. This reduction is designed to compensate Teva for tax liabilities it may assume as a result of the spin-off. In addition, in order to account for the equitable adjustment to the exercise price and number of Bentley options and restricted stock units that will be made in connection with the spin-off of CPEX, the per share price to Bentley stockholders will be recalculated prior to the stockholders’ meeting in order to spread the aggregate purchase price across all shares of Bentley common stock and restricted stock units then outstanding and all options for Bentley common stock with an exercise price less than the price per share to be paid in the acquisition. The final price

per share, reflecting any potential adjustments as a result of the spin-off, will be announced by Bentley at least 14 days prior to its stockholders’ meeting relating to the transaction.

     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 of its drug delivery business and merger with Teva. These costs totaled approximately $3,834,000 and $69,000 for the three months ended March 31, 2008 and 2007, respectively, and have been reported as separation costs within operating expenses in the Company’s Unaudited Consolidated Income Statements. Separation costs totaling $69,000 for the three months ended March 31, 2007 were reclassified from general and administrative expenses to separation costs to conform to the current period presentation.

Overview

We are an international specialty pharmaceutical company, headquartered in the U.S., that is 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.

Specialty Generic Pharmaceuticals

     Our pharmaceutical product sales and licensing activities are based primarily in Spain, where we have a significant commercial presence and manufacture and market approximately 200 product presentations (also known as stock keeping units, 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 26% of our product revenues in the three months ended March 31, 2008. 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 several countries in the European Union. As of March 31, 2008 approximately 32% of our net product sales were derived from sales outside of Spain. The launch of simvastatin, our first U.S. generic product, in December 2006 marked a significant strategic milestone for us; however, due to market price conditions and limited demand, sales of our generic simvastatin were less favorable than our initial projections. As a result, we reduced the carrying value of these inventories to zero at December 31, 2007 and subsequently wrote those inventories off in the first quarter of 2008. As a result of these market conditions and adjustments, we also reassessed the carrying value of our U.S. simvastatin drug license at December 31, 2007. Due to the inability to generate net profits on these products and the lack of additional orders, we reduced the carrying value of this drug license to zero at December 31, 2007, and effective in April 2008, we terminated our product development, license and manufacturing agreement with our collaborator for generic simvastatin.

     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 it 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

compared to periods prior to 2007. Gross margins were 45% in the three months ended March 31, 2007 and 2008. The products most affected by the price reductions are two of our top selling product lines, omeprazole and simvastatin. 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 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 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.

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 in the United States in February 2003. Testim, which is the first product incorporating our CPE-215 drug delivery technology, is a gel indicated for testosterone replacement therapy. Testim is also approved for marketing in 15 European countries and Canada. 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 delivery of insulin to diabetic patients intranasally. It is these products, including Nasulin™, our intransal product candidate, and the CPE-215 technology that we plan to spin-off to stockholders in CPEX Pharmaceuticals, Inc.

     Our U.S. research and development activities are primarily focused on the development of Nasulin, our intranasal insulin product candidate. In 2004, we concluded a Phase IIA study for Nasulin in Type I diabetic patients using our CPE-215 technology. We reported the results of that trial in an abstract titled “Intranasal Insulin Administration in Type 1 Diabetic Patients Utilizing CPE-215 Technology” at the American Diabetes Association 65^th Scientific Sessions, September 10-14, 2005, in San Diego, California. 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 in healthy non-diabetic volunteers and advanced our Phase IIA studies in the U.S. in Type 1 diabetic patients. In first quarter of 2007, we completed preparations for a Phase II study in India in Type 2 diabetic patients 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 Scientific Sessions in Chicago, Illinois in June 2007. We expect the U.S. development and clinical programs for Nasulin to continue and expand domestically and internationally. We expect to incur, and upon consummation of the spin-off, for CPEX to incur, increased costs from the advancement of our clinical programs and from continued product formulation and testing efforts.

Effect of Foreign Currency Fluctuations

     A substantial amount of our business is conducted in Europe and is therefore influenced by fluctuations in the U.S. Dollar’s value in relation to other currencies, particularly the Euro. An increase in the weighted average value of the Euro in relation to the U.S. Dollar over the prior year first quarter, had the following impact on the results of our operations when reported in U.S. Dollars: (1) total revenues were increased by approximately $4,607,000, (2) gross profit was increased by approximately $2,107,000, (3) operating expenses increased by approximately $1,307,000, (4) provision for income taxes was increased by approximately $243,000, and (5) our resulting net income was increased by approximately $557,000.

     The following discussion includes references to “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.

CONSOLIDATED RESULTS OF OPERATIONS:

Three Months Ended March 31, 2008 compared to Three Months Ended March 31, 2007

     Revenues

		For the Three Months Ended March 31,																Change
(in thousands)		2008				%				2007				%				$				%
Specialty Generics
Net product sales		$	36,364				91	%		$	29,114				93	%		$	7,250				25	%
Licensing and collaboration revenues			199				*				114				*				85				75	%
			36,563				91	%			29,228				93	%			7,335				25	%
Drug Delivery
Licensing and collaboration revenues			3,450				9	%			2,163				7	%			1,287				60	%
Total revenues		$	40,013				100	%		$	31,391				100	%		$	8,622				27	%

     Total revenues for the three months ended March 31, 2008 increased $8,622,000 from the same period in the prior year. Our specialty generics business continued to experience increased demand when compared to the first quarter of 2007. Our net product sales increased by 10% over the comparable period of the prior year when expressed in constant currency. Our drug delivery revenues increased 60% from the first quarter of 2007 due to increased royalties earned on sales of Testim. Based on industry sources, Testim was reported to capture approximately 22% of all testosterone gel replacement prescriptions in the U.S. market as of March 31, 2008, compared to approximately 19% of all testosterone gel replacement prescriptions as of March 31, 2007.

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

     For the three months ended March 31, 2008:

(in thousands)		Revenues Within Spain
														Revenues
		Branded												Outside of								% of Total
Product Line		Generics				Generics				Other				Spain				Total				Revenues
Omeprazole		$	499			$	5,331			$	—			$	—			$	5,830				15	%
Simvastatin			290				1,506				—				—				1,796				4	%
Enalapril			1,381				373				—				—				1,754				4	%
Lansoprazole			1,002				400				—				—				1,402				4	%
Paroxetine			464				816				—				—				1,280				3	%
All other products			3,268				3,889				310				968				8,435				21	%
Sales to licensees and others			—				—				5,241				10,626				15,867				40	%
Licensing and collaborations			—				—				199				3,450				3,649				9	%
Total Revenues		$	6,904			$	12,315			$	5,750			$	15,044			$	40,013				100	%
% of Q-1 2008 Revenues			17	%			31	%			14	%			38	%			100	%

     For the three months ended March 31, 2007:

(in thousands)		Revenues Within Spain
														Revenues
		Branded												Outside of								% of Total
Product Line		Generics				Generics				Other				Spain				Total				Revenues
Omeprazole		$	551			$	3,870			$	—			$	—			$	4,421				14	%
Simvastatin			366				1,339				—				—				1,705				6	%
Enalapril			1,314				391				—				—				1,705				6	%
Lansoprazole			856				314				—				—				1,170				4	%
Paroxetine			449				897				—				—				1,346				4	%
All other products			3,460				3,868				275				957				8,560				27	%
Sales to licensees and others			—				—				3,670				6,537				10,207				32	%
Licensing and collaborations			—				—				114				2,163				2,277				7	%
Total Revenues		$	6,996			$	10,679			$	4,059			$	9,657			$	31,391				100	%
% of Q-1 2007 Revenues			22	%			34	%			13	%			31	%			100	%