SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                 ---------------

                                   FORM 10-K/A

                         (AMENDMENT NO. 1 TO FORM 10-K)
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

For the fiscal year ended December 31, 2000
                          -----------------

                                       OR

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

For the transition period from __________  to  __________

                         Commission File Number 0-28308

                        COLLAGENEX PHARMACEUTICALS, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

              Delaware                                   52-1758016
  ------------------------------------------------------------------------------
  (State or Other Jurisdiction of           (I.R.S. Employer Identification No.)
   Incorporation or Organization)

41 University Drive, Newtown, Pennsylvania                            18940
-------------------------------------------                        ------------
(Address of Principal Executive Offices)                            (Zip Code)

Registrant's telephone number, including area code (215)579-7388
                                                   ----------------------------

Securities registered pursuant to Section 12(b) of the Act:

Title of each class                    Name of Each Exchange on Which Registered
--------------------                   -----------------------------------------

         None

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $0.01 par value
--------------------------------------------------------------------------------
                                (Title of Class)

--------------------------------------------------------------------------------
                                (Title of Class)


<PAGE>



         Indicate  by check  mark  whether  the  registrant:  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                        Yes:     X           No:
                              --------            --------

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-K/A or any  amendment to
this Form 10-K/A.

     State  the  aggregate  market  value of the  voting  common  stock  held by
non-affiliates  of the  registrant:  $40,406,361  at March 15, 2001 based on the
last sales price on that date.

         Indicate the number of shares  outstanding of each of the  registrant's
classes of common stock, as of March 15, 2001:

Class                                                        Number of Shares
-----                                                        ----------------
Common Stock, $0.01 par value                                 10,550,638

         The following  documents are  incorporated by reference into the Annual
Report on Form 10-K/A:  Portions of the registrant's  definitive Proxy Statement
for its 2001 Annual Meeting of Stockholders  are  incorporated by reference into
Part III of this Report.



<PAGE>


                                           TABLE OF CONTENTS


            Item                                                          Page
            ----                                                          ----

PART I      1.  Business...............................................     1
            2.  Properties.............................................    24
            3.  Legal Proceedings......................................    24
            4.  Submission of Matters to a Vote of Security Holders....    24

PART II     5.  Market for the Company's Common Equity and Related
                   Stockholder Matters.................................    25
            6.  Selected Consolidated Financial Data...................    25
            7.  Management's Discussion and Analysis of Financial
                   Condition and Results of Operations.................    28
            7A. Quantitative and Qualitative Disclosures about
                   Market Risk.........................................    35
            8.  Financial Statements and Supplementary Data............    35
            9.  Changes in and Disagreements with Accountants on
                   Accounting and Financial Disclosure.................    35

PART III    10. Directors and Executive Officers of the Company........    36
            11. Executive Compensation.................................    36
            12. Security Ownership of Certain Beneficial Owners and
                   Management..........................................    36
            13. Certain Relationships and Related Transactions.........    36

PART IV     14. Exhibits, Financial Statement Schedules, and
                   Reports on Form 8-K.................................    37

SIGNATURES.............................................................    38

EXHIBIT INDEX..........................................................    40

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
  SCHEDULE.............................................................    F-1



                                       i
<PAGE>



                                EXPLANATORY NOTE

         This Amendment No. 1 on Form 10-K/A amends and restates in its entirety
the  Annual  Report  on  Form  10-K of  CollaGenex  Pharmaceuticals,  Inc.  (the
"Company" or  "CollaGenex")  for its fiscal year ended  December 31, 2000.  This
Form  10-K/A is being filed to amend  certain  information  presented  under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of  Operations"  in  Part  II,  Item 7 to  provide  expanded  disclosure  of the
significant  components of selling,  general and administrative  expenses of the
Company.

                                     PART I

ITEM 1.  BUSINESS.

GENERAL
-------

         CollaGenex Pharmaceuticals, Inc. and subsidiaries ("CollaGenex", or the
"Company") is a specialty pharmaceutical company focused on providing innovative
medical   therapies  to  the  dental  market.   The  Company's   first  product,
Periostat(R),  is an orally administered,  prescription  pharmaceutical  product
that was approved by the United States Food and Drug  Administration (the "FDA")
in  September  1998 and is the  first  and only  pharmaceutical  to treat  adult
periodontitis  by  inhibiting  the  enzymes  that  destroy  periodontal  support
tissues.  In December  2000 and  February  2001,  the United  Kingdom  Medicines
Control  Agency  (the "UK MCA")  and the FDA,  respectively,  granted  marketing
approval for a new tablet  formulation of Periostat which is smaller,  easier to
swallow and offers manufacturing cost advantages.  This formulation will replace
the currently marketed capsule  formulation during 2001.  Periostat is indicated
as an adjunct to scaling and root planing  ("SRP"),  the most prevalent  therapy
for adult  periodontitis,  to promote attachment level gain and to reduce pocket
depth in  patients  with adult  periodontitis.  Adult  periodontitis,  a chronic
disease  characterized by the progressive  loss of attachment  between the tooth
root and the  surrounding  periodontal  structures,  may result in tooth loss if
untreated. See "- Periostat."

         The  Company  believes  that it is the  only  specialty  pharmaceutical
company  specifically  focused on the  dental  market.  There are  approximately
120,000 dentists in the United States, who write about 55 million  prescriptions
per year.  Most of these  prescriptions  are for drugs that  treat the  symptoms
associated  with dental  diseases,  such as pain,  inflammation  and  infection.
Periostat   is   the   first   orally   administered,   systemically   delivered
pharmaceutical developed and approved specifically to treat a dental disease.

         Research has shown that the  enzyme-suppression  technology  underlying
Periostat may also be applicable to other diseases involving  destruction of the
body's   connective   tissues,   including  cancer   metastasis,   osteoporosis,
osteoarthritis,  rheumatoid  arthritis,  diabetes  and acute  lung  injury.  The
Company is also  developing a series of novel,  proprietary  compounds  known as
IMPACS(R)  (Inhibitors  of Multiple  Proteases  and  Cytokines) to address other
applications.  Phase I  clinical  trials for  Metastat(R),  the  Company's  lead
compound for the treatment of metastatic cancer,  were initiated in January 1998
under the sponsorship of the National Cancer  Institute (the "NCI").  In Phase I
clinical trials,  Metastat demonstrated an overall tumor response


                                       1
<PAGE>


rate of 44% in  patients  with  Kaposi's  sarcoma,  and the NCI has  elected  to
continue testing Metastat in Phase II clinical trials.

         The Company's  core  technology is licensed on an exclusive  basis from
the  Research  Foundation  of the State  University  of New York at Stony  Brook
("SUNY").  SUNY  also  conducts  research  and  development  on other  potential
applications of the core technology pursuant to a contract with the Company.

         Periostat  is  marketed to the  professional  dental  community  in the
United States through a  professional  pharmaceutical  sales force  comprised of
approximately 120 sales representatives and managers.  Currently,  the Company's
sales  force  is  also  marketing   Vioxx(R),   a   prescription   non-steroidal
anti-inflammatory drug (NSAID) developed by Merck & Co., Inc. ("Merck") that the
Company  promotes for the  treatment of acute dental  pain,  and  Denavir(R),  a
prescription drug owned by Novartis Pharmaceuticals Corporation ("Novartis") for
the treatment of cold sores. Novartis notified the Company by letter dated March
14, 2001 of its  intention  to terminate  its  co-promotion  agreement  with the
Company  with  respect to Denavir and the Company and  Novartis  are  discussing
potential  alternate  partnering  arrangements,  if any.  The  Company  recently
initiated a  direct-to-consumer  ("DTC")  advertising  campaign to build patient
awareness of Periostat and to drive prescription and revenue growth. The Company
is actively pursuing other prescription and non-prescription  products to market
to the professional dental community and directly to the consumer, and may enter
directly into manufacturing  arrangements for additional complementary products,
such as dental neutraceuticals.

         The Company was incorporated in Delaware in January 1992 under the name
CollaGenex,  Inc. The Company's name was changed to CollaGenex  Pharmaceuticals,
Inc. in April 1996. The Company's executive offices are located at 41 University
Drive, Newtown, Pennsylvania 18940, and its telephone number is (215) 579-7388.

         "Periostat(R)",   "Metastat(R)"   and  "IMPACS(R)"  are  United  States
trademarks  of the Company.  All other trade names,  trademarks or service marks
appearing  in this  Annual  Report  on Form  10-K/A  are the  property  of their
respective owners and are not property of the Company.

PERIOSTAT
---------

         Adult   periodontitis  is  a  chronic  disease   characterized  by  the
progressive  loss  of  attachment  between  the  periodontal  ligament  and  the
surrounding  alveolar  bone,  ultimately  resulting in tooth loss.  According to
industry data, in the United States alone, an estimated one-third of all adults,
or  approximately  67  million  people,  suffer  from some  form of  periodontal
disease.  Approximately 13 million people seek professional  treatment  annually
for periodontal disease, resulting in over 15 million periodontal procedures and
annual  expenditures of approximately  $6 billion,  primarily for procedures and
surgeries performed by a periodontist or a dental professional.

         The most prevalent therapy for adult periodontitis is SRP, a mechanical
procedure that removes  bacteria and bacteria  deposits called plaque from tooth
and root  surfaces  above and below the gum line.  Periostat is the first orally
administered,  systemically delivered


                                       2
<PAGE>


pharmaceutical  indicated as an adjunct to SRP to promote  attachment level gain
and to reduce pocket depth in patients with adult periodontitis.

         Periostat, a 20 mg dose of doxycycline,  is a unique sub-anti-microbial
dosage strength that suppresses the chronic and progressive  tissue  degradation
characteristic  of  periodontitis  without exerting any  anti-microbial  effect.
Doxycycline  is an active  ingredient of several FDA approved drugs and has been
in use for approximately 35 years for the treatment of microbial infections and,
along  with  other   tetracyclines,   has  a  well  established  safety  record.
Periostat's  mechanism  of  action  is  believed  in  part  to  be  through  the
down-regulation of the activity of collagenases,  enzymes which are members of a
broad  class of enzymes  known as matrix  metalloproteinases  ("MMPs")  that are
excessively  produced  as a result  of  inflammation  resulting  from  bacterial
infection  in the gums.  Periostat is intended to be taken orally by the patient
between dental visits.  In September 1998, the FDA granted the Company marketing
approval for Periostat as an adjunct to SRP to promote attachment level gain and
reduce  pocket depth in patients  with adult  periodontitis.  Periostat was made
available for prescription in November 1998 and was fully launched  commercially
in January 1999. Since January 1999, more than 975,000  Periostat  prescriptions
have been filled and over 34,000 dentists have written a Periostat prescription.

         In  December  2000  and  February   2001,  the  UK  MCA  and  the  FDA,
respectively,   granted   marketing   approval  for  the  Company's  new  tablet
formulation of Periostat.  Such tablets will be manufactured  by  Pharmaceutical
Manufacturing Research Services, Inc. ("PMRS") a contract manufacturing company.
Tablets will also be supplied to the Company's foreign  marketing  partners upon
receipt of requisite regulatory approvals,  if at all, which will be applied for
in 2001.

VIOXX
-----

         Pursuant to a Co-Promotion  Agreement  executed with Merck in September
1999, the Company received the exclusive right to co-promote Vioxx to the dental
community.  Vioxx is a prescription  strength NSAID that was approved by the FDA
on May 20, 1999 for the  treatment of  osteoarthritis,  the  management of acute
pain  in  adults,   including   dental  pain,   and  the  treatment  of  primary
dysmenorrhea.  Merck  promotes  Vioxx to the general  physician  community.  The
agreement  provides  for certain  payments by Merck to the Company upon sales of
Vioxx to the dental community.

         Vioxx  belongs to a new class of NSAIDs  that are  believed  to work by
selectively  inhibiting the cyclooxygenase-2  (COX-2) enzyme, which plays a role
in pain and  inflammation.  Vioxx  spares a related  enzyme  (COX-1)  that helps
maintain the normal stomach lining and platelet  homeostasis.  In general,  most
NSAIDs block both enzymes. Such medications treat pain and inflammation, but may
damage the stomach lining,  potentially  leading to ulcers in some patients.  In
recent clinical trials,  Vioxx was shown to be more effective than acetominophen
plus  codeine,  a narcotic,  in  relieving  pain,  with a much lower risk of the
gastrointestinal  side effects and prolonged  bleeding commonly  associated with
NSAID pain relievers.  Vioxx may also now be promoted for  osteoarthritis of the
temporomandibular  joint  ("TMJ"),  a  painful  chronic  disorder  of  the  jaw.
Prescribed as a once-a-day dose, Vioxx offers patients a convenient  alternative
to the multiple daily doses required for many other NSAIDs.


                                       3
<PAGE>

DENAVIR
-------

         Denavir  is an FDA  approved  topical  antiviral  cream  used  for  the
treatment of cold sores. It is the first and only prescription-strength medicine
for treating  recurrent cold sores in healthy  adults.  The Company has marketed
Denavir to the dental  community  under a Co-Promotion  Agreement with Novartis,
since  October 13,  1998,  which  agreement  provided  for  certain  payments by
Novartis to the Company. Novartis notified the Company by letter dated March 14,
2001 of its intention to terminate its  co-promotion  agreement with the Company
with respect to Denavir,  and the Company and Novartis are discussing  potential
alternative partnering arrangements, if any.

SALES AND MARKETING
-------------------

         The Company markets and sells its products in the United States through
a dedicated sales force comprised of approximately 120 sales representatives and
managers.  The Company  intends to market  Periostat  in foreign  markets,  upon
receipt of all requisite regulatory  approvals,  primarily through marketing and
distribution partnerships with companies in these markets. The Company currently
has such  agreements  with foreign  companies,  subject to requisite  regulatory
approvals,  covering Japan,  Germany,  Italy, Canada, Spain,  Portugal,  Greece,
Israel,  Austria and  Switzerland,  and has an export  marketing  agreement  for
countries in the Middle East. A capsule formulation of Periostat was approved by
the UK MCA in February 2000, and the Company  launched a modest direct marketing
effort in the United  Kingdom to dentists  through the Company's  United Kingdom
subsidiary  in  September  2000.  In December  2000 the UK MCA approved a tablet
formulation  of  Periostat  and  during  2001 the  Company  intends  to file for
regulatory  approvals  in  European  countries  through  the Mutual  Recognition
Procedure.  The Company's foreign marketing and distribution  agreements provide
for milestone payments upon the achievement of various regulatory and commercial
events as well as supply  agreements  for  manufactured  product.  The Company's
Swiss and Israeli  distributors  will also file for regulatory  approval  during
2001.

         United States
         -------------

         The field sales  organization  is  currently  comprised of two regional
managers,  eleven district managers and  approximately 105 full-time  equivalent
("FTE") sales representatives.  Each FTE is responsible for covering a territory
that includes  approximately 250 dentists and periodontists that are believed to
be high volume potential  prescribers of Periostat based on the estimated number
of SRPs performed in their respective practices.

         The Company believes that its sales effort is distinguished  from other
dental  sales  forces by its focus on  education  and the  clinical  benefits of
pharmaceutical   dentistry,   a  new  approach  to  treating  dental   diseases.
Accordingly,  the Company produces educational marketing materials,  detail aids
and product samples that are used  extensively by the  representatives  in their
presentations to dentists.  Clinical  reprints and video  presentations are also
provided.  The Company believes that  peer-to-peer  communications  are vital to
increasing the  acceptance of Periostat and arranges  speaking  engagements  and
teleconferences  where Periostat  advocates share their  experiences  with other
dental professionals.


                                       4
<PAGE>


         Sales  training is an important  component of the  Company's  marketing
efforts. New representatives  receive four weeks of field training and two weeks
of  intensive  office  training in  periodontal  disease,  host  response,  pain
management,  territory  management  and selling  skills.  Training  continues at
district-level meetings throughout the year.

         In order to provide an integrated  dental product line and leverage the
Company's sales and marketing  organization,  the Company is actively seeking to
in-license or acquire other high-quality therapeutic dental products.

         United States Direct-to-Consumer Advertising Campaign
         -----------------------------------------------------

         DTC is a relatively  new but highly  effective  marketing  tool used by
pharmaceutical companies to build patient awareness of prescription drugs and to
drive  prescription  and revenue  growth.  In conducting  market  research,  the
Company  learned that there was a greater than 90% awareness of Periostat  among
dentists but less than a 10%  awareness of Periostat  among  patients with adult
periodontitis.

         In October 2000, the Company initiated a test DTC campaign in Tampa and
St. Louis to evaluate the potential  effectiveness  of this tool for  increasing
Periostat  prescription  growth. The Company's  advertisements were developed by
Bozell Healthcare,  the fourth largest healthcare advertising firm in the world,
and were placed in both print and television  media in Tampa and St. Louis.  The
test campaign was conducted from October 8 through December 11, 2000 and resumed
again in January 2001 for one month.

         During the fourth quarter of 2000, new Periostat  prescriptions  in the
test cities were 48% higher  than the third  quarter of 2000  compared to a 1.4%
increase  in new  Periostat  prescriptions  in the  rest of the  United  States.
Periostat is typically  prescribed  for 30 days with two or more refills.  Total
Periostat  prescriptions,  which  include  refills,  in the test  markets in the
fourth  quarter  of 2000  increased  32.4% over new  prescriptions  in the third
quarter compared to a 3.3% increase in the rest of the United States.

         Based on these  results,  in January 2001 the Company  expanded its DTC
campaign to include Philadelphia,  Washington,  Houston and Chicago. The Company
plans a further expansion of the campaign in up to eight additional  advertising
markets over the course of 2001.

         International
         -------------

         The Company is establishing  relationships  with key partners to market
and sell  Periostat  internationally,  upon  receipt  of the  requisite  foreign
regulatory  approvals.  In  1996,  the  Company  executed  a  manufacturing  and
distribution  agreement with Roche S.P.A.  (formerly Boehringer Mannheim Italia)
pursuant to which Roche S.P.A.  has the exclusive  right to market  Periostat in
Italy, San Marino and The Vatican City pending requisite regulatory approval. In
1997,  the Company  announced  that a Marketing  Authorization  for Approval was
filed for Periostat by Roche S.P.A. with the Italian Ministry of Health.  Due to
delays incurred in the review of national  filings,  Roche S.P.A.  has agreed to
withdraw the  Marketing  Authorization  for Approval in Italy,  and this country
will now be included under the pan-European Mutual Recognition  Procedure.  Such
filing will take place during 2001.


                                       5
<PAGE>


         In  July  1998,  the  Company  executed  a  licensing   agreement  with
Laboratoires Pharmascience S.A. ("Laboratories Pharmascience") pursuant to which
Laboratoires  Pharmascience was to market and distribute Periostat following the
requisite regulatory approval on an exclusive basis in France, Morocco, Algeria,
Tunisia and other  countries of French  speaking  Africa.  On March 31, 2000 the
Company  received notice from  Laboratories  Pharmascience  terminating the 1998
license agreement. After negotiation, the parties mutually agreed to discontinue
their  relationship.  The  Company is  actively  seeking a partner to market and
distribute  Periostat in France, upon receipt of requisite  regulatory approvals
in such region.

         In October 1998, the Company  announced that a Marketing  Authorization
Application ("MAA") had been filed with the UK MCA with respect to Periostat. In
February  2000,  the UK MCA granted  marketing  approval for  Periostat  for the
adjunctive treatment of chronic adult periodontitis. On May 2, 2000, the Company
announced  that it had  filed  another  MAA  with the UK MCA  seeking  marketing
approval  of  a   tablet-formulation   of  Periostat,   which   application  was
subsequently  granted in December 2000. Sales of Periostat capsules commenced in
the United Kingdom in September 2000. A new filing  incorporating data from both
the capsule and tablet MAAs was filed with the UK MCA in February 2001 and, when
approved, will form the basis for an application for approval of Periostat under
the European Mutual Recognition Procedure.  Such a filing will take place during
2001.  There can be no assurance  that the Company will  achieve  other  foreign
regulatory  approvals or will be successful in marketing Periostat in the United
Kingdom or other European countries.

         The Company  executed a licensing  agreement  with  Pharmascience  Inc.
("Pharmascience")  in June 1999 pursuant to which  Pharmascience will market and
distribute  Periostat in Canada pending requisite  regulatory  approval.  In the
fourth quarter of 1999,  Pharmascience  submitted an application to the Canadian
Therapeutic Products Program of Health Canada for Canadian marketing approval of
Periostat. This application remains under review by the Canadian authorities.

         On May 2, 2000, the Company announced that it had executed an exclusive
marketing and  distribution  agreement with ISDIN S.A., a joint venture  between
the Spanish companies Laboratorios del Dr. Esteve S.A. and Antonio Puig S.A, for
the  marketing  and  distribution  of Periostat  tablets in Spain and  Portugal,
pending requisite regulatory approval. Such agreement was subsequently extended,
granting  ISDIN S.A.  the right to market and  distribute  Periostat  in Greece,
pending requisite regulatory approval.

         On June 9, 2000, the Company  announced that it had executed  marketing
and distribution agreements with Willvonseder & Marchesani Ges.m.b.H & Co. KG, a
Vienna based company and Karr Dental Ltd., a Zurich based company,  with respect
to  the  marketing  and  distribution  of  Periostat   tablets  in  Austria  and
Switzerland, respectively, pending requisite regulatory approval.

         On August 9,  2000,  the  Company  announced  that it had  executed  an
exclusive  marketing  and supply  agreement  with Showa Yakuhin Kako Co. Ltd., a
Japanese company,  with respect to the marketing and supply of Periostat tablets
in Japan, pending requisite regulatory approval.

         On August 24,  2000,  the  Company  announced  that it had  executed an
agreement for the marketing  and  distribution  of Periostat in Israel with Taro
International Ltd. ("Taro"),  a wholly-


                                       6
<PAGE>


owned subsidiary of Taro Pharmaceutical  Industries Limited, an Israeli company,
pending requisite  regulatory  approval.  Such agreement between the Company and
Taro provides for the payment of milestone fees to the Company  associated  with
the regulatory approvals of Periostat, if any.

         On  December  5,  2000,  the  Company  announced  that it had  signed a
Distribution and Marketing Agreement with Hain Diagnostika GmbH ("Hain") for the
distribution and marketing of Periostat in Germany, pending requisite regulatory
approval  of  Periostat.  Hain  will pay  milestone  fees  associated  with such
regulatory approvals, if any.

         On  January  30,  2001,  the  Company  announced  that it had signed an
exclusive Middle East Export Marketing  Agreement with Pharma Med Inc.  ("Pharma
Med") to distribute and manage the  introduction  of Periostat in certain Middle
Eastern countries,  pending requisite  regulatory  approval.  In return for such
services,  Pharma Med will be paid a fee  contingent  on Periostat  sales to the
distributors.

MANUFACTURING, DISTRIBUTION AND SUPPLIERS
-----------------------------------------

         The  Company  has  entered  into  a  supply   agreement   with  Hovione
International  Limited  ("Hovione")  pursuant to which the active  ingredient in
Periostat,  doxycycline,  is supplied by Hovione from its  offshore  facilities.
Hovione  supplies a substantial  portion of the  doxycycline  used in the United
States from two independent,  FDA-registered and approved facilities,  providing
for a back-up  supply in the event that one  facility is unable to  manufacture.
The  initial  term of the  supply  agreement  expired on  January  25,  2000 and
thereafter  automatically  renewed  and will  continue  to renew for  successive
two-year  periods  unless,  90 days prior to the expiration of any such periods,
either party gives the other party written notice of  termination.  In addition,
in the event of a default,  uncured for 90 days,  the  non-defaulting  party can
terminate the supply agreement  effective  immediately at the end of such 90-day
period. The Company relies on Hovione as its sole supplier of doxycycline.

         The  Company  currently  relies  on  a  single   third-party   contract
manufacturer,  Applied Analytical Industries, Inc. ("AAI"), of Wilmington, North
Carolina,   for  the  commercial   manufacturing   of  Periostat  in  a  capsule
formulation.  This agreement with AAI,  which  initially had a three-year  term,
will terminate in November 2001 subject to AAI's limited  ongoing  commitment to
provide  product to the Company as  discussed  below.  AAI is required to comply
with Good Manufacturing Practices ("GMP") requirements.

         In October  2000,  AAI notified the Company of AAI's belief that it was
commercially  impracticable  for AAI to continue  to  manufacture  Periostat  at
current pricing levels as a result of certain  manufacturing  specifications for
Periostat  that were  mandated by the FDA. AAI sought to recover  certain  costs
that  AAI  claims  it  incurred  since  beginning  commercial  manufacturing  of
Periostat in late 1998. The Company resolved this dispute with AAI and agreed to
pay a de minimus  amount to AAI and to incur certain  price  increases on future
quantities  of  Periostat  manufactured  for the  Company.  Concurrent  with the
resolution  of their  dispute,  AAI served notice of its intent to terminate the
agreement to supply as of November 2001. The agreement with AAI provides for AAI
to commit to an  additional  12 months  supply of  product  at a price  premium,
should  CollaGenex  be unable to qualify  an  alternative  manufacturing  source


                                       7
<PAGE>


subsequent to the termination of the AAI Agreement. The Company plans to convert
manufacturing  to the tablet  formulation  prior to the  termination  of the AAI
Agreement.

         The Company  also intends to rely on PMRS as its sole  manufacturer  of
Periostat in a tablet  formulation.  CollaGenex  and PMRS entered into a Service
and Supply  Agreement on September 26, 2000 for Periostat  with an initial three
year term,  during which time CollaGenex has committed to certain minimum needs,
and PMRS has committed to certain  guaranteed supply terms. This agreement shall
be  automatically  extended for consecutive  one-year periods unless twelve (12)
months prior to the expiration of any such period,  either party gives the other
party written notice of termination.  The Company has placed an initial purchase
order with PMRS and committed to certain minimum  purchases through 2002 to take
advantage  of volume  price  discounts.  PMRS is  required  to  comply  with GMP
requirements.

         In  November  1998,  the  Company  executed  a  Distribution   Services
Agreement with Cord Logistics, Inc. ("Cord"), pursuant to which Cord acts as the
Company's  exclusive  logistics  provider for Periostat in the United States and
Puerto Rico. Cord is a subsidiary of Cardinal Health,  Inc., a leading wholesale
distributor  of  pharmaceutical  and  related  healthcare  products.  Under this
agreement,  Cord  warehouses and ships  Periostat from its central  distribution
facility  to  wholesalers  and  large  national  retail  chains  which  in  turn
distribute Periostat to pharmacies throughout the United States for prescription
sale to  patients.  Cord  also  provides  sample  fulfillment  services  for the
Company's sales force and various customer and financial support services to the
Company, including billing and collections,  contract pricing maintenance,  cash
application,   chargeback   processing  and  related  reporting  services.   The
Distribution  Services  Agreement  has an initial  term of three  years and will
renew automatically for successive one-year periods unless notice of termination
is provided by either party 90 days prior to expiration.

         There can be no  assurance  that the Company will be able to enter into
additional,   or  maintain  existing   manufacturing,   distribution  or  supply
agreements  on  acceptable  terms,  if at all.  In the event that the Company is
unable  to  obtain   sufficient   quantities  of  doxycycline  or  Periostat  on
commercially  reasonable  terms,  or in a  timely  manner,  or if the  Company's
suppliers fail to comply with GMP, or if the Company's  distributors  are unable
to ship or support the Company's  products,  the Company's  business,  financial
condition and results of operations may be materially  adversely  affected.  See
"--Government Regulation."

CUSTOMERS
---------

         During  2000,  net  product  sales to each of  McKesson  Drug  Company,
Cardinal Health,  Inc., Bergen Brunswig and Walgreens,  Inc.  accounted for 31%,
17%, 14% and 10%, respectively, of the Company's aggregate net product sales.

RESEARCH AND DEVELOPMENT
------------------------

         The  Company's  research  and  development   activities  are  conducted
primarily by third parties,  such as contract research  organizations,  academic
and  government  institutions.  The  main  focus  of  these  activities  is  the
identification  and  development  of  novel  tetracycline-based   compounds  for
application in a variety of inflammatory and tissue-destructive disorders. Other


                                       8
<PAGE>


than Periostat,  the most advanced program involves Metastat, the Company's lead
compound for treating metastatic cancer.

         On October 18, 2000, the Company announced that it had received a Phase
I STTR grant from the National Heart,  Lung and Blood  Institute,  a division of
the  National  Institute  of  Health.  The  grant  will  support  the  potential
development of one of the Company's compounds known as IMPACS for the prevention
and treatment of acute lung injury.

         Technology
         ----------

         The  Company's   core   technology   involves  the  prevention  of  the
destruction of the connective  tissues of the body and the  down-regulation of a
pathological  host  response to a variety of external and internal  mediators of
inflammation and tissue destruction.

         One  manifestation  of this  technology is the ability of the compounds
under  development  by CollaGenex to  pharmaceutically  modulate the activity of
MMPs.  MMPs are  responsible  for the  normal  turnover  of  collagen  and other
proteins that are integral components of a variety of connective tissues such as
skin, bone, cartilage and ligaments.

         Under  normal  physiological  conditions,   the  natural  breakdown  of
collagen  is in  part  regulated  by the  interaction  between  the  degradative
properties of MMPs and a group of naturally occurring biomolecules called tissue
inhibitors  of  metalloproteinases  ("TIMPs"),  which  modulate the level of MMP
activity. In many pathological conditions, however, the balance between collagen
production and  degradation  is disrupted  resulting in excessive loss of tissue
collagen, a process called  collagenolysis.  One such example is the progressive
destruction   of  the   periodontal   ligament  and   alveolar   bone  in  adult
periodontitis.  Similar degradative  activity is associated with other disorders
and conditions such as cancer metastasis, wounds, osteoarthritis,  osteoporosis,
rheumatoid arthritis and diabetic nephropathy.

         The Company's  core  technology is licensed on an exclusive  basis from
SUNY and results from the research of Drs. Lorne M. Golub and Thomas F. McNamara
and their colleagues at SUNY. These researchers  demonstrated that tetracyclines
can  significantly  reduce the  pathologically  excessive  collagen  degradation
associated  with  periodontitis.  They also were able to  demonstrate  that this
result was unrelated to the antibiotic properties of tetracyclines. Furthermore,
they demonstrated that the  administration of doses of antibiotic  tetracyclines
well below the dosage  levels  necessary  to  destroy  microbes  (sub-antibiotic
doses) was still effective in preventing the loss of connective tissue in models
of  periodontitis.   Studies  published  in  scientific   journals  support  the
hypothesis  that the  mechanism  of action for this  activity is the result,  in
part,  of the direct  binding of  tetracyclines  to certain  metal binding sites
associated with the MMP structure.

         Although commercially available antibiotic tetracyclines show effective
anti-collagenolytic  potential,  long-term  administration of these compounds at
normal  antibiotic  doses can result in  well-known  complications  of long-term
antibiotic therapy,  such as gastrointestinal  disturbance,  overgrowth of yeast
and fungi,  and the emergence of  antibiotic-resistant  bacteria.  The Company's
Phase III clinical trials using Periostat  demonstrated that the  administration
of  sub-antimicrobial  doses of  doxycycline  over a 12-month  period exerted no
anti-microbial  effects.


                                       9
<PAGE>

Thus, the use of this dosage strength provides the  anti-collagenolytic  effects
without the  complications of long-term  antibiotic  therapies.  The Company has
conducted  and is  currently  conducting  Phase IV  clinical  studies to support
future marketing activities of Periostat.

         The Company's license from SUNY also covers a broad class of chemically
modified tetracyclines (IMPACS) that have been chemically modified to retain and
enhance their  anti-collagenolytic  properties but which have had the structural
elements  responsible for their antibiotic  activity  removed.  These compounds,
which  lack any  antibiotic  activity,  have  shown  potential  in a  number  of
pre-clinical  models of excessive  connective  tissue  breakdown.  The Company's
current  research and  development  programs  focus on the use of IMPACS in drug
therapies for potential  applications  where more potent doses of  tetracyclines
may enhance the  efficacy of the  treatment  as well as on the Phase IV clinical
studies for Periostat.

         Periostat
         ---------

         The Company is planning and conducting various Phase IV clinical trials
that evaluate the use of Periostat for other therapeutic  indications.  Phase IV
studies  being  conducted  at  Boston  University,  SUNY at Stony  Brook and the
University of Michigan are evaluating  Periostat's ability to promote attachment
level,  decrease  pocket  depth  and  promote  healing  in  patients  undergoing
periodontal  flap  surgery.  Another  Phase  IV  study  being  conducted  at the
University of Southern  California was designed to study the use of Periostat to
prevent  root  resorption  during  orthodontic  tooth  movement.  Other Phase IV
clinical  trials are being  conducted  or are planned to evaluate the ability of
Periostat to arrest or reverse the degradation of the attachment  apparatus that
is sometimes associated with dental implants,  the evaluation of Periostat as an
adjunct to SRP in  institutionalized  geriatric patients,  and the evaluation of
Periostat as an adjunct to SRP in patients with Type I and Type II diabetes.  To
extend the possible  therapeutic  use of Periostat  beyond the oral cavity,  the
Company and its  collaborators  are planning or  conducting  clinical  trials to
evaluate  whether  Periostat can manage  posterior  blepharitis,  prevent repeat
heart attack, decrease bone loss in postmenopausal women, prevent the growth and
rupture of aortic  aneurysms and prevent or reverse the clinical  manifestations
of disease secondary to diabetes.

         A Phase IV clinical  trial  conducted at the  University  of Pittsburgh
Dental  School,  the results of which were  announced  by the Company in October
2000,   demonstrated   significant   clinical   benefit  in  patients  who  were
administered  Periostat  in  conjunction  with  traditional  mechanical  therapy
compared to the same therapy plus a placebo.

         Metastat
         --------

         Cancer  metastasis is the spread of cancer cells from a diseased  organ
to the lymphatic or circulatory system, where such cells then migrate throughout
the body causing  cancer to develop in other  organs.  Tumor cell  invasion is a
complex  process that  involves the  destruction  of the basement  membrane,  or
structural  support  tissue,  of the lymphatic or  circulatory  system,  and the
migration of tumor cells to secondary sites,  followed by proliferation of these
cells.  Data from  pre-clinical  studies  sponsored  by the Company at two major
universities  suggest that several of the Company's  IMPACS drug candidates have
potent activity in models of cancer invasion,  including prostate, breast, lung,
colon and melanoma.



                                       10
<PAGE>

         These  studies  also  demonstrated  that  the  down-regulation  of  the
invasive  phenotype  by  conventional  tetracyclines  and  IMPACS  results  in a
decreased ability of tumor cells to invade the lung in models of metastasis. For
example,  IMPACS have been shown to modulate the  specific  type of MMP isolated
from human lung cancer cells, the activity of which has been correlated with the
metastatic  potential of tumors.  In animal models  involving a variety of human
cancer cell types, including prostate,  breast, lung, colon and melanoma, IMPACS
developed by the Company exhibited an ability to inhibit metastasis.

         In October 1996, the Company and the NCI executed a letter of intent to
formalize a collaborative  research and development  agreement pursuant to which
the NCI agreed to perform  pharmacology,  toxicology and Phase I clinical trials
using the  Company's  lead  compound for the  prevention  of cancer  metastasis,
Metastat.

         In June 1997, the Company  announced that it had formally  extended its
Collaboration  Agreement  with  the  NCI  with  respect  to the  development  of
Metastat.  On December 5, 1997, the Company  announced that the NCI had filed an
investigational new drug application ("IND") for Metastat.  In January 1998, the
Company initiated Phase I clinical trials with respect to Metastat. Such studies
were sponsored by the NCI pursuant to the Company's Collaboration Agreement with
the NCI. In February 1999, the Company released initial findings related to such
studies.  Following oral  administration,  desired plasma  concentrations of the
compound were achieved and no  dose-limiting  side effects other than manageable
phototoxicity were encountered. In February 1999, the Company also announced the
allowance  of a  United  States  patent  which  provides  intellectual  property
protection  for the use of Metastat  for the  inhibition  of cancer  metastasis.
Subsequently,  the NCI advised the  Company  that it believed  that the level of
photosensitivity,  although manageable,  could limit the commercial viability of
Metastat.  However, the NCI also advised the Company that it remained interested
in the  mechanism  of action  of this  class of  compounds  and it  intended  to
complete the current  clinical  trials to establish  "proof of  principal"  with
respect to a variety of  surrogate  markers.  Two Phase I clinical  trials  were
completed  in 1999,  one  Phase I  clinical  trial is  ongoing  and a fourth  is
currently planned to initiate in the first half of 2001.

         On May 18,  2000,  the  Company  announced  positive  findings  from an
18-patient,   NCI  sponsored   Phase  I   dose-escalating   study  of  Metastat,
administered  once daily to patients with Kaposi's  sarcoma,  a disfiguring  and
potentially deadly malignancy frequently associated with human  immunodeficiency
virus (HIV). In such Phase I clinical trials,  Metastat  demonstrated an overall
tumor  response rate of 44% in patients  with  Kaposi's  sarcoma and the NCI has
elected to continue testing Metastat in Phase II clinical trials.

         Preclinical Research and Development Activities
         -----------------------------------------------

         The Company has an active preclinical  program in place to identify and
characterize  IMPACS that exhibit  enhanced  biological  activities  compared to
Periostat and Metastat.  In collaboration with the University of Rochester,  the
Company has synthesized  over thirty new IMPACS.  These are being evaluated in a
variety  of in vitro  and in vivo  assay  systems  under a  three-year  research
agreement with SUNY, which will conclude in May 2001.


                                       11
<PAGE>

         The  Company  receives  certain  proprietary  rights to  inventions  or
discoveries  that  arise as a result of this  research.  The  Company's  current
research and development  objective is to develop additional  products utilizing
its IMPACS technology, preferably in conjunction with development partners.

         The Company's research and development  expenditures were approximately
$4.7  million,   $5.0  million  and  $3.1  million  in  1998,   1999  and  2000,
respectively.

PATENTS, TRADE SECRETS AND LICENSES
-----------------------------------

         The  Company's  success  will depend in part on patent and trade secret
protection for its technologies,  products and processes,  and on its ability to
operate without  infringement of proprietary rights of other parties both in the
United States and in foreign  countries.  Because of the  substantial  length of
time and expense  associated with bringing new products  through  development to
the marketplace,  the pharmaceutical  industry places considerable importance on
obtaining  and   maintaining   patent  and  trade  secret   protection  for  new
technologies, products and processes.

         The Company depends on the license from the Research  Foundation of the
State of New York at Stony  Brook  for all of its  core  technology  (the  "SUNY
License"). The SUNY License grants the Company an exclusive worldwide license to
make and sell products employing  tetracyclines that are designed or utilized to
alter a biological process. Twenty-eight (28) United States patents and four (4)
United States patent applications held by SUNY are licensed to the Company under
the SUNY License. Two (2) of the twenty-eight (28) patents have been co-assigned
to the University of Miami,  Florida, and another patent has been co-assigned to
Washington  University.  Other  institutions are co-owners with SUNY as follows:
one (1) patent is  co-owned  with the  Hospital  for Joint  Diseases in New York
City;  three (3) patents are co-owned with the  University of Helsinki;  and one
(1) patent is co-owned  with the  University of  Rochester.  The primary  United
States patent claims  methods of use of  conventional  tetracyclines  to inhibit
pathologically excessive collagenolytic activity (the "Primary Patent"), while a
related United States patent claims methods of use of  tetracyclines  which have
no antibiotic  activity (the  "Secondary  Patent").  The  twenty-six  (26) other
United  States  patents  relate  to  the   compositions  of  certain  CMTs  with
anti-collagenolytic  properties,  methods of use of tetracyclines to reduce bone
loss and  methods of use of  tetracyclines  to enhance  bone  growth and inhibit
protein  glycosylation.  SUNY did not apply in  foreign  countries  for  patents
corresponding  to the Primary Patent but has obtained patents that correspond to
the Secondary Patent in Australia, Canada and certain European countries. One of
the  Secondary  Patents  has also been issued in Japan.  SUNY also has  obtained
patents in certain European countries,  Canada and Japan, and has pending patent
applications in certain other foreign  countries which  correspond to its United
States patents  relating to methods of use of tetracyclines to reduce bone loss.
Sixty-nine  (69)  patents have been issued in foreign  countries.  All of SUNY's
United States and foreign  patents  expire  between 2004 and 2018. The Company's
rights  under the SUNY  License are subject to certain  statutory  rights of the
United States government  resulting from federal support of research  activities
at SUNY. The failure to obtain and maintain patent  protection may mean that the
Company  will face  increased  competition  in the United  States and in foreign
countries.  The SUNY License is  terminable by SUNY on 90 days prior notice only
upon the Company's  failure to make timely payments,  reimbursements or reports,
if the failure is not cured by the Company


                                       12
<PAGE>

within 90 days. The  termination  of the SUNY License,  or the failure to obtain
and maintain  patent  protection  for the Company's  technologies,  would have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         One of the United States patents and a  corresponding  Japanese  patent
application  licensed to the Company under the SUNY License are owned jointly by
SUNY and a Japanese  company.  These patent rights,  which expire in 2012, cover
particular  CMTs (the  "Jointly  Owned  CMTs")  that were  involved  in research
activities between SUNY and the Japanese company.  The Japanese company may have
exclusive rights to these Jointly Owned CMTs in Asia,  Australia and New Zealand
and may have a non-exclusive  right to exploit these Jointly Owned CMTs in other
territories.  These  Jointly  Owned  CMTs  are  not  involved  in the  Company's
Periostat  product but could,  in the future,  prove to be important  for one or
more of the Company's  other potential  applications  of its technology.  If the
Company does incorporate the Jointly Owned CMTs in any future product, it may be
precluded from marketing  these products in Asia,  Australia and New Zealand and
could experience increased competition in other markets from the joint owner.

         In  consideration  of the license granted to the Company,  the Company:
(i) issued to SUNY  78,948  shares of common  stock;  and (ii) has agreed to pay
SUNY  royalties  on the net  sales of  products  employing  tetracyclines,  with
minimum annual royalty  payments per year. The term of the license is: (i) until
the expiration of the last to expire of the licensed patents in each country; or
(ii) until  November  18,  2018,  at which time the  Company  has a fully  paid,
non-exclusive license.

         In addition to the patents and patent  applications  licensed from SUNY
which represent the core technology,  the Company owns additional technology for
which  applications  for  United  States  patents  have been filed and have been
issued.  In this regard,  the Company  reports the existence of an issued patent
for  a   toothpaste/mouthwash   formulation  for  the   amelioration  of  dentin
hypersensitivity. Furthermore, the Company reports pending applications covering
new tetracycline derivatives having increased lipophilicity.

         The Company  intends to enforce its patent rights  against  third-party
infringers.  Due to the general availability of generic tetracyclines for use as
antibiotics,  the Company could become involved in infringement  actions,  which
could  entail  substantial  costs to the  Company.  Regardless  of the  outcome,
defense or  prosecution  of patent claims is expensive and time  consuming,  and
results  in  the  diversion  of  substantial  financial,  management  and  other
resources from the Company's other activities.

         The patent positions of  pharmaceutical  firms,  including the Company,
are  generally  uncertain  and  involve  complex  legal and  factual  questions.
Consequently,  as to the patent  applications  licensed  to it,  even though the
Company currently is prosecuting such patent applications with United States and
foreign  patent  offices,  the  Company  does  not  know  whether  any  of  such
applications  will result in the issuance of any  additional  patents or, if any
additional patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated.  Since patent applications in
the United  States are  maintained in secrecy  until  patents  issue,  and since
publication of discoveries in the scientific and patent  literature tends to lag
behind actual  discoveries by several months, the Company cannot be


                                       13
<PAGE>

certain that it was the first  creator of inventions  covered by pending  patent
applications  or that it was the  first  to file  patent  applications  for such
inventions.

         There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents,  that any patents issued or
licensed to the Company will not be challenged  and held to be invalid,  or that
any  such  patents  will  provide  commercially  significant  protection  to the
Company's  technology,  products and  processes.  In  addition,  there can be no
assurance that others will not independently  develop  substantially  equivalent
proprietary  information not covered by patents to which the Company owns rights
or obtain  access to the Company's  know-how,  or that others will not be issued
patents which may prevent the sale of one or more of the Company's products,  or
require  licensing  and the  payment of  significant  fees or  royalties  by the
Company to third parties in order to enable the Company to conduct its business.
In the event that any relevant claims of third-party patents are upheld as valid
and  enforceable,  the Company  could be prevented  from selling its products or
could be required to obtain licenses from the owners of such patents.  There can
be no assurance that such licenses would be available or, if available, would be
on terms  acceptable  to the  Company.  The  Company's  failure to obtain  these
licenses  would  have a  material  adverse  effect  on the  Company's  business,
financial condition and results of operations.

         The Company's  success also is dependent upon know-how,  trade secrets,
and the  skills,  knowledge  and  experience  of its  scientific  and  technical
personnel.  The Company  requires all  employees  to enter into  confidentiality
agreements  that prohibit the disclosure of  confidential  information to anyone
outside the Company.  In addition,  the Company seeks to obtain such  agreements
from its  consultants,  advisors  and  research  collaborators.  There can be no
assurance  that adequate  protection  will be provided for the  Company's  trade
secrets,  know-how  or  other  proprietary  information  in  the  event  of  any
unauthorized use or disclosure.  The Company  occasionally  provides information
and chemical compounds to research collaborators in academic  institutions,  and
requests that the  collaborators  conduct tests in order to investigate  certain
properties  of the  compounds.  There  can be no  assurance  that  the  academic
institutions will not assert intellectual  property rights in the results of the
tests conducted by the research collaborators, or that the academic institutions
will grant licenses under such  intellectual  property  rights to the Company on
acceptable  terms.  If the  assertion  of  intellectual  property  rights  by an
academic  institution can be substantiated,  failure of the academic institution
to grant  intellectual  property  rights to the  Company  could  have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

GOVERNMENT REGULATION
---------------------

         Government  authorities  in  the  United  States  and  other  countries
extensively regulate,  among other things, the research,  development,  testing,
manufacture,  labeling, promotion,  advertising,  distribution, and marketing of
the Company's  products.  In the United  States,  the FDA regulates our approved
product,  Periostat, and our products in development, as drugs under the Federal
Food,  Drug, and Cosmetic Act and  implementing  regulations.  Failure to comply
with FDA  requirements  may subject the  Company to  administrative  or judicial
sanctions,  such as the FDA's refusal to approve pending applications or warning
letters,  product  recalls,  product  seizures,  total or partial  suspension of
production  or  distribution,   withdrawal  of  approvals,   import  detentions,
injunctions, and/or criminal prosecution.


                                       14
<PAGE>

        The steps  required  before a drug may be marketed in the United States
include:

        o    pre-clinical laboratory tests, animal studies, and formulation
             studies;

        o    submission to the FDA of an investigational new drug exemption, or
             IND, for human clinical testing, which must become effective before
             human clinical trials may begin;

        o    adequate and well-controlled clinical trials to establish the
             safety and efficacy of the drug for each indication;

        o    submission to the FDA of a new drug application, or NDA, for
             approval;

        o    satisfactory completion of an FDA inspection of the manufacturing
             facility or facilities at which the drug is produced to assess
             compliance with Good Manufacturing Practice, or GMP; and

        o    FDA review and approval of the NDA.

         Pre-clinical tests include laboratory evaluations of product chemistry,
toxicity,  and  formulation,  as well as  animal  studies.  The  results  of the
pre-clinical tests,  together with manufacturing  information,  analytical data,
and a plan for studying the product in humans,  are submitted to the FDA as part
of an IND, which must become  effective  before human clinical trials may begin.
An IND automatically  becomes effective 30 days after receipt by the FDA, unless
before that time the FDA raises  concerns or questions  about issues such as the
conduct of the trials outlined in the IND. In that case, the IND sponsor and the
FDA must  resolve any  outstanding  FDA concerns or  questions  before  clinical
trials  can  proceed.  Submission  of an IND does not  always  result in the FDA
allowing clinical trials to commence.

         Clinical trials involve  administration of the investigational  drug to
human  subjects  under  the  supervision  of  qualified  investigators  and  are
conducted under protocols  detailing the objectives of the study, the parameters
to be used in monitoring safety, and the effectiveness criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the IND process,  and must
be reviewed and approved by an independent  Institutional Review Board before it
can begin.  Clinical trials typically are conducted in three sequential  phases,
but the phases may overlap or be combined.  Phase 1 usually involves the initial
introduction  of the  investigational  drug into people to evaluate  its safety,
dosage tolerance, phamacodynamics, and, if possible, to gain an early indication
of its  effectiveness.  Phase 2 usually  involves  trials  in a limited  patient
population  to  evaluate  dosage  tolerance  and  appropriate  dosage,  identify
possible  adverse  effects  and  safety  risks and  evaluate  preliminarily  the
efficacy of the drug for specific  indications.  Phase 3 trials usually  further
evaluate  clinical efficacy and test further for safety by using the drug in its
final form in an expanded patient population.  The Company cannot guarantee that
Phase 1, Phase 2, or Phase 3 testing  for its  products in  development  will be
completed  successfully  within any  specified  period of time,  if at all. Many
products that initially appear promising are found,  after clinical  evaluation,
not to be safe and effective.  Also, the Company or the FDA may suspend clinical
trials at any time on various grounds,  including a finding that the subjects or
patients are being exposed to an unacceptable health risk.


                                       15
<PAGE>

         Assuming  successful  completion of the required clinical testing,  the
results of the preclinical  studies and of the clinical  studies,  together with
other  detailed  information,  including  information  on  the  manufacture  and
composition  of the  drug,  are  submitted  to the  FDA  in the  form  of an NDA
requesting  approval to market the product for one or more  indications.  Before
approving  an  application,  the FDA usually  will  inspect the  facility or the
facilities at which the drug is  manufactured,  and will not approve the product
unless  compliance  with  GMP  is  satisfactory.   If  the  FDA  determines  the
application and the manufacturing facilities are acceptable,  the FDA will issue
an approval  letter.  If the FDA  determines the  application  or  manufacturing
facilities  are not  acceptable,  the FDA will outline the  deficiencies  in the
submission   and  often  will  request   additional   testing  or   information.
Notwithstanding the submission of any requested additional information,  the FDA
ultimately  may decide that the  application  does not  satisfy  the  regulatory
criteria for  approval.  The Company  received an NDA for  Periostat in 1998; it
cannot be sure that any additional  approvals will be granted on a timely basis,
if at all. After  approval,  certain  changes to the approved  product,  such as
adding new indications, manufacturing changes, or additional labeling claims are
subject to further FDA review and approval. For example,  before the Company can
market  Periostat for additional  indications  now being  evaluated,  it will be
required to obtain an additional FDA approval.

         In some  circumstances,  approved  drugs are provided  protection  from
competitive  versions of the  approved  drug for  specified  time  periods.  For
example,  the law provides for patent extension or market exclusivity in certain
circumstances. Periostat, however, is not eligible for such protection.

         After NDA approval is obtained,  the Company is required to comply with
a number of post-approval requirements.  For example, as a condition of approval
of an application, the FDA may require postmarketing testing and surveillance to
monitor the drug's safety or efficacy. As part of the NDA for Periostat, the FDA
has  requested  a  postmarket  animal  study  related  to  long-term  dosing and
carcogenicity,  which was  completed in 2000.  It was found that up to 200 mg/kg
per day of doxycycline, the active ingredient in Periostat, produced no evidence
of carcinogenic activity in laboratory rats. In addition, holders of an approved
NDA are required to report certain adverse reactions and production problems, if
any, to the FDA,  and to comply with  requirements  concerning  advertising  and
promotional labeling for their products.  For example, the FDA does not permit a
manufacturer  to market or promote an approved  drug  product for an  unapproved
use. Also, quality control and manufacturing procedures must continue to conform
to GMP after approval. Accordingly,  manufacturers must continue to expend time,
money,  and effort in the area of  production  and  quality  control to maintain
compliance  with  GMP  and  other  aspects  of  regulatory  compliance.  The FDA
periodically  inspects  manufacturers  to assess  compliance  with GMP and other
requirements.  The Company buys bulk active  ingredient  for  Periostat  and the
Company's  products in development  from third party  suppliers and finishes the
products in third party manufacturing facilities.  Failure of either the Company
or its suppliers to comply with FDA  requirements  could disrupt  production and
subject the Company to enforcement sanctions.

         In addition to the applicable FDA requirements,  the Company is subject
to foreign  regulatory  authorities  governing  clinical  trials and drug sales.
Whether or not FDA  approval  has been  obtained,  approval of a  pharmaceutical
product by the comparable  regulatory  authorities of foreign  countries must be
obtained  prior  to the  commencement  of  marketing  of the  product  in  those
countries.  The  approval  process  varies from  country to country and the time
required  may



                                       16
<PAGE>

be longer or shorter than that required for FDA approval.  The Company has filed
for and  subsequently  received  approval  from the UK MCA for the  marketing of
Periostat  tablets in the United  Kingdom.  Such  application was filed with the
United Kingdom acting as a Reference  Member State,  thus providing a foundation
for the possible  submission of  applications,  later in 2001, to other European
Union countries through the Mutual Recognition Procedure.

COMPETITION
-----------

         The pharmaceutical  industry is subject to intense  competition as well
as  rapid  and  significant  technological  change.  The  Company  expects  that
competition in the  periodontal  area will be based on other factors,  including
product efficacy, safety,  cost-effectiveness,  ease of use, patient discomfort,
availability, price, patent position and effective product promotion.

         The  Company  believes  that  Periostat  is  distinguished  from  other
existing and known  periodontitis  treatments  in that it is the only  treatment
which is directed to suppression of the enzymes that degrade periodontal support
tissues.  The Company  believes that all other  therapies  focus on  temporarily
removing the bacteria associated with periodontitis. Periostat is a prescription
pharmaceutical  capsule  indicated  as an adjunct  to SRP to promote  attachment
level gain and to reduce pocket depth in patients with adult  periodontitis that
is taken by the patient  between  dental visits.  The Company  believes that the
following chart summarizes the available forms of periodontitis treatment, other
than SRP and resective surgery:

<TABLE>
<CAPTION>

Product         Product                  Dental         Delivery      Patient       Treatment
Name            Manufacturer/Marketer    Procedure       Route     Administered       Focus
------------    ----------------------   ---------      --------   ------------    -----------
<S>             <C>                        <C>          <C>            <C>         <C>
Periostat(R)    CollaGenex                 No           Systemic       Yes         Tissue
                Pharmaceuticals,                                                   degradation
                Inc.

Atridox(TM)     Atrix Laboratories/        Yes           Local         No          Bacteria
                Glaxo Smith Kline
                Beecham

Periochip(TM)   Dexxon Ltd.                Yes           Local         No          Bacteria

Arestin(TM)     Orapharma, Inc.            Yes           Local         No          Bacteria

</TABLE>

         Many  of the  companies  participating  in the  periodontal  area  have
substantially greater financial,  technical and human resources than the Company
and may be better equipped to develop,  manufacture and market  products.  These
companies may develop and introduce  products and processes  competitive with or
superior to those of the Company.

EMPLOYEES
---------

         The Company  historically  has outsourced its  manufacturing,  clinical
trials, NDA preparation and other activities. The Company intends to continue to
outsource many of the activities  which it historically  has  outsourced.  As of
December 31, 2000,  the Company  employed  146 persons.  Each of its  management
personnel has had extensive prior experience with pharmaceutical,  biotechnology
or medical products  companies.  There can be no assurance that the Company will
be able to recruit and retain  qualified  inside sales and marketing  personnel,
additional  foreign  sub-licensees or distributors or marketing partners or that
the Company's

                                       17
<PAGE>

marketing and sales efforts will be successful. Currently, none of the Company's
employees  are covered by  collective  bargaining  agreements.  In general,  the
Company's  employees  are  covered by  confidentiality  agreements.  The Company
considers relations with its employees to be excellent.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
-------------------------------------------------

         IF PERIOSTAT IS NOT ADOPTED  ROUTINELY  BY DENTAL  PROFESSIONALS  OR IF
MANAGED CARE  PROVIDERS DO NOT CONTINUE TO  REIMBURSE  PATIENTS,  THE  COMPANY'S
SALES GROWTH WILL SUFFER.

         The Company's  growth and success  depends in large part on its ability
to continue to  demonstrate  the safety and  effectiveness  of Periostat for the
treatment  of gum  disease  to  dental  practitioners.  Periostat  is the  first
long-term  medical  therapy  for  any  dental  disease,  and  dentists  are  not
accustomed to prescribing  drugs for a minimum 90-day duration.  Periostat works
by suppressing  certain  enzymes  involved in the periodontal  disease  process,
which is a new concept for many  dentists  who believe that  removing  bacterial
plaque is the only way to treat this disease.  Accordingly,  the Company's sales
efforts are largely focused on educating dental  professionals about an entirely
new approach to treating  periodontitis.  Although  over 32,000  dentists in the
United States have written at least one prescription for Periostat,  a number of
dentists  have not adopted  Periostat  routinely  into their  treatment of adult
periodontitis.  Other  dentists have  prescribed  Periostat for only a subset of
their eligible  patients,  typically their most advanced or refractory cases. If
the Company is unable to initiate  and/or expand usage of Periostat by dentists,
its sales growth will suffer.

         Approximately  65% of the large  managed  care  providers in the United
States  (defined  as those that cover  100,000 or more  lives)  reimburse  their
patients for Periostat,  typically requiring a modest co-payment.  The Company's
goal is to achieve  reimbursement  from  approximately  75% of the large managed
care  providers,  since the  remainder  have  policies that do not reimburse for
drugs to treat dental  conditions.  Patients who are not  reimbursed  by managed
care providers may choose not to accept  Periostat as a treatment.  In addition,
the Company has not yet  achieved  reimbursement  from the largest  managed care
provider in  California,  thus  limiting  prescription  and sales growth in that
state.

         THE COMPANY RELIES ON PERIOSTAT FOR MOST OF ITS REVENUE.

         During   1999  and  2000,   Periostat   accounted   for  95%  and  84%,
respectively,  of  the  Company's  total  net  revenues.  Although  the  Company
currently  derives revenues from co-promoting two (2) other products (for one of
which the Company has received a notice of termination  effective in April 2001)
and from licensing fees from foreign marketing  partners,  the Company's revenue
and  profitability  in the near future will depend on the  Company's  ability to
successfully market and sell Periostat.

         THE COMPANY ANTICIPATES FUTURE LOSSES.

         From the Company's  founding in 1992 through the  commercial  launch of
Periostat  in November,  1998,  the Company had no revenue from sales of its own
products.  During  the years  ended  December  31,  1999 and 2000,  the  Company
incurred  net  losses  of   approximately   $14.6   million  and  $8.8  million,
respectively. From inception through December 31, 2000, the


                                       18
<PAGE>

Company has  incurred an  aggregate  net loss of $61.3  million.  The  Company's
historical losses have resulted primarily from the expenses  associated with its
pharmaceutical  development  program,  clinical trials, the regulatory  approval
process associated with Periostat and sales and marketing activities relating to
Periostat.   The  Company  expects  to  incur   significant   future   expenses,
particularly with respect to the sales and marketing of Periostat.  As a result,
the Company anticipates losses through at least the first nine months of 2001.

         THE COMPANY HAS A LIMITED  MARKETING  AND SALES  HISTORY AND MAY NOT BE
ABLE TO SUCCESSFULLY MARKET ITS PRODUCT CANDIDATES.

         The  Company  has a limited  history  of  marketing,  distributing  and
selling  pharmaceutical  products in the dental  market.  In January  1999,  the
Company  first trained a sales force of sales  representatives  and managers and
began to promote  Periostat  to the dental  community.  The Company  markets and
sells its  products  in the United  States  through  this  direct  sales  force.
Further,  the Company has entered  into  agreements  to market  Periostat,  upon
receipt of the necessary foreign regulatory  approvals,  in certain countries in
Europe,  Israel,  Japan  and  Canada,  and the  Company  continues  to  evaluate
partnering  arrangements  in other countries  outside the United States.  If the
Company is unable to continue to recruit,  train and retain sales and  marketing
personnel,  the  Company  will be unable to  successfully  expand  its sales and
marketing efforts.  Furthermore, if the Company's foreign partners do not devote
sufficient resources to perform their contractual  obligations,  the Company may
not achieve its foreign sales goals.

         THE  COMPANY'S  COMPETITIVE  POSITION  IN THE  MARKETPLACE  DEPENDS  ON
ENFORCING AND SUCCESSFULLY DEFENDING ITS INTELLECTUAL PROPERTY RIGHTS.

         In  order  to be  competitive  in the  pharmaceutical  industry,  it is
important to establish, enforce, and successfully defend patent and trade secret
protection for the Company's established and new technologies.  The Company must
also avoid liability from infringing the proprietary rights of others.

         The Company's core  technology is licensed from SUNY and other academic
and research  institutions  collaborating  with SUNY. Under the SUNY License the
Company has an exclusive  worldwide  license to SUNY's rights in certain patents
and patent  applications to make and sell products  employing  tetracyclines  to
treat certain disease  conditions.  The SUNY License imposes various payment and
reporting  obligations  on the Company and the Company's  failure to comply with
these  requirements  permits SUNY to  terminate  the SUNY  License.  If the SUNY
License is terminated,  the Company would lose its right to exclude  competitors
from  commercializing  similar products,  and the Company could be excluded from
marketing  the same  products if SUNY  licensed the  underlying  technology to a
competitor after terminating the SUNY License.

         SUNY owns  twenty-eight  (28) United States patents and four (4) United
States  patent  applications  that are  licensed  to the  Company.  The  patents
licensed  from SUNY  expire  between  2004 and 2018.  Two (2) of the patents are
related to Periostat  and expire in 2004 and 2007.  Technology  covered by these
patents becomes available to competitors as the patents expire.

         Since many of the Company's  patent rights cover new  treatments  using
tetracyclines, which are generally available for their known use as antibiotics,
the Company may be required to


                                       19
<PAGE>

bring  expensive  infringement  actions to enforce  the  Company's  patents  and
protect  its  technology.  Although  federal  law  prohibits  making and selling
pharmaceuticals for infringing use, competitors and/or practitioners may provide
generic forms of  tetracycline  for  treatment(s)  which  infringe the Company's
patents,  rather than prescribe the Company's Periostat product.  Enforcement of
patents can be expensive and time consuming.

         The Company's  success also depends upon know-how,  trade secrets,  and
the skills,  knowledge and experience of its scientific and technical personnel.
To that end,  the  Company  requires  all of its  employees  and,  to the extent
possible, all consultants,  advisors and research  collaborators,  to enter into
confidentiality agreements prohibiting unauthorized disclosure.  With respect to
information  and  chemical   compounds  the  Company  provides  for  testing  to
collaborators  in academic  institutions,  the Company cannot guarantee that the
institutions  will not assert  property  rights in the results of such tests nor
that a license can be reasonably  obtained from such  institutions  which assert
such  rights.  Failure to obtain the  benefit of such  testing  could  adversely
affect the  Company's  commercial  position  and,  consequently,  its  financial
condition.

         IF THE COMPANY LOSES ITS SOLE SUPPLIER OF  DOXYCYCLINE OR THE COMPANY'S
CURRENT MANUFACTURER OF PERIOSTAT, THE COMPANY'S  COMMERCIALIZATION OF PERIOSTAT
WILL BE INTERRUPTED OR LESS PROFITABLE.

         The Company  relies on a single  supplier for  doxycycline,  the active
ingredient in  Periostat.  There are  relatively  few  alternative  suppliers of
doxycycline and this supplier  produces the majority of the doxycycline  used in
the United States. If the Company is unable to procure a commercial  quantity of
doxycycline  from its  current  supplier  on an ongoing  basis at a  competitive
price,  or if the Company cannot find a replacement  supplier in a timely manner
or with favorable pricing terms, the Company's costs may increase  significantly
and the Company may experience delays in the supply of Periostat.

         The Company has historically  relied on a single  third-party  contract
manufacturer,  Applied  Analytical  Industries,  Inc., to produce Periostat in a
capsule  formulation.  The Company's  previously  reported  dispute with Applied
Analytical  has been  resolved  and the  Company  has agreed to pay a de minimus
amount to Applied  Analytical  and to incur  certain  price  increases on future
quantities  of  Periostat  manufactured  for the  Company.  Concurrent  with the
resolution  of their  dispute,  AAI served notice of its intent to terminate the
agreement to supply as of November 2001. The agreement with AAI provides for AAI
to commit to an  additional  twelve  (12)  months  supply of  product at a price
premium,  should the Company be unable to qualify an  alternative  manufacturing
source  subsequent  to the  termination  of the AAI  agreement.  An inability to
maintain such arrangements with Applied Analytical could result in delays in the
supply of  Periostat.  The Company has entered  into an  agreement  with another
contract manufacturer,  PMRS, on a tablet formulation for Periostat. The Company
has placed an initial  purchase order with PMRS and committed to certain minimum
purchases   through  2002.  Upon  the  termination  of  the  Company's   current
arrangements   with  AAI,  PMRS  will  become  the  sole  third-party   contract
manufacturer  to supply  Periostat  to the  Company.  Any  inability  of PMRS to
produce and supply  product on agreed  upon terms could  result in delays in the
supply of  Periostat.  The  Company  also  intends to contract  with  additional
manufacturers for the commercial manufacture of Periostat.  The Company believes
that  it  could  take  up  to  one  year  to  successfully  transition  to a new
manufacturer.


                                       20
<PAGE>

        THE COMPANY IS SUBJECT TO EXTENSIVE  GOVERNMENT  REGULATION,  INCLUDING
THE REQUIREMENT OF APPROVAL BEFORE ITS PRODUCTS MAY BE MARKETED.

         The FDA has approved only one of the Company's products, Periostat, for
sale in the United States. The Company's other products are in development,  and
will have to be  approved  by the FDA before  they can be marketed in the United
States. If the FDA does not approve the Company's  products in a timely fashion,
or does not approve them at all, the Company's business and financial  condition
may be adversely affected.

         In addition,  the Company and its products are subject to comprehensive
regulation by the FDA both before and after products are approved for marketing.
The FDA regulates, for example, research and development,  including preclinical
and  clinical   testing,   safety,   effectiveness,   manufacturing,   labeling,
advertising,  promotion,  export,  and marketing of its products.  The Company's
failure to comply with  regulatory  requirements  may result in various  adverse
consequences,  including FDA delay in approving or refusal to approve a product,
recalls, withdrawal of an approved product from the market and/or the imposition
of civil or criminal sanctions.

         The  Company  is,  and will  increasingly  be,  subject to a variety of
foreign  regulatory regimes governing clinical trials and sales of its products.
Other than  Periostat,  which has been approved by the Medicines  Control Agency
for the marketing in the United  Kingdom,  the Company's  products have not been
approved in any foreign country.  Whether or not FDA approval has been obtained,
approval  of a product  by the  comparable  regulatory  authorities  of  foreign
countries must be obtained prior to the commencement of marketing of the product
in those  countries.  The approval  process varies from country to country,  and
other countries may also impose post-approval requirements.

         IF THE COMPANY'S PRODUCTS CAUSE INJURIES, THE COMPANY MAY INCUR
SIGNIFICANT EXPENSE AND LIABILITY.

         The Company's  business may be adversely  affected by potential product
liability  risks  inherent  in  the  testing,  manufacturing  and  marketing  of
Periostat  and other  products  developed  by or for us. The  Company  has $10.0
million in product  liability  insurance for Periostat.  This level of insurance
may not  adequately  protect  the  Company  against  product  liability  claims.
Insufficient  insurance coverage or the failure to obtain  indemnification  from
third  parties  for  their  respective  liabilities  may  expose  us to  product
liability  claims  and/or  recalls  and  could  cause  the  Company's  business,
financial condition and results of operations to decline.

         IF  THE  COMPANY   NEEDS   ADDITIONAL   FINANCING,   AND  FINANCING  IS
UNAVAILABLE, THE COMPANY'S ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS AND ITS
OPERATIONS WILL BE ADVERSELY AFFECTED.

         The Company has historically financed its operations through public and
private equity financings. The Company's capital requirements depend on numerous
factors,   including  its  ability  to  successfully   commercialize  Periostat,
competing technological and market developments,  the Company's ability to enter
into  collaborative  arrangements for the development,  regulatory  approval and
commercialization  of  other  products,  and the  cost of


                                       21
<PAGE>

filing,   prosecuting,   defending  and   enforcing   patent  claims  and  other
intellectual property rights. The Company anticipates that it may be required to
raise additional capital in order to conduct its operations. Additional funding,
if necessary,  may not be available on favorable  terms,  if at all. If adequate
funds are not  available,  the Company  may be  required  to curtail  operations
significantly  or  to  obtain  funds  through  arrangements  with  collaborative
partners or others that may require the Company to relinquish  rights to certain
of its  technologies,  product  candidates,  products or potential  markets.  At
December  31,  2000,  the  Company had cash,  cash  equivalents  and  short-term
investments  of  approximately  $5.4 million.  In March 2001, the Company raised
approximately  $6.9  million,  net of  offering  costs,  through the sale of its
Common Stock and Warrants to purchase  shares of its Common Stock in the future.
The Company  anticipates  that its  existing  working  capital,  including  such
additional  $6.9 million  raised by the Company will be  sufficient  to fund its
operations through at least the middle of 2002.

         DELAWARE  LAW,  THE  COMPANY'S  CERTIFICATE  OF  INCORPORATION  AND THE
COMPANY'S  BY-LAWS CONTAIN  PROVISIONS  THAT COULD  DISCOURAGE A TAKEOVER OF THE
COMPANY.

         Anti-takeover  provisions of Delaware law, the Company's Certificate of
Incorporation and the Company's By-Laws could make it more difficult for a third
party to acquire control of the Company, even if such change would be beneficial
to the  Company's  stockholders.  The  Company's  Certificate  of  Incorporation
provides that the Company's  board of directors may issue  preferred  stock with
superior  rights  and  preferences  without  common  stockholder  approval.  The
issuance of  preferred  stock could have the effect of  delaying,  deterring  or
preventing  a change in  control.  The  Company's  board of  directors  has also
adopted a "poison  pill"  rights plan that may further  discourage a third party
from making a proposal to acquire the Company.  In addition,  in connection with
the  issuance of the  Company's  preferred  stock,  the rights of the  Company's
common  stockholders may be limited in certain instances with respect to divided
rights,  rights on  liquidation,  winding up and  dissolution  and certain other
matters submitted to a vote of the Company's common stockholders.

         BECAUSE THE COMPANY'S  EXECUTIVE  OFFICERS,  DIRECTORS  AND  AFFILIATED
ENTITIES OWN  APPROXIMATELY  43.1% OF THE COMPANY'S  CAPITAL STOCK, SUCH PERSONS
COULD  CONTROL  THE  COMPANY'S  ACTIONS  IN A  MANNER  THAT  CONFLICTS  WITH THE
COMPANY'S INTERESTS AND THE INTERESTS OF THE COMPANY'S OTHER STOCKHOLDERS.

         Currently,  the Company's executive officers,  directors and affiliated
entities together beneficially own approximately 43.1% of the outstanding shares
of common stock or equity securities convertible into common stock. As a result,
these stockholders,  acting together,  or in the case of the Company's preferred
stockholders, in certain instances, as a class, will be able to exercise control
over corporate actions requiring stockholder approval, including the election of
directors.  This  concentration  of ownership may have the effect of delaying or
preventing a change in control,  including  transactions  in which the Company's
stockholders  might  otherwise  receive a premium  for  their  shares  over then
current market prices.



                                       22
<PAGE>

         THE COMPANY'S STOCK PRICE IS HIGHLY  VOLATILE,  AND THEREFORE THE VALUE
OF AN INVESTMENT IN THE COMPANY MAY FLUCTUATE SIGNIFICANTLY.

         The market price of the Company's  common stock has fluctuated and will
continue to  fluctuate  as a result of  variations  in the  Company's  quarterly
operating  results.  These fluctuations may be exaggerated if the trading volume
of the Company's  common stock is low. In addition,  the stock market in general
has experienced  dramatic price and volume fluctuations from time to time. These
fluctuations may or may not be based upon any business or operating results. The
Company's  common stock may  experience  similar or even more dramatic price and
volume fluctuations which may continue indefinitely.



                                       23
<PAGE>

ITEM 2.  PROPERTIES.

         The Company owns no real  property.  From January 1995 to May 1999, the
Company  leased  3,500  square feet of office  space at 301 South State  Street,
Newtown,  Pennsylvania  under two leases.  In May 1999,  the  Company  moved its
principal executive offices to 41 University Drive, Newtown,  Pennsylvania.  The
newly leased premises consist of  approximately  14,204 square feet and the term
of the lease is one hundred and twenty-two (122) months.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company is not a party to any material legal proceedings.

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

         Not applicable.



                                       24
<PAGE>

                                    PART II


ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         Prior to June 1996,  there was no established  market for the Company's
common  stock.  Since June 20,  1996,  the common stock has traded on the Nasdaq
National Market (the "NNM") under the symbol "CGPI."

         The following table sets forth the high and low bid information for the
common  stock for each of the quarters in the period  beginning  January 1, 1999
through  December  31,  2000 as  reported on the NNM.  Such  quotations  reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.


                       Quarter Ended                   High         Low
           -----------------------------------     ------------  ---------

           March 31, 1999.....................        $12.44       $8.00
           June 30, 1999......................        $11.25       $7.50
           September 30, 1999.................        $23.94       $9.13
           December 31, 1999..................        $24.56      $16.19
           March 31, 2000.....................        $30.38      $11.88
           June 30, 2000......................        $16.06       $7.50
           September 30, 2000.................         $9.91       $6.44
           December 31, 2000..................         $8.00       $2.75


         As of March 15, 2001,  the  approximate  number of holders of record of
the common stock was 119 and the approximate number of beneficial holders of the
common stock was 3,800.

         The Company has never declared or paid any cash dividends on its common
stock.  Except as set forth below,  the Company intends to retain  earnings,  if
any, to fund future growth and the  operation of its business.  On May 12, 1999,
the Company  consummated a $20.0 million  financing  through the issuance of its
Series D Cumulative  Convertible Preferred Stock. As a result of such financing,
the Company has  cumulative  cash and common stock  dividend  obligations to the
holders of the Series D Cumulative  Convertible  Preferred Stock. Such financing
arrangement also limits the Company's  ability to generally declare dividends to
its common stockholders. In addition, the Company's ability to generally declare
dividends  to its common  stockholders  is  further  limited by the terms of its
credit  facility with Silicon  Valley Bank.  See  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA.

         The selected  consolidated  financial data set forth below with respect
to the  Company's  statement  of  operations  data for each of the  years in the
three-year  period ended December 31, 2000, and with respect to the consolidated
balance  sheet  data at  December  31,  1999 and 2000 are  derived  from and are
qualified by reference to the audited consolidated  financial statements and the
related  notes  thereto of the Company  found at "Item 14.  Exhibits,  Financial
Statement Schedules, and Reports on Form 8-K" herein. The consolidated statement
of  operations  data for


                                       25
<PAGE>

the years ended December 31, 1996 and 1997 and with respect to the  consolidated
balance  sheet data as of December  31,  1996,  1997 and 1998 are  derived  from
consolidated  audited financial statements not included in this Annual Report on
Form 10-K/A. The selected consolidated  financial data set forth below should be
read in  conjunction  with and is qualified  in its  entirety by, the  Company's
audited  consolidated  financial  statements  and related notes thereto found at
"Item 14. Exhibits,  Financial Statement Schedules, and Reports on Form 8-K" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of  Operations"  which are  included  elsewhere  in this  Annual  Report on Form
10-K/A.

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                               ---------------------------------------------------------------------
                                                     1996          1997          1998         1999          2000
                                               ------------   -----------   ------------   -----------   -----------
Consolidated  Statement
  of Operations Data:                                           (in thousands except for per share data)
                                               ---------------------------------------------------------------------

<S>                                            <C>            <C>           <C>            <C>           <C>

Revenues:
   Product sales.........................      $       --     $      --     $   3,053      $   15,211    $   20,501
   License revenues......................             400           325           400             100           530
   Contract revenues.....................              --             9             8             770         3,240
                                               ------------   -----------   ------------   -----------   -----------
Total revenues...........................             400           334         3,461          16,081        24,271
Operating expenses:
   Cost of product sales.................              --            --           745           3,139         4,070
   Research and development..............           4,436         4,200         4,670           5,005         3,128
   Selling, general and administrative...           2,527         6,096        10,600          23,180        25,746
                                               ------------   -----------   ------------   -----------   -----------
Operating loss...........................          (6,563)       (9,962)      (12,554)        (15,243)       (8,673)
Interest income..........................             645         1,338           988             851           613
Interest expense.........................              --            --            --            (197)          (15)
Other income (expense)...................              --            --            --              (2)            9
                                               ------------   -----------   ------------   -----------   -----------
Loss before cumulative effect of
   change in accounting principle........          (5,918)       (8,624)      (11,566)        (14,591)       (8,066)
Cumulative effect of change in
   accounting principle(1)...............              --            --            --              --          (764)
                                               ------------   -----------   ------------   -----------   -----------
Net loss.................................          (5,918)       (8,624)      (11,566)        (14,591)       (8,830)
Net loss allocable to common
   stockholders..........................      $   (6,638)    $  (8,624)    $ (11,566)     $  (15,683)   $  (10,519)

Net loss per share allocable to common
   stockholders before cumulative effect
   of change in accounting principle:
   Basic.................................      $    (1.74)    $   (1.04)    $   (1.35)     $    (1.82)   $    (1.12)
   Diluted...............................           (1.72)        (1.04)        (1.35)          (1.82)        (1.12)
Net loss per share allocable to common
   stockholders(2):
   Basic.................................      $    (1.74)    $   (1.04)    $   (1.35)     $    (1.82)   $    (1.21)
   Diluted...............................           (1.72)        (1.04)        (1.35)          (1.82)        (1.21)
Shares used in computing per share
amounts(2):
   Basic.................................           3,809         8,291         8,579           8,598         8,712
   Diluted...............................           3,864         8,291         8,579           8,598         8,712
--------------------------------------------------------------------------------------------------------------------

</TABLE>



                                       26
<PAGE>

<TABLE>

<CAPTION>

                                                                     As of December 31,
                                          ---------------------------------------------------------------------
                                                1996          1997          1998           1999        2000
                                          -------------- ------------- -------------- ------------- -----------
Balance Sheet Data:                                                    (in thousands)
                                          ---------------------------------------------------------------------
<S>                                       <C>            <C>           <C>            <C>           <C>
Cash, cash equivalents and short-term
   investments......................      $   18,215     $   22,771    $  10,250      $   14,367    $    5,448
Total assets........................          18,437         23,165       14,740          18,563        10,431
Note payable, less current portion..              --             --           --             116            47
Accumulated deficit.................         (17,739)       (26,362)     (37,928)        (53,611)      (64,130)
Total stockholders' equity..........          17,592         20,708        9,281          13,607         5,264

<FN>

(1)     See Note 7 of Notes to  Consolidated  Financial  Statements  for  information
        concerning  the  cumulative effect of change in accounting principle.

(2)     See  Note 2 of Notes to Consolidated Financial Statements for information
        concerning computation of net loss per share.
</FN>

</TABLE>

                                       27
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS.

Overview
--------

         The Company is a specialty  pharmaceutical company focused on providing
innovative  medical therapies to the dental market. The Company's first product,
Periostat, is a prescription pharmaceutical capsule that was approved by the FDA
in September 1998 as an adjunct to scaling and root planing,  the most prevalent
therapy for periodontitis, to promote attachment level gain and to reduce pocket
depth in patients with adult  periodontitis.  The Company is marketing Periostat
to the dental community through its own professional dental pharmaceutical sales
force of approximately 120 sales representatives and managers.  This sales force
also  co-promotes  Vioxx, a prescription  non-sterodial  anti-inflammatory  drug
developed by Merck and Denavir,  a prescription  cold sore  medication  owned by
Novartis,  although Novartis has terminated its co-promotion  agreement with the
Company  effective  in April 2001,  and the Company is  actively  seeking  other
products to market to the dental community or directly to consumers.

         The Company began  operations in January 1992 and functioned  primarily
as a research  and  development  company  until 1998.  During this  period,  the
Company  operated with a minimal  number of  employees,  and  substantially  all
pharmaceutical  development  activities were contracted to independent  contract
research  and other  organizations.  Following  FDA  approval  of  Periostat  in
September  1998,  the Company  significantly  increased its number of employees,
primarily  in the  areas  of sales  and  marketing.  The  Company  continues  to
outsource its research and development  activities as well as its  manufacturing
and distribution functions.

         The Company has incurred  losses each year since  inception  and had an
accumulated  deficit of $64.1 million at December 31, 2000. The Company  expects
to continue to incur losses in the foreseeable  future from expenditures on drug
development, marketing, manufacturing and administrative activities.

         Statements contained or incorporated by reference in this Annual Report
on Form  10-K/A  that are not  based  on  historical  fact are  "forward-looking
statements" within the meaning of Section 21E of the Securities  Exchange Act of
1934,  as amended.  Forward-looking  statements  may be identified by the use of
forward-looking   terminology  such  as  "may,"  "will,"  "expect,"  "estimate,"
"anticipate,"  "continue,"  or similar  terms,  variations  of such terms or the
negative of those terms.  This Form 10-K/A contains  forward-looking  statements
that  involve  risks and  uncertainties.  The  Company's  business  of  selling,
marketing  and  developing  pharmaceutical  products  is  subject to a number of
significant  risks,  including  risks  relating  to  the  implementation  of the
Company's  sales and marketing  plans for Periostat,  risks inherent in research
and development  activities,  risks  associated  with  conducting  business in a
highly  regulated  environment  and  uncertainty  relating to clinical trials of
products under development. The success of the Company depends to a large degree
upon the market acceptance of Periostat by periodontists,  dental practitioners,
other  health care  providers,  patients  and  insurance  companies.  Other than
Periostat,  which has been FDA approved for  marketing in the United  States and
approved by the Medicines  Control  Agency for marketing in the United  Kingdom,
there can be no assurance  that any of the Company's  other  product  candidates
will be approved by any



                                       28
<PAGE>

regulatory authority for marketing in any jurisdiction or, if approved, that any
such products or Vioxx will be successfully  commercialized by the Company. As a
result of these risks,  and others  expressed from time to time in  CollaGenex's
filings  with the  Securities  and Exchange  Commission,  the  Company's  actual
results may differ  materially  from the results  discussed in or implied by the
forward-looking statements contained herein.

Results of Operations
---------------------

         From its founding  through the quarter ended  September  30, 1998,  the
Company  had no  revenues  from  sales of its own  products.  During  the fourth
quarter  of 1998,  the  Company  achieved  net  product  sales  of $3.1  million
following the commercial  launch of Periostat in November 1998. Most of the 1998
sales represented  initial wholesale and retail stocking.  During the year ended
December 31, 1999, the Company  achieved net product sales of $15.2 million from
sales of  Periostat.  In addition,  the Company  generated  $770,000 in contract
revenues  from its two (2)  co-promotion  agreements  (one  (1) of  which  shall
terminate in April 2001) and $100,000 in license fees relating to the signing of
a distribution agreement for Periostat in Canada. During the year ended December
31, 2000, the Company  achieved net product sales of $20.5 million from sales of
Periostat.  In addition,  in 2000 the Company generated $3.2 million in contract
revenues  from its two (2)  co-promotion  agreements  (one  (1) of  which  shall
terminate in April 2001) and $530,000 in license and milestone fees from various
foreign  distribution  and  marketing  agreements  for  Periostat.  This  amount
included $397,000 of license revenues that were deferred upon the implementation
of Staff  Accounting  Bulletin  ("SAB") 101,  effective  January 1, 2000.  These
amounts were previously  recognized as license revenues in prior years under the
historical revenue recognition policy prior to the adoption of SAB 101.

         The Company realized a net loss in 2000 resulting primarily from higher
revenue offset by higher planned sales,  marketing and  administrative  expenses
incurred  during such period.  Total operating  expenses  consist of the cost of
product  sales,  research and  development  expenses  and  selling,  general and
administrative  expenses.  Cost of product  sales  consists  primarily of direct
manufacturing expenses and royalties.  Research and development expenses consist
primarily of funds paid to contract research  organizations for the provision of
services  and  materials  for  drug  development,   ongoing   manufacturing  and
formulation   enhancements   and   clinical   trials.   Selling,   general   and
administrative  expenses consist  primarily of personnel  salaries and benefits,
direct marketing costs,  professional and consulting fees, insurance and general
office expenses.

         Years Ended December 31, 2000 and December 31, 1999
         ---------------------------------------------------

         Revenues.  The Company  realized  $24.3 million in net revenues  during
2000 compared to $16.1  million  during 1999.  Revenues in 2000  included  $20.5
million in net sales of Periostat, $3.2 million in contract revenues, which were
derived from the Company's  co-promotion  of Vioxx and Denavir,  and $530,000 in
foreign  license and  milestone  revenues for  Periostat.  Revenues from Denavir
accounted for approximately  $700,000 of such contract revenues. The Company has
received a thirty  (30) day  termination  notice by letter  dated March 14, 2001
from Novartis Pharmaceuticals Corporation, the owner of Denavir, with respect to
the Company's  co-promotion  agreement with Novartis for Denavir.  In accordance
with SAB 101, which was adopted in 2000, the 2000 licensing revenues of $530,000
were attributable, in part, to the


                                       29
<PAGE>

recognition of up-front  license fees received for various  agreements which are
being recognized over the expected term of these agreements. License revenues in
2000 also  included  $397,000  that were  recorded in earlier years prior to the
adoption of SAB 101 which were deferred as a result of the cumulative  effect of
a change in accounting  principle as of January 1, 2000.  Licensing  revenues in
1999 included $100,000 in connection with an agreement with Pharmascience,  Inc.
pursuant to which  Pharmascience  Inc. will market  Periostat in Canada  pending
requisite  regulatory  approval.  However,  under  SAB 101,  licensing  revenues
recognized in 1999 would have been $58,000.

         Cost of product  sales.  Cost of product  sales were $4.1  million,  or
19.9% of net product  sales in 2000  compared to $3.1  million,  or 20.6% of net
product  sales in 1999.  This decrease in costs of product sales as a percentage
of net product sales resulted primarily from the absence of trade allowances and
price increases for Periostat during 2000.

         Research and development  expenses.  Research and development  expenses
decreased  to $3.1  million  in 2000 from $5.0  million in 1999.  This  decrease
resulted  primarily from fewer expenses  related to Phase 3b clinical studies to
support future marketing activities for Periostat,  decreased  manufacturing and
formulation  development  work for  Periostat  tablets and reduced  research and
development  activities.  Such  decreases  were  partially  offset by a $324,000
non-cash  compensation  charge  incurred during the year ended December 31, 2000
related  to  accelerating  the  vesting  on stock  options  granted  to  certain
non-employees  in 1999.  In 2000,  the Company's  expenditures  for research and
development  included,  among  other  things,  regulatory  and  consulting  fees
associated with the Company's NDA for Periostat  tablets submitted to the FDA as
well as  applications  submitted  to the UK MCA for  marketing  approval  of the
tablet formulation of Periostat in the United Kingdom,  expenditures relating to
the ongoing  Phase IV marketing  studies of Periostat,  as well as  expenditures
incurred  relating  to a Phase I study of  Metastat.  Research  and  development
expenses for 1999 were  primarily  for Phase IV clinical  studies to support the
future marketing activities of Periostat,  ongoing manufacturing and formulation
development work for Periostat and research and development activities funded by
the Company at SUNY.

         Selling,  general and  administrative  expenses.  Selling,  general and
administrative expenses increased to $25.7 million in 2000 from $23.2 million in
1999.  This  increase  was  mainly  due to higher  advertising  and  promotional
expenses for Vioxx pursuant to the Company's  co-promotion  agreement with Merck
and  the  initiation  of a  direct-to-consumer  advertising  test  campaign  for
Periostat  which commenced in October 2000.  Significant  components of selling,
general and  administrative  expenses  incurred in 2000 include $12.9 million in
direct selling and sales training  expenses,  $9.0 million in marketing expenses
for  Periostat  and  Vioxx,  and $3.8  million  in  general  and  administrative
expenses, which include business development,  finance and corporate activities.
During 1999, the Company incurred $10.3 million in direct selling expenses, $9.3
million in marketing  expenses,  primarily  for  Periostat,  and $3.6 million in
general and administrative expenses.

         Other income/expenses.  Interest income decreased from $851,000 for the
year ended  December 31, 1999  compared to $613,000 for the year ended  December
31,  2000.  This  decrease  was due to lower  balances  in cash  and  short-term
investments  during the year  December 31, 2000.  Interest  expense for the year
ended  December  31, 2000 was  $15,000,  compared to


                                       30
<PAGE>

$197,000 for the year ended  December 31, 1999.  This decrease was primarily due
to the repayment of a $10.0 million short term note executed in connection  with
the Company's Financing (as hereinafter  defined) in May 1999. Such decrease for
2000 was  offset by  interest  expense  related  to the  $219,000  note  payable
executed by the Company in April 1999.

         Change in  accounting  principle.  The  Company  recognized  a $764,000
charge during the year ended December 31, 2000 from the  cumulative  effect of a
change in  accounting  principle,  effective  as of January  1,  2000,  upon the
adoption of SAB 101. This change in accounting principle primarily reflected the
deferral of up-front  licensing  revenues  recognized in prior years.  Under SAB
101,  up-front  licensing fees must be recognized over the expected  performance
period of the  relevant  agreements.  Accordingly,  at December  31,  2000,  the
Company has  recorded  approximately  $739,000 in  deferred  revenue  which will
recognized over the expected performance period of each respective agreement.

         Preferred stock dividend. Preferred stock dividends increased from $1.1
million  during the year ended December 31, 1999 to $1.7 million during the year
ended December 31, 2000. Such preferred stock  dividends,  paid in shares of the
Company's  Common  Stock,  were  the  result  of the  Company's  obligations  in
connection with the issuance of its Series D Stock (as  hereinafter  defined) in
May 1999.

         Years Ended December 31, 1999 and December 31, 1998
         ---------------------------------------------------

         Revenues.  The Company  realized  $16.1 million in net revenues  during
1999  compared to $3.5 million  during  1998.  Revenues in 1999  included  $15.2
million  in net sales of  Periostat  and  $870,000  in  licensing  and  contract
revenues.  Revenues from Denavir  accounted for  approximately  $511,000 of such
contract revenues. The Company has received a thirty (30) day termination notice
by letter  dated  March 14, 2001 from  Novartis  with  respect to the  Company's
co-promotion agreement with Novartis for Denavir. The 1999 licensing revenues of
$100,000 were  attributable to a licensing  agreement with  Pharmascience,  Inc.
pursuant to which  Pharmascience,  Inc., will market Periostat in Canada pending
requisite  regulatory  approval.  Revenues  in 1998  included  a  non-refundable
$400,000  licensing  fee  from  Laboratories  Pharmascience  under  a  licensing
agreement pursuant to which  Laboratories  Pharmascience was to market Periostat
in France pending requisite regulatory approval. Such agreement was subsequently
terminated.

         Cost of product sales. Cost of product sales were $3.1 million or 20.6%
of net product sales in 1999, compared to $745,000 or 24.4% of net product sales
in 1998.  This  improvement in gross margin  resulted from the absence of launch
trade  allowances in 1999 and lower royalty rates applicable to the higher sales
achieved in 1999 compared to 1998.

         Research and development  expenses.  Research and development  expenses
increased to $5.0 million in 1999 from $4.7 million in 1998.  In 1999,  research
and development expenses were primarily for Phase IV clinical studies to support
the  future  marketing  activities  of  Periostat,   ongoing  manufacturing  and
formulation   development  work  for  Periostat  and  research  and  development
activities funded by the Company at SUNY. Research and development  expenses for
1998 consisted primarily of costs associated with the Company's amendment to its



                                       31
<PAGE>

NDA for  Periostat,  a Phase III  clinical  trial  intended  to  support  future
marketing  activities for Periostat and certain  pre-clinical  studies for other
potential compounds under development.

         Selling,  general and  administrative  expenses.  Selling,  general and
administrative expenses increased to $23.2 million in 1999 from $10.6 million in
1998.  This increase was due primarily to higher selling and marketing  expenses
for a full year of commercial activities for Periostat in 1999 and the hiring of
additional sales personnel as Periostat sales commenced in the fourth quarter of
1998.  Significant  components of selling,  general and administrative  expenses
incurred in 1999 include $10.3 million in direct selling expenses,  $9.3 million
in marketing expenses,  primarily for Periostat, and $3.6 million in general and
administrative  expenses,  which  include  business  development,   finance  and
corporate  activities.  During 1998, the Company incurred $2.8 million in direct
and contracted selling expenses,  $5.0 million in marketing expenses,  primarily
for  Periostat,  launched  in  November  1998,  and $2.8  million in general and
administrative expenses.

         Other income/expenses.  Interest income decreased from $988,000 in 1998
to  $851,000  in  1999.  This  decrease  was due to lower  balances  in cash and
short-term  investments  as a result of normal  operating  activities.  Interest
expense for the year ended  December  31, 1999 was  $197,000.  This  expense was
primarily  due to the interest on the $10.0  million short term note executed by
the  Company in March 1999 which was  repaid in  connection  with the  Company's
Financing (as hereinafter defined) in May 1999.

         Preferred stock dividend.  Preferred stock dividends, paid in shares of
the  Company's  Common  Stock,  increased to $1.1 million  during the year ended
December 31, 1999 as a result of the Company's  obligations  in connection  with
the issuance of its Series D Stock (as hereinafter defined) in May 1999.

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

         Since its  origin  in  January  1992,  the  Company  has  financed  its
operations  through  private  placements of preferred stock and common stock, an
initial public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately  $18.0 million after  underwriting fees
and related  expenses,  and a subsequent  public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million  after  underwriting  fees and related  expenses.  On May 12, 1999,  the
Company  consummated a $20.0 million  financing  (the  "Financing")  through the
issuance of its Series D Cumulative  Convertible  Preferred Stock (the "Series D
Stock"),  which  generated  net  proceeds to the Company of $18.5  million.  The
issuance  of the  Series D Stock was  approved  by a majority  of the  Company's
stockholders at the Company's  Annual Meeting of Stockholders on May 11, 1999. A
portion of the  proceeds of such  Financing  were used to repay a $10.0  million
Senior  Secured  Convertible  Note provided by one of the investors on March 19,
1999 in connection with the Financing. The remaining proceeds have been and will
be used for general working capital purposes.

         The  Series D Stock is  convertible  at any time into  shares of common
stock of the Company at a current  conversion  price of $9.94 per common  share,
which conversion price reflects a decrease from the initial  conversion price of
$11.00 per share as a result of the



                                       32
<PAGE>

Company's  Common Stock financing  consummated on March 12, 2001. The conversion
price is not subject to reset  except in the event that the Company  should fail
to declare and pay  dividends  when due or the Company  should  issue new equity
securities or convertible securities at a price per share or having a conversion
price per share lower than the then applicable  conversion price of the Series D
Stock. During the first three years following issuance,  holders of the Series D
Stock  will be  entitled  to  receive  dividends  payable  in  shares  of  fully
registered common stock at a rate of 8.4% per annum. Thereafter,  dividends will
be payable in cash at a rate of 8.0% per annum.

         All or a portion of the shares of Series D Stock  shall,  at the option
of the Company  (as  determined  by the Board of  Directors),  automatically  be
converted into fully paid, registered and non-assessable shares of common stock,
if the following two conditions are met: (i) the last sale price, or, in case no
such sale takes  place on such day,  the  average of the  closing  bid and asked
prices on the Nasdaq is at least 200% of the conversion price then in effect (as
of March 15, 2001, $9.94 per share) for forty consecutive trading days; and (ii)
a shelf  registration  is in effect for the shares of common  stock to be issued
upon conversion of the Series D Stock. Without written approval of a majority of
the holders of record of the Series D Stock,  the Company,  among other  things,
shall not:  (i)  declare or pay any  dividend or  distribution  on any shares of
capital  stock of the Company other than  dividends on the Series D Stock;  (ii)
make any loans,  incur any indebtedness or guarantee any  indebtedness,  advance
capital  contributions  to,  or  investments  in any  person,  issue or sell any
securities  or  warrants  or other  rights to  acquire  debt  securities  of the
Company,  except that the Company may incur such  indebtedness in any amount not
to exceed $10.0  million in the  aggregate  outstanding  at any time for working
capital requirements in the ordinary course of business;  or (iii) make research
and development  expenditures in excess of $7.0 million in any continuous twelve
month  period,  unless the Company  has  reported  positive  net income for four
consecutive quarters immediately prior to such twelve month period.

         At  December  31,  2000,  the Company had cash,  cash  equivalents  and
short-term investments of approximately $5.4 million, a decrease of $9.0 million
from the $14.4 million balance at December 31, 1999. This decrease was primarily
attributable to the cash used to fund operations during 2000. In accordance with
investment  guidelines  approved  by the  Company's  Board  of  Directors,  cash
balances in excess of those  required to fund  operations  have been invested in
short-term United States Treasury  securities and commercial paper with a credit
rating no lower than A1/P1.  The Company's  working capital at December 31, 2000
was $5.3  million,  a decrease of $7.7  million from  December  31,  1999.  This
decrease was primarily  attributable to the cash used to fund operations  during
2000.

         In April 1999,  the  Company  received  $219,000  in proceeds  from the
issuance  of a note  payable.  The  proceeds  of such note were used to fund the
purchase of equipment,  fixtures and  furniture  for the Company's  newly leased
corporate offices in Newtown,  Pennsylvania. The term of the note is three years
at 9.54% per annum, with monthly minimum payments of principal and interest.

         On March 12, 2001, the Company consummated a private equity offering of
1,500,000  shares  of  Common  Stock  for an  aggregate  purchase  price of $7.5
million,  which  generated  net  proceeds to the Company of  approximately  $6.9
million.   Such   proceeds   will  be   used   primarily


                                       33
<PAGE>

for the  Company's  direct-to-consumer  advertising  campaign  and  for  general
working capital purposes. In addition, the investors in such financing were also
issued an aggregate of 400,000  warrants which are  exercisable  for up to three
(3) years into 400,000 shares of the Company's Common Stock at an exercise price
per share of $6.00. The consideration  received for such warrants is included in
the aggregate proceeds received in the financing. The Company also issued to its
financial advisor in such financing warrants to purchase an aggregate of 150,000
shares of the Company's Common Stock exercisable for up to three (3) years at an
exercise  price of $5.70  per  share,  as  partial  consideration  for  services
rendered  in  connection  with  this  financing.  These  warrants  may be deemed
automatically  exercised in certain circumstances based upon the Company's stock
price.  The  Company is  obligated  to file by April 11, 2001 and  maintain  the
effectiveness of a shelf registration  statement with respect to all such shares
of Common  Stock issued and shares  underlying  all such  warrants  beginning no
later than June 10,  2001.  Should the Company fail to obtain  effectiveness  of
such registration statement by June 10, 2001 or to maintain the effectiveness of
such registration  statement for a continuous twenty-four (24) month period, the
investors and the financial advisor shall receive an additional 27,500 shares of
the Company's Common Stock, in the aggregate, for no additional consideration.

         On March 19, 2001, the Company  consummated a revolving credit facility
(the "Facility")  with Silicon Valley Bank (the "Bank").  The Company may borrow
up to the lesser of  $3,000,000  or 80% of  eligible  accounts  receivables,  as
defined under the Facility.  The amount available is also reduced by outstanding
letters of credit which may be issued under this Facility in amounts totaling up
to  $1,500,000.  The Company is not obligated to draw amounts under the Facility
and any such draws will bear interest,  payable monthly,  at the then prevailing
prime  rate  plus  1.5%  per  annum  and may be used  only for  working  capital
purposes.  The Company  intends to secure its  purchase  order  commitments  for
Periostat  from PMRS with a letter of credit  under the  Facility.  Without  the
consent of the Bank,  the Company,  among other  things,  shall not (i) merge or
consolidate with another entity; (ii) acquire assets outside the ordinary course
of business;  or (iii) pay or declare any cash dividends on the Company's Common
Stock. The Company must also maintain a certain tangible net worth and a minimum
of $2.0 million in cash,  net of  borrowings  under the  Facility,  at all times
during the term of the  Facility.  In  addition,  the  Company  has  secured its
obligations  under the Facility  through the granting of a security  interest in
favor of the Bank with respect to all of the  Company's  assets,  including  its
intellectual property.

         The Company  anticipates that its existing  working capital,  including
the  approximately  $6.9 million  received  through the  Company's  Common Stock
financing  consummated  on  March  12,  2001,  will be  sufficient  to fund  the
Company's  operations  through at least the middle of 2002. The Company's future
capital requirements and the adequacy of its available funds will depend on many
factors,  including  the size and scope of the  Company's  marketing  effort and
sales of  Periostat,  the  terms  of  agreements  entered  into  with  corporate
partners,  if any, and the results of research and development and  pre-clinical
and clinical  studies for other  applications of the Company's core  technology.
Over the long-term, the Company's liquidity is dependent on market acceptance of
its products and technology.

         At December 31, 2000,  the Company had  approximately  $59.8 million of
Federal and $46.5 million of state net operating loss carryforwards available to
offset  future  taxable  income.  The  Federal  and  state  net  operating  loss
carryforwards  will  begin  expiring  in 2007  and  2005,


                                       34
<PAGE>

respectively, if not utilized. The Company also has research and development tax
credit  carryforwards  of  approximately  $840,000  available to reduce  Federal
income taxes which begin expiring in 2007.

         Section 382 of the Internal  Revenue  Code of 1986  subjects the future
utilization of net operating  losses and certain other tax  attributes,  such as
research and  development  credits,  to an annual  limitation in the event of an
ownership  change,   as  defined.   Due  to  the  Company's  prior  year  equity
transactions,  a portion  of the net  operating  losses  and tax  credits of the
Company are subject to an annual  limitation of approximately  $3.8 million.  To
the extent that any single-year limitation is not utilized to the full amount of
the limitation,  such unused amounts are carried over to subsequent  years until
the earlier of its  utilization or the  expiration of the relevant  carryforward
period.  At December 31, 2000,  assuming there are no future ownership  changes,
and not giving effect, if any, to the March 2001 financing,  approximately $25.0
million is immediately available to offset future taxable income. In addition to
the Section 382 limitation, the state net operating loss carryforward is subject
to a $2.0 million annual limitation.

EUROPEAN MONETARY UNION
-----------------------

         On January 1,  1999,  eleven of the  fifteen  member  countries  of the
European  Union  set  fixed  conversion  rates  between  their  existing  legacy
currencies and the euro. At such time, these participating countries adopted the
euro as their common legal currency. The eleven participating countries will now
issue  sovereign  debt  exclusively  in euro and will  redenominate  outstanding
sovereign  debt. The legacy  currencies will continue to be used as legal tender
through  January 1, 2002, at which point the legacy  currencies will be canceled
and euro bills and coins will be used for cash transactions in the participating
countries.

         The Company does not denominate its international  licensing agreements
in foreign  currencies.  The Company  currently  does not believe  that the euro
conversion will have a material impact on the Company's results of operations or
financial condition.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company believes that it is not subject to a material impact to its
financial position or results of operations relating to market risk.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The financial  statements and  supplementary  data required to be filed
pursuant to this Item 8 are  appended to this Annual  Report on Form  10-K/A.  A
list of the financial  statements filed herewith is found at "Item 14. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K."

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.



                                       35
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

         The  information  relating to the  Company's  directors,  nominees  for
election as directors and  executive  officers  under the headings  "Election of
Directors",  "Executive  Officers"  and  "Compliance  with Section  16(a) of the
Exchange Act" in the Company's  definitive  proxy  statement for the 2001 Annual
Meeting  of  Stockholders  is  incorporated  herein by  reference  to such proxy
statement.

ITEM 11. EXECUTIVE COMPENSATION.

         The  discussion  under  the  heading  "Executive  Compensation"  in the
Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders
is incorporated herein by reference to such proxy statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The  discussion  under  the  heading  "Security  Ownership  of  Certain
Beneficial  Owners and Management" in the Company's  definitive  proxy statement
for the 2001 Annual Meeting of Stockholders is incorporated  herein by reference
to such proxy statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The discussion  under the heading  "Certain  Relationships  and Related
Transactions"  in the Company's  definitive  proxy statement for the 2001 Annual
Meeting  of  Stockholders  is  incorporated  herein by  reference  to such proxy
statement.



                                       36
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)      (1)      Financial Statements.

                  Reference  is  made to the  Index  to  Consolidated  Financial
                  Statements and Schedule on Page F-1.

         (2)      Financial Statement Schedule.

                  Reference  is  made to the  Index  to  Consolidated  Financial
                  Statements and Schedule on Page F-1.

         (3)      Exhibits.

                  Reference is made to the Index to Exhibits on Page 40.

(b)      Reports on Form 8-K.

                  No  Reports on Form 8-K have been  filed  during  the  quarter
                  ended December 31, 2000.




                                       37
<PAGE>

                                   SIGNATURES


         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its  behalf  by  the  undersigned, thereunto  duly  authorized  this 31st day of
December, 2001.

                                       COLLAGENEX PHARMACEUTICALS, INC.


                                       By:  /s/ Brian M. Gallagher
                                           -----------------------------------
                                           Brian M. Gallagher, Ph.D., Chairman,
                                           Chief Executive Officer and President




                                       38
<PAGE>



         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

          Signature                                      Title                        Date
-------------------------------------      ----------------------------------   -------------------
<S>                                        <C>                                  <C>


/s/ Brian M. Gallagher, Ph.D.              Chairman, Chief Executive Officer,   December 31, 2001
-------------------------------------
    Brian M. Gallagher, Ph.D.              President and Director (Principal
                                           Executive Officer)

/s/ Nancy C. Broadbent                     Chief Financial Officer, Treasurer   December 31, 2001
-------------------------------------
    Nancy C. Broadbent                     and Secretary (Principal Financial
                                           and Accounting Officer)

/s/ Peter R. Barnett, D.M.D.               Director                             December 31, 2001
-------------------------------------
    Peter R. Barnett, D.M.D.

/s/ Robert C. Black                        Director                             December 31, 2001
-------------------------------------
    Robert C. Black

/s/ James E. Daverman                      Director                             December 31, 2001
-------------------------------------
    James E. Daverman

/s/ Robert J. Easton                       Director                             December 31, 2001
-------------------------------------
    Robert J. Easton

/s/ Stephen A. Kaplan                      Director                             December 31, 2001
-------------------------------------
    Stephen A. Kaplan

/s/ W. James O'Shea                        Director                             December 31, 2001
-------------------------------------
    W. James O'Shea

</TABLE>


                                       39
<PAGE>


<TABLE>

                                  EXHIBIT INDEX

<CAPTION>

 Exhibit No.      Description of Exhibit
-------------     ------------------------
<S>               <C>
   3.1(a)         Amended and Restated Certificate of Incorporation.

   3.2(a)         Amended and Restated Bylaws.

   4.1(a)         Registration  Rights  Agreement dated September 29, 1995 by and among
                  the Company and certain investors, as supplemented.

   4.2(a)(b)      Letter dated December 16, 1993 re: certain rights of the Company with
                  respect to certain securities of the Company owned by Brian M. Gallagher, Ph.D.

   4.3(a)         Fourth  Investment  Agreement as of September 29, 1995 by and among
                  the Company and certain Investors.

   4.4(d)         Shareholder Protection Rights Agreement, dated as of September  15,
                  1997,  between the Company and American  Stock Transfer & Trust
                  Company  which includes (i) the Form of Rights Certificate and (ii) the
                  Certificate  of Designation of Series A Participating Preferred Stock
                  of the Company.

   4.5(f)         Amendment No. 1 to Shareholder Protection Rights Agreement, dated
                  as of March 16, 1999, between the Company and American Stock
                  Transfer & Trust Company.

   4.6(h)         Certificate of Designation. Preferences and Rights of Series D
                  Cumulative Convertible Preferred Stock of CollaGenex
                  Pharmaceuticals, Inc.

 +10.1(a)         Assignment  of,  Amendment to and  Restatement  of Agreement,  with all
                  exhibits,  as amended,  and  schedules,  dated January 13, 1992 by and
                  among the Company,  Johnson & Johnson  Consumer  Products,  Inc. and
                  Research  Foundation of State University of New York.

 +10.2(a)         Supply Agreement dated January 23, 1995 between the Company and
                  Hovione  International Limited.

 +10.3(a)         Manufacturing  Agreement  as of April 12,  1996 by and between the
                  Company and Applied Analytical Industries, Inc.

  10.4(a)         Form of  Non-Disclosure  Agreement  executed by all Employees as
                  employed from time to time.

</TABLE>
                                       40
<PAGE>
<TABLE>
<CAPTION>


 Exhibit No.     Description of Exhibit
-------------    ------------------------
<S>              <C>
10.5(a)(b)       Form of  Non-Competition  Agreement  executed  by each of Brian M.
                 Gallagher,  Ph.D., Nancy C. Broadbent and Robert A. Ashley.

 10.6(a)         Form of Mutual  Non-Disclosure  Agreement executed by certain
                 consultants and research collaborators as retained from time to time.

 10.7(a)(b)      Form of  Indemnification  Agreement  executed by each of the  Company's
                 directors and officers.

 10.8(a)         Forms of  Consulting  Agreement executed by each of Lorne M. Golub
                 and  Thomas F. McNamara.

 10.9(a)         Form of Material Transfer Agreement between the Company and Researchers.

 10.10(a)(b)     1992 Stock Option Plan of the Company, as amended to date.

 10.11(a)(b)     1996 Stock Plan of the Company.

 10.12(a)(b)     1996 Non-Employee Director Stock Option Plan of the Company.

+10.13(c)        License  Agreement  dated July 18, 1996 by and  between  the Company
                 and  Boehringer Mannheim Italia.

+10.14(e)        License  Agreement  dated  as of  June  30, 1998 by and between  the
                 Company  and Laboratories Pharmascience S.A.

+10.15(e)        Exhibit A to the  Manufacturing  Agreement  as of April 12, 1996 by and
                 between  the  Company and Applied Analytical  Industries,  Inc., filed with
                 the Company's  Registration Statement on Form S-1 (File Number  333-
                 3582) which became effective on June 20, 1996.

+10.16(e)        Co-Promotion  Agreement  dated October 13, 1998 between  SmithKline
                 Beecham  Consumer Healthcare, L.P. and the Company.

+10.17(e)        Distribution  Services  Agreement dated August 15, 1998 between Cord
                 Logistics, Inc. and the Company.

 10.18(f)        Convertible  Loan and  Security  Agreement  dated as of March 19,  1999,
                 between  OCM Principal Opportunities Fund, L.P. and the Company.

 10.19(f)        Convertible  Note dated March 19, 1999,  made by the Company in favor
                 of OCM Principal Opportunities Fund, L.P.
</TABLE>

                                       41
<PAGE>
<TABLE>
<CAPTION>

 Exhibit No.      Description of Exhibit
-------------     ------------------------
<S>               <C>

 10.20(f)         Stock  Purchase  Agreement  dated March 19, 1999,  between the
                  Company,  OCM Principal Opportunities Fund, L.P. and other
                  Purchasers set forth therein.

 10.21(g)         Lease  Agreement  dated  March 15, 1999  between the Company and
                  Newton  Venture IV Associates, effective May 15, 1999.

 10.22(h)         Stockholders and  Registration  Rights  Agreement, dated March 19, 1999,
                  by and among CollaGenex  Pharmaceuticals,  Inc., OCM Principal
                  Opportunities  Fund, L.P. and the Purchasers set forth therein.

 10.23(i)         Form of Common Stock Purchase  Agreement,  dated March 12,  2001,
                  between the Company  and  the  Investors  set for  therein,  together  with
                  form  of  Registration  Rights Agreement as an exhibit thereto and form of
                  Warrant as an exhibit thereto.

 10.24            Loan and Security  Agreement  dated  March 19,  2001,  between the
                  Company and Silicon Valley Bank filed herewith.

 21               List of subsidiaries of the Registrant filed herewith.

 23.1             Consent of KPMG LLP filed herewith.

+  Confidential  treatment has been  requested and granted for a portion of this
Exhibit.

<FN>

(a)      Incorporated  by reference to the Company's  Registration  Statement on
         Form S-1 (File  Number  333-3582)  which  became  effective on June 20,
         1996.
(b)      A management  contract or compensatory plan or arrangement  required to
         be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(c)      Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended  September 30, 1996 which was filed with the
         Securities and Exchange Commission on October 29, 1996.
(d)      Incorporated by reference to the Company's  Current Report on Form 8-K,
         dated  September  16,  1997,  which was filed with the  Securities  and
         Exchange Commission on September 17, 1997.
(e)      Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the quarter ended September 30, 1998, which was filed with the
         Securities and Exchange Commission on November 16, 1998.
(f)      Incorporated by reference to the Company's  Current Report on Form 8-K,
         dated March 19, 1999 which was filed with the  Securities  and Exchange
         Commission on March 25, 1999.
(g)      Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the  quarter  ended March 31,  1999,  which was filed with the
         Securities and Exchange Commission on May 7, 1999.
(h)      Incorporated by reference to the Company's  Current Report on Form 8-K,
         dated May 12, 1999,  which was filed with the  Securities  and Exchange
         Commission on May 26, 1999.

</FN>



                                       42
<PAGE>

<FN>

(i)      Incorporated by reference to the Company's  Current Report on Form 8-K,
         dated March 16, 2001,  which was filed with the Securities and Exchange
         Commission on March 16, 2001.

</FN>
</TABLE>


                                       43
<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
                                                                                                    Page
                                                                                                   ------
<S>                                                                                                <C>

Independent Auditors' Report..............................................................          F-2

Consolidated Balance Sheets as of December 31, 1999 and 2000..............................          F-3

Consolidated Statements of Operations for the years ended December 31, 1998,
1999, and 2000............................................................................          F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31,
1998, 1999 and 2000.......................................................................          F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999
and 2000..................................................................................          F-6

Notes to Consolidated Financial Statements................................................          F-7

Financial Statement Schedule - Valuation and Qualifying Accounts..........................          F-27

</TABLE>


                                       F-1
<PAGE>




                          Independent Auditors' Report



The Board of Directors and Stockholders
CollaGenex Pharmaceuticals, Inc.:

We  have  audited  the   consolidated   financial   statements   of   CollaGenex
Pharmaceuticals,  Inc. and subsidiaries as listed in the accompanying  index. In
connection with our audits of the  consolidated  financial  statements,  we also
have  audited the  financial  statement  schedule as listed in the  accompanying
index. These consolidated  financial statements and financial statement schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these  consolidated  financial  statements  and  financial
statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,   the  financial  position  of  CollaGenex
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1999 and 2000, and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December  31,  2000,  in  conformity  with  accounting
principles  generally  accepted  in the United  States of  America.  Also in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  consolidated  financial  statements  taken as a  whole,  presents
fairly, in all material respects, the information set forth therein.

As  discussed in Notes 2 and 7 to the  consolidated  financial  statements,  the
Company adopted the provisions of the Securities and Exchange Commission's Staff
Accounting  Bulletin No. 101, "Revenue  Recognition in Financial  Statements" in
2000.



                                  /s/ KPMG LLP



Princeton, New Jersey
January 31,  2001,  except as to the first
  paragraph of note 14, which is as of
  March 12, 2001 and the second  paragraph
  of note 14,  which is as of March
  19, 2001


                                       F-2
<PAGE>



                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1999 and 2000

                  (dollars in thousands, except per share data)

<TABLE>

                                 Assets                                               1999             2000
                                                                                ----------------  -------------

<S>                                                                             <C>              <C>

Current assets:
     Cash and cash equivalents............................................      $    7,981       $     3,709
     Short term investments...............................................           6,386             1,739
     Accounts receivable, net of allowance
         of $386 and $381 in 1999 and
         2000, respectively...............................................           2,150             3,038
     Inventories..........................................................             695               277
     Prepaid expenses and other current assets............................             615               989
                                                                                ----------------  -------------
     Total current assets.............................................              17,827             9,752
Equipment and leasehold improvements, net.................................             709               652
Other assets..............................................................              27                27
                                                                                ----------------  -------------
         Total assets.....................................................      $   18,563       $    10,431
                                                                                ================  =============
                 Liabilities and Stockholders' Equity
Current liabilities:
     Current portion of note payable......................................      $       65       $        65
     Accounts payable.....................................................           2,440             1,865
     Accrued expenses.....................................................           2,335             2,514
                                                                                ----------------  -------------
         Total current liabilities...............................                    4,840             4,444
                                                                                ----------------  -------------
Note payable, less current portion........................................             116                47
Deferred revenue..........................................................              --               676
Commitments
Stockholders' equity:
     Preferred stock,  $0.01 par value,  5,000,000  shares
         authorized, 200,000 shares of Series D cumulative
         convertible  preferred stock issued and
         outstanding in 1999 and 2000, respectively
         (liquidation value $20,000)......................................               2                 2
     Common stock, $0.01 par value; 25,000,000 shares
         authorized, 8,622,091 and 8,775,176 shares
         issued and outstanding in 1999 and 2000,
         respectively.....................................................              86                88
     Common stock to be issued (39,188 shares and 275,462 shares in 1999
         and 2000, respectively)..........................................             858               872
     Additional paid in capital...........................................          66,348            68,461
     Deferred compensation................................................             (76)              (29)
     Accumulated deficit..................................................         (53,611)          (64,130)
                                                                                ----------------  -------------
                  Stockholders' equity....................................          13,607             5,264
                                                                                ----------------  -------------
Total liabilities and stockholders' equity................................      $   18,563       $    10,431
                                                                                ================  =============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>



                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations

                  Years ended December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                   1998             1999             2000
                                                               ------------     ------------      -----------
<S>                                                            <C>              <C>               <C>
Revenues:
     Product sales.....................................        $     3,053      $    15,211       $   20,501
     License revenues..................................                400              100              530
     Contract revenues.................................                  8              770            3,240
                                                               ------------     ------------      -----------
         Total revenues................................              3,461           16,081           24,271
                                                               ------------     ------------      -----------
Operating expenses:
     Cost of product sales.............................                745            3,139            4,070
     Research and development..........................              4,670            5,005            3,128
     Selling, general and administrative...............             10,600           23,180           25,746
                                                               ------------     ------------      -----------
         Total operating expenses......................             16,015           31,324           32,944
                                                               ------------     ------------      -----------
         Operating loss................................            (12,554)         (15,243)          (8,673)
Other income (expense):
     Interest income...................................                988              851              613
     Interest expense..................................                 --             (197)             (15)
     Other income (expense)............................                 --               (2)               9
                                                               ------------     ------------      -----------
         Loss before cumulative effect of change in
              accounting principle.....................            (11,566)         (14,591)          (8,066)
Cumulative effect of change in accounting principle....                 --               --             (764)
                                                               ------------     ------------      -----------
         Net loss......................................            (11,566)         (14,591)          (8,830)
Preferred stock dividend...............................                 --            1,092            1,689
                                                               ------------     ------------      -----------
Net loss allocable to common stockholders..............        $   (11,566)     $   (15,683)      $  (10,519)
                                                               ============     ============      ===========
Basic and diluted net loss per share allocable to
     common stockholders before cumulative effect of
     change in accounting principle....................        $     (1.35)     $     (1.82)      $    (1.12)
Cumulative effect of change in accounting principle....                 --               --            (0.09)
                                                               ------------     ------------      -----------
Basic and diluted net loss per share allocable to
     common stockholders...............................        $     (1.35)     $     (1.82)      $    (1.21)
                                                               ============     ============      ===========
Shares used in computing per share amounts:
     Basic and diluted.................................          8,579,054        8,597,676        8,711,668
                                                               ============     ============      ===========
Pro forma net loss assuming new accounting principle
     is applied retroactively..........................        $   (11,926)     $   (14,633)      $   (8,066)
                                                               ============     ============      ===========
Pro forma net loss allocable to common stockholders
     assuming new accounting principle is applied
     retroactively.....................................        $   (11,926)     $   (15,725)      $   (9,755)
                                                               ============     ============      ===========
Pro forma basic and diluted net loss per share
     allocable to common stockholders assuming new
     accounting principle is applied retroactively.....        $     (1.39)     $     (1.83)      $    (1.12)
                                                               ============     ============      ===========
</TABLE>
          See accompanying notes to consolidated financial statements.


                                       F-4
<PAGE>



                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 1998, 1999 and 2000

                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                 Series D cumulative
                                                convertible preferred
                                                        stock                  Common stock
                                               ----------------------    ----------------------
                                                                                                   Common      Additional
                                               Number of                 Number of                Stock to      paid-in
                                                 shares     Par value      shares     Par value   be issued     capital
                                               ---------    ---------    ----------   ---------   ---------    ----------
<S>                                            <C>          <C>          <C>          <C>         <C>          <C>

Balance, December 31, 1997................            --    $      --     8,567,579    $    86    $      --    $  47,297
    Exercise of common stock options......            --           --        19,625         --           --           20
    Amortization of deferred compensation.            --           --            --         --           --           --
    Net loss..............................            --           --            --         --           --           --
                                               ---------    ---------    ----------   ---------   ---------    ----------
Balance, December 31, 1998................            --    $      --     8,587,204    $    86           --    $  47,317
Exercise of common stock options..........            --           --        13,575         --           --           44
Issuance of Series D cumulative
      convertible preferred stock, net of
      issuance costs......................       200,000            2            --         --           --       18,448
Common stock dividends on Series D
      cumulative convertible preferred
      stock...............................            --           --        21,312         --          858          234
Compensation expense resulting from
      options to non-employees............            --           --            --         --           --          305
Amortization of deferred compensation.....            --           --            --         --           --           --
Net loss..................................            --           --            --         --                        --
                                               ---------    ---------    ----------   ---------   ---------    ----------
Balance, December 31, 1999................       200,000    $       2     8,622,091    $    86          858    $  66,348
Exercise of common stock options..........            --           --        21,325         --           32           84
Common stock dividends on Series D
      cumulative convertible preferred
      stock...............................            --           --       131,760          2         (858)       1,705
Common stock dividends declared on Series
      D cumulative convertible preferred
      stock...............................            --           --            --         --          840           --
Compensation expense resulting from
      options to non-employees............            --           --            --         --           --          324
Amortization of deferred compensation.....            --           --            --         --           --           --
Net loss..................................            --           --            --         --           --           --
                                               ---------    ---------    ----------   ---------   ---------    ----------
Balance, December 31, 2000................       200,000    $       2     8,775,176    $    88    $     872    $  68,461
                                               =========   ==========    ==========   =========   =========    ==========

<CAPTION>


                                                                                Total
                                                 Deferred     Accumulated   Stockholders'
                                               compensation     deficit        equity
                                               ------------   -----------   -------------
<S>                                            <C>            <C>           <C>

Balance, December 31, 1997................     $      (313)   $  (26,362)   $   20,708
    Exercise of common stock options......              --            --            20
    Amortization of deferred compensation.             119            --           119
    Net loss..............................              --       (11,566)      (11,566)
                                               ------------   -----------   -------------
Balance, December 31, 1998................     $      (194)   $  (37,928)   $    9,281
Exercise of common stock options..........              --            --            44
Issuance of Series D cumulative
      convertible preferred stock, net of
      issuance costs......................              --            --        18,450
Common stock dividends on Series D
      cumulative convertible preferred
      stock...............................              --        (1,092)           --
Compensation expense resulting from
      options to non-employees............              --            --           305
Amortization of deferred compensation.....             118            --           118
Net loss..................................              --       (14,591)      (14,591)
                                               ------------   -----------   -------------
Balance, December 31, 1999................     $       (76)   $  (53,611)   $   13,607
Exercise of common stock options..........              --            --           116
Common stock dividends on Series D
      cumulative convertible preferred
      stock...............................              --          (849)           --
Common stock dividends declared on Series
      D cumulative convertible preferred
      stock...............................              --          (840)           --
Compensation expense resulting from
      options to non-employees............              --            --           324
Amortization of deferred compensation.....              47            --            47
Net loss..................................              --        (8,830)       (8,830)
                                               ------------   -----------   -------------
Balance, December 31, 2000................     $       (29)   $  (64,130)   $    5,264
                                               ============   ===========   =============

</TABLE>
          See accompanying notes to consolidated financial statements.



                                       F-5
<PAGE>



                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

              For the years ended December 31, 1998, 1999 and 2000

                             (dollars in thousands)

<TABLE>
<CAPTION>

                                                                                1998           1999             2000
                                                                             ------------   ------------    ------------
<S>                                                                          <C>            <C>             <C>

Cash flows from operating activities:
     Net loss............................................................    $   (11,566)   $   (14,591)    $    (8,830)
     Adjustments to reconcile net loss to net cash used
         in operating activities:
           Noncash compensation expense..................................            119            423             371
           Depreciation and amortization expense.........................             66            151             226
           Cumulative effect of change in accounting principle...........             --             --             764
           Change in assets and liabilities:
               Accounts receivable.......................................         (3,045)           895            (888)
               Inventories...............................................           (342)          (353)            418
               Prepaid expenses and other assets.........................           (545)           194            (342)
               Accounts payable..........................................          2,363           (474)           (575)
               Accrued expenses..........................................            639           (210)            116
               Deferred revenue..........................................             --             --             (25)
                                                                             ------------   ------------    ------------
                  Net cash used in operating activities..................        (12,311)       (13,965)         (8,765)
                                                                             ------------   ------------    ------------
Cash flows from investing activities:
     Capital expenditures................................................           (230)          (593)           (169)
     Proceeds from the sale of short-term investments....................          6,880          7,464           6,871
     Purchase of short-term investments..................................         (7,452)        (6,886)         (2,224)
                                                                             ------------   ------------    ------------
                  Net cash provided by (used in)
                    investing activities.................................           (802)           (15)          4,478
                                                                             ------------   ------------    ------------
Cash flows from financing activities:
     Proceeds from issuance of note payable..............................             --         10,000              --
     Repayment of note payable...........................................             --        (10,000)             --
     Net proceeds from the issuance of preferred stock...................             --         18,450              --
     Proceeds from issuance of common stock..............................             20             44              84
     Proceeds from issuance of long-term debt............................             --            219              --
     Repayment of long-term debt.........................................             --            (38)            (69)
                                                                             ------------   ------------    ------------
                  Net cash provided by financing activities..............             20         18,675              15
                                                                             ------------   ------------    ------------
Net increase (decrease) in cash and cash equivalents.....................        (13,093)         4,695          (4,272)
Cash and cash equivalents at beginning of year...........................         16,379          3,286           7,981
                                                                             ------------   ------------    ------------
Cash and cash equivalents at end of year.................................    $     3,286    $     7,981     $     3,709
                                                                             ============   ============    ============
Supplemental schedule of noncash financing activities:
     Common stock dividends issued or to be issued on
        preferred stock..................................................    $        --    $     1,092     $     1,689
                                                                             ============   ============    ============
     Common stock to be issued on exercise of common
        stock options....................................................    $        --    $        --     $        32
                                                                             ============   ============    ============
Supplemental disclosure of cash flow information:
     Cash paid during the year for interest..............................    $        --    $       199     $         6
                                                                             ============   ============    ============
</TABLE>
          See accompanying notes to consolidated financial statements.



                                       F-6
<PAGE>



                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)



(1)      BUSINESS

         CollaGenex Pharmaceuticals,  Inc. ("CollaGenex  Pharmaceuticals" or the
"Company")  was  incorporated  in Delaware on January 10, 1992. The Company is a
specialty   pharmaceutical  company  focused  on  providing  innovative  medical
therapies to the dental market. The Company, through its own sales and marketing
force, is currently marketing Periostat(R)  (doxycycline hyclate), the Company's
lead drug for the treatment of adult periodontal disease which received approval
from the U.S.  Food & Drug  Administration  (the "FDA") in September  1998.  The
Company is also co-marketing other pharmaceutical  products on a contract basis.
The  Company  has other  internally  developed  compounds  in the  research  and
development stage.

         The accompanying  consolidated financial statements include the results
of operations of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Cash and Cash Equivalents
         -------------------------

         The Company  considers all highly liquid  investments  with an original
maturity of three months or less when purchased to be cash equivalents. All cash
and cash  equivalents are invested in obligations of the U.S.  Government and in
commercial  paper  which  bears  minimal  risk.  To date,  the  Company  has not
experienced any significant losses on its cash equivalents.

         Short-Term Investments
         ----------------------

         Short-term  investments  consist  of U.S.  Government  obligations  and
corporate debt securities with original maturities greater than three months. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain  Investments in Debt and Equity  Securities," the Company classifies
its short-term  investments as available for sale. Available for sale securities
are recorded at their fair value,  which  approximates  cost, of the investments
based on quoted  market  prices at  December  31,  1999 and  2000.  The  Company
considers all of its short-term investments to be available for sale.

         Inventories
         -----------

         Inventories are stated at the lower cost or market.  Cost is determined
using the first-in, first-out method.



                                       F-7
<PAGE>
                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

         Equipment
         ---------

         Equipment,   consisting  of  computer  and  office  equipment,  exhibit
equipment  and  leasehold  improvements  is recorded at cost.  Depreciation  and
amortization  is provided  using the  straight-line  method  over the  estimated
useful  lives of the assets or the  related  lease term,  whichever  is shorter,
generally  three to ten years.  Expenditures  for  repairs and  maintenance  are
expensed as incurred.

         Segment Information
         -------------------

         The  Company  is  managed  and  operated  as one  business.  The entire
business  is  managed  by a single  management  team that  reports  to the chief
executive  officer.  The Company does not operate  separate lines of business or
separate  business  entities  with  respect  to any of its  products  or product
candidates.  Accordingly,  the  Company  does  not  prepare  discrete  financial
information  with respect to separate  product areas or by location and does not
have  separately  reportable  segments as defined by SFAS No. 131,  "Disclosures
about Segments of an Enterprise and Related Information".

         Financial Instruments
         ---------------------

         The  carrying  amounts  of  cash  and  cash   equivalents,   short-term
investments,   accounts  receivable,   accounts  payable  and  accrued  expenses
approximate fair value because of the short maturity of these  instruments.  The
interest  rates on the note  payable  approximate  rates  for  similar  types of
borrowing  arrangements at December 31, 1999 and 2000,  therefore the fair value
of the note payable  approximates  the  carrying  value at December 31, 1999 and
2000.

         Product Sales
         -------------

         In  September  1998,  the Company  received  clearance  from the FDA to
market Periostat. The Company has the exclusive right to market Periostat in the
United  States.  In November  1999,  the Company  began  shipping  Periostat  to
wholesalers  throughout the United States.  The Company recognizes sales revenue
upon  shipment.  Sales are reported net of allowances  for  discounts,  rebates,
chargebacks and product returns.

         Revenue Recognition
         -------------------

         Milestone   revenue  from  license   arrangements  is  recognized  upon
completion of the milestone event or requirement.  Payments, if any, received in
advance of performance under a contract are deferred and recognized when earned.
As  described in note 7, as of January 1, 2000,  upfront  license fees where the
Company  has  continuing  involvement,  (which  prior to  January  1,  2000 were
recorded as license revenues when received) are now deferred and recognized over



                                       F-8
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

the  estimated  performance  period of each  individual  licensing  agreement in
accordance  with the SEC's  Staff  Accounting  Bulletin  No.  101  ("SAB  101").
Accordingly,  effective  January 1, 2000, the Company has recorded a $764 charge
as a cumulative  effect of change in accounting  principle  for certain  upfront
license revenues recognized prior to January 1, 2000.

         Contract Revenues
         -----------------

         Contract revenues are earned and recognized according to the provisions
of each collaborative agreement.

         Advertising Costs
         -----------------

         The  Company  incurs  advertising  costs from print  advertisements  in
various   periodicals  and  television   advertisements.   The  Company  records
advertising  expense when  incurred.  Such amounts  charged to the  consolidated
statements of operations for 1998, 1999 and 2000 were $0.8 million, $1.6 million
and $2.1 million, respectively.

         Research and Development
         ------------------------

         Research and product development costs are expensed as incurred.

         Accounting for Income Taxes
         ---------------------------

         Deferred tax assets and liabilities are determined based on differences
between the financial  reporting and tax bases of assets and liabilities and are
measured  using the  enacted tax rates and laws that will be in effect when such
differences  are expected to reverse.  The measurement of deferred tax assets is
reduced,  if necessary,  by a valuation allowance for any tax benefits which are
not expected to be realized.  The effect on deferred tax assets and  liabilities
of a change in tax rates is  recognized in the period that such tax rate changes
are enacted.

         Management Estimates
         --------------------

         The preparation of consolidated financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the amount reported in the  consolidated  financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

         Stock-Based Compensation
         ------------------------

         As described in note 6, Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," encourages but does
not require  companies

                                      F-9
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

to record compensation cost for stock-based employee  compensation plans at fair
value. The Company has chosen to account for stock-based  compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting  for  Stock  Issued  to  Employees,"  and  related  interpretations.
Accordingly, compensation cost for stock options issued to employees is measured
as the excess,  if any, of the market price of the  Company's  stock at the date
both the number of shares and price per share are known  (measurement date) over
the exercise price. Such amounts are amortized on a straight-line basis over the
respective   vesting   periods  of  the   option   grants.   Transactions   with
non-employees, in which goods or services are the consideration received for the
issuance  of equity  instruments,  are  accounted  for on a fair value  basis in
accordance with SFAS 123 and related interpretations.

         Concentration of Credit and Other Risks
         ---------------------------------------

         The  Company  invests  its  excess  cash in  deposits  with  major U.S.
financial  institutions,  money market funds,  U.S.  Government  obligations and
corporate debt securities.  The Company has established  guidelines  relative to
diversification and maturities that maintain safety and liquidity.  To date, the
Company has not experienced any significant losses.

         The Company  currently  contracts with a single source for the domestic
manufacturing of Periostat  capsules which are sold throughout the United States
exclusively to wholesale and retail distributors. In addition, the Company has a
supply  agreement  with a single  company  to supply the  active  ingredient  in
Periostat.  A single  company also  provides all  warehousing  and  distribution
services to the Company. During 2000, four customers accounted for 31%, 17%, 14%
and  10%,  of net  product  sales,  respectively.  During  1999,  two  customers
accounted for 30% and 14%, of net product sales, respectively.  During 1998, two
customers accounted for 28% and 27% of net product sales, respectively.

         The   Company's   business  of  selling,   marketing   and   developing
pharmaceutical  products is subject to a number of significant risks,  including
risks relating to the implementation of the Company's sales and marketing plans,
risks inherent in research and  development  activities,  risks  associated with
conducting business in a highly regulated  environment and uncertainties related
to clinical trials of products under development.

         Net Loss Per Share
         ------------------

         Basic  earnings per share ("EPS") is  calculated  by dividing  earnings
(loss) allocable to common stockholders by the weighted average shares of common
stock outstanding.  Net loss allocable to common stockholders includes dividends
on the preferred stock. Diluted EPS would also include the effect of dilution to
earnings of convertible  securities and stock options.  As of December 31, 2000,
the Company has certain convertible preferred stock and stock options which have
not been included in the  calculation of diluted net loss per share allocable to
common


                                       F-10
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

stockholders because to do so would be anti-dilutive. As such, the numerator and
denominator  used in  computing  both  basic  and  diluted  net loss  per  share
allocable to common stockholders are equal.

         Reclassification
         ----------------

         Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform to the 2000 presentation.

(3)      COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

         Inventories
         -----------

         Inventories at December 31, 1999 and 2000 consists of the following:

<TABLE>
<CAPTION>

                                                            1999             2000
                                                       --------------   --------------
         <S>                                           <C>              <C>

         Raw materials............................     $         254    $          60
         Finished goods...........................               441              217
                                                       -------------    --------------
                                                       $         695    $         277
                                                       =============    ==============

</TABLE>
         Equipment and Leasehold Improvements
         ------------------------------------

         Equipment  and  leasehold  improvements  at December  31, 1999 and 2000
consists of the following:

<TABLE>
<CAPTION>
                                                            1999             2000
                                                       --------------   --------------
         <S>                                           <C>              <C>

         Computer and office equipment............     $         673    $         792
         Exhibit equipment........................               259              309
         Leasehold improvements...................                45               45
                                                       -------------    --------------
                                                                 977            1,146
         Less accumulated depreciation and
           amortization...........................              (268)            (494)
                                                       -------------    --------------
                                                       $         709    $         652
                                                       =============    ==============
</TABLE>

                                       F-11
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

         Accrued Expenses
         ----------------

         Accrued  expenses  at  December  31,  1999  and  2000  consists  of the
following:

<TABLE>
<CAPTION>
                                                            1999             2000
                                                       --------------   -------------
         <S>                                           <C>              <C>
        Contracted development and manufacturing
           costs..................................     $         441    $         314
         Sales and marketing costs................               144              597
         Payroll and related costs................             1,237            1,061
         Professional and consulting fees.........               221              204
         Royalties................................               215              201
         Deferred revenue.........................                --               63
         Miscellaneous taxes......................                32               52
         Other....................................                45               22
                                                       --------------   -------------
                                                       $       2,335    $       2,514
                                                       ==============   =============
</TABLE>

(4)      NOTE PAYABLE

         In April 1999, the Company  received $219 in proceeds from the issuance
of a note  payable.  The proceeds of such note were used to fund the purchase of
equipment,  fixtures and  furniture  for the  Company's  newly leased  corporate
office  in  Newtown,  Pennsylvania.  The term of the note is  three  years  with
interest at 9.54% per annum,  with monthly  minimum  payments of  principal  and
interest.

(5)      STOCKHOLDERS' EQUITY

         The Company's  Board of Directors  may,  without  further action by the
Company's  stockholders,  from time to time,  direct the  issuance  of shares of
preferred  stock in  series  and may,  at the time of  issuance,  determine  the
rights,  preferences  and  limitations of each series.  The holders of preferred
stock would normally be entitled to receive a preference payment in the event of
any liquidation,  dissolution or winding-up of the Company before any payment is
made to the holders of the common stock.

         On May 12, 1999, the Company consummated a $20.0 million financing (the
"Financing")  through the issuance of 200,000  shares of its Series D Cumulative
Convertible  Preferred  Stock  (the  "Preferred  Stock"),  which  generated  net
proceeds  to  the  Company  of  approximately   $18.5  million.   OCM  Principal
Opportunities  Fund, L.P.  ("OCM") led the investor  group,  which also included
certain current stockholders of the Company.

         The issuance of the  Preferred  Stock was approved by a majority of the
Company's  stockholders  at the Company's  Annual Meeting of Stockholders on May
11, 1999. A portion of




                                       F-12
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

the proceeds of the  Financing  were used for the  repayment of a $10.0  million
Senior Secured  Convertible  Note with interest at 12% per annum provided by OCM
on March 19, 1999 in connection with the financing. During the first three years
following issuance, the Preferred Stock pays dividends in common stock at a rate
of 8.4% per annum.  Thereafter,  the Preferred Stock pays dividends in cash at a
rate of 8.0% per annum. The Preferred Stock is convertible into common shares of
the  Company at an  initial  conversion  price of $11.00  per share,  subject to
adjustment (see note 14), at any time by the holder and under certain conditions
by the Company.  The conversion  price is subject to adjustment in the event the
Company fails to declare or pay  dividends  when due or should the Company issue
new equity securities or convertible securities at a price per share or having a
conversion  price per share lower than the  applicable  conversion  price of the
Preferred  Stock  (see note 14).  Dividends  totaling  $1,092  and  $1,689  were
declared in 1999 and 2000, respectively. At December 31, 1999 and 2000, declared
dividends of 39,188 and 259,462 shares of common stock,  respectively,  have not
been issued,  and have  accordingly been classified as common stock to be issued
in the accompanying consolidated balance sheet.

         The  holders  of the  Preferred  Stock  are  entitled  to vote with the
holders  of the  Company's  common  stock on all  matters  to be voted on by the
Company's  stockholders  on an as converted  to common  stock basis,  subject to
adjustment.  The holders of the  Preferred  Stock are  entitled  to  liquidation
preferences  equal to the original  purchase  price plus  dividends  accrued and
unpaid plus other  dividends in certain  circumstances.  In connection  with the
issuance of the  Preferred  Stock,  the rights of the  holders of the  Company's
common  stock may be limited  in  certain  instances  with  respect to  dividend
rights,  rights on liquidation,  winding up and dissolution of the Company,  and
the right to vote in connection with certain matters  submitted to the Company's
stockholders.

         Without written  approval of a majority of the holders of record of the
Preferred Stock, the Company,  among other things, shall not: (i) declare or pay
any dividend or distribution on any shares of capital stock of the Company other
than  dividends  on  the  Preferred  Stock;  (ii)  make  any  loans,  incur  any
indebtedness or guarantee any indebtedness, advance capital contributions to, or
investments  in any person,  issue or sell any  securities  or warrants or other
rights to acquire debt  securities  of the Company,  except that the Company may
incur  such  indebtedness  in any  amount  not to exceed  $10.0  million  in the
aggregate  outstanding  at any  time for  working  capital  requirements  in the
ordinary course of business; or (iii) make research and development expenditures
in excess of $7.0  million in any  continuous  twelve month  period,  unless the
Company  has  reported  positive  net  income  for  four  consecutive   quarters
immediately prior to such twelve month period.

         The Company  maintains a Shareholder  Rights Plan (the "Rights  Plan").
Under the Rights  Plan,  each common  stockholder  receives one "Right" for each
share of common stock held. Each Right, once exercisable, entitles the holder to
purchase from the Company one one-



                                       F-13
<PAGE>
                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

hundredth of a share of the Company's Series A Participating  Preferred Stock at
an exercise price of $65. All Rights expire on September 26, 2007 unless earlier
redeemed.  At December 31, 2000, the Rights were neither  exercisable nor traded
separately from the Company's  common stock,  and become  exercisable  only if a
person or a group of affiliated or associated persons has acquired,  or obtained
the right to acquire, beneficial ownership of 20% or more of the voting power of
all  outstanding  shares of the  Company's  common  stock and in  certain  other
limited  circumstances.  Upon separation from the common stock,  each Right will
entitle the holder,  other than the  acquiring  person that has  triggered  such
separation, to effectively purchase certain shares of the Company's common stock
equal in market  value to two times the then  applicable  exercise  price of the
Right.  If the  Company is acquired  in a merger or other  business  combination
transaction, or 50% or more of the Company's assets or earning power are sold in
one or more related transactions, the Rights will entitle holders, upon exercise
of the Rights,  to receive  shares of common stock of the acquiring or surviving
company with a market value equal to twice the exercise price of each Right.  In
1999,  the Company  amended its Rights Plan to  specifically  exclude an initial
issuance of the Preferred Stock.

(6)      STOCK OPTION PLANS

         The Company has three stock-based  compensation plans (the "Plans") and
has adopted the disclosure-only provisions of SFAS 123. The Company continues to
apply  APB  Opinion  No.  25 in  accounting  for its  stock  option  plans  and,
accordingly,  no compensation  expense has been  recognized in the  consolidated
financial  statements for stock options  issued to employees at exercise  prices
equal to the market value on the measurement date.

         The 1992 Stock Option Plan, as amended,  (the "1992 Plan") provided for
the granting of incentive and nonstatutory  options to directors,  employees and
consultants to purchase up to 291,000 shares of the Company's  common stock at a
price,  for the  incentive  options,  not less than the fair market value on the
measurement date. Such options are exercisable for a period of 10 years from the
grant date and generally vest over a four year period.  All such 291,000 options
available under the 1992 Plan were granted by March 31, 1996.

         The 1996 Stock Option Plan (the "1996 Plan")  provides for the granting
of incentive and  nonstatutory  options to employees and consultants to purchase
up to  1,500,000  shares  of the  Company's  common  stock at a  price,  for the
incentive options,  not less than the fair market value on the measurement date.
Incentive and nonstatutory  options granted to individuals  owning more than 10%
of the  voting  power of all  classes of stock at the time of grant must have an
exercise  price no less than 110% of the fair market value on the date of grant.
Such  options are  exercisable  for a period of 10 years from the grant date and
generally  vest  over a two to five  year  period,  and may be  accelerated  for
certain grants in certain circumstances.



                                       F-14
<PAGE>
                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

         In March 1996, the Board of Directors  approved a nonqualified plan for
the issuance of stock options to non-employee  directors under the  Non-Employee
Director Stock Option Plan (the "Non-Employee  Director Plan"). Under this plan,
300,000  shares of common stock are  reserved for issuance at an exercise  price
equal to the fair market  value on the date of grant.  Such options vest 20% per
annum commencing one year from the grant date.

         During 1999,  192,500  options were granted to employees at fair market
value with an exercise price of $10.06 per share.  During 2000,  237,750 options
were granted to  employees at fair market value with an exercise  price of $5.00
per share.  These  grants  were not  issued  under the terms of any of the above
Plans.

         At December 31, 2000,  there were 278,670  shares  available  for grant
under the 1996 Plan and 105,000 under the Non-Employee Director Plan.

         Deferred  compensation  had been  recorded  in years  prior to 1998 for
options  granted where the fair value of the Company's  stock on the measurement
date exceeded the exercise price of such options. Deferred compensation is being
amortized to compensation expense in the accompanying  consolidated statement of
operations over the respective  vesting  periods of such grants ($119,  $118 and
$47 in 1998, 1999 and 2000, respectively).

         In 1999,  the  Company  granted  options  to certain  non-employees  to
purchase 60,000 shares of common stock.  Such options were originally  scheduled
to vest over a four year  period  based upon  future  service  requirements.  In
accordance  with EITF  Issue  96-18,  the amount of  compensation  expense to be
recorded in periods  following  the grant are  subject to change each  reporting
period  based upon changes in the market value of the  Company's  common  stock,
estimated  volatility  and risk  free  interest  rates  until  the  non-employee
completed  performance  under the option  agreement  and the options  vest.  The
Company recorded total compensation expense of $305 in 1999, based on the market
value of the  options at the grant date and at December  31, 1999 as  determined
using a  Black-Scholes  option  pricing model.  In 2000, the Company  elected to
accelerate  the vesting on the  remaining  unvested  options.  Accordingly,  the
Company  recorded  total  compensation  expense,  including  that related to the
accelerated  vesting,  of $324 in 2000, based on the market value of the options
at the  grant  date and at the  vesting  dates in 2000 as  determined  using the
Black-Scholes  option  pricing  model.  No future  compensation  expense will be
recorded on these 60,000 options.



                                       F-15
<PAGE>
                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

         The following table  summarizes  stock option activity for 1998 through
2000:
<TABLE>
<CAPTION>

                                                                       Weighted average
                                                                        exercise price
                                                          Shares           per share
                                                       ------------    -----------------
         <S>                                           <C>             <C>

         Balance December 31, 1997................        725,954        $    7.06
           Granted................................        315,000             8.08
           Exercised..............................        (19,625)            1.00
           Cancelled..............................         (3,000)            6.75
                                                        ---------      -----------------
         Balance December 31, 1998................      1,018,329             7.49
           Granted................................        475,150            11.36
           Exercised..............................        (13,575)            3.24
           Cancelled..............................        (42,000)           10.72
                                                        ---------      -----------------
         Balance December 31, 1999................      1,437,904             8.72
           Granted................................        721,880            13.17
           Exercised..............................        (37,325)            3.11
           Cancelled..............................        (99,450)           12.97
                                                        ---------      -----------------
         Balance December 31, 2000................      2,023,009            10.20
</TABLE>

     Amounts  exercised in 2000 include 16,000 options to purchase  common stock
at $2.00 per share which were not issued until January 2001, and accordingly are
classified  as common stock to be issued in the  accompanying  balance  sheet at
December 31, 2000.


                                       F-16
<PAGE>
                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

         As of December 31, 2000,  the following  options were  outstanding  and
exercisable by price range as follows:

<TABLE>
<CAPTION>
                                         Outstanding                                      Exercisable
                    ------------------------------------------------------   -----------------------------------

                                        Weighted
                                         average             Weighted                              Weighted
                                        remaining            average                                average
   Range of            Number of       contractual        exercise price         Number of       exercise price
exercise prices         Shares            life              per share              Shares          per share
-----------------   ----------------   ----------------   ----------------   ----------------   ----------------
<S>                 <C>                <C>                <C>                <C>                <C>

 $ 0.20- 2.00            189,954        4.7 years            $    0.95            189,954        $     0.95
   4.50-10.00            739,050        7.3 years                 7.18            278,025              8.61
  10.06-12.00            444,275        7.4 years                10.29            201,624             10.46
  12.19-13.56            198,950        8.0 years                12.42            124,287             12.44
  14.06-22.88            450,780        8.5 years                17.96             18,925             17.12
                    ----------------   ----------------   ----------------   ----------------   ----------------
                       2,023,009        7.4 years            $   10.20            812,815        $     8.06
                    ================   ================   ================   ================   ================
</TABLE>

     Had the  Company  elected to  recognize  compensation  cost for  options as
prescribed  by the fair value  method  under SFAS 123,  the  Company's  net loss
allocable to common  stockholders and basic and diluted loss per share allocable
to common stockholders would have been reflected as set forth below:
<TABLE>
<CAPTION>

                                                1998           1999            2000
                                             -----------    -----------    -----------
     <S>                                     <C>            <C>            <C>
     Net loss allocable to
        common stockholders:
        As reported......................    $    11,566    $    15,683    $    10,519
        Pro forma........................         12,487         17,338         13,802
     Basic and diluted net loss
        per share allocable to
        common stockholders:
        As reported......................    $    1.35      $    1.82      $    1.21
        Pro forma........................         1.46           2.02           1.58

</TABLE>

         Pro  forma net loss  allocable  to common  stockholders  reflects  only
options  granted  in  1995  through  2000.  Consequently,  the  full  impact  of
calculating  compensation cost for stock options under SFAS 123 is not reflected
in the pro forma net loss  allocable to common  stockholders  amounts  presented
above because  compensation  cost is incurred under SFAS 123 over the respective
vesting  period of such  options,  and options  granted by the Company  prior to
January 1, 1995 are not reflected in the pro forma net loss  allocable to common
stockholders figures above.

                                       F-17
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

         The weighted  average fair values of stock options granted to employees
during 1998, 1999 and 2000 were $4.64, $7.81 and $10.72 per share, respectively,
on the date of grant.  The weighted average fair values of stock options granted
to nonemployees during 1999 were $9.21 per share on the date of grant. Such fair
values were  determined  using the  Black-Scholes  option  pricing model and are
based on the following assumptions:

<TABLE>
<CAPTION>
                                           1998           1999           2000
                                         ----------    -----------    ----------
     <S>                                 <C>           <C>            <C>
     Expected life in years.............     5              5              7
     Risk-free interest rate............   6.25%          6.25%          6.20%
     Volatility.........................    60%            80%            90%
     Expected dividend yield............    --%            --%            --%
</TABLE>


(7)      CHANGE IN ACCOUNTING PRINCIPLE

         In the fourth  quarter of 2000, the Company  adopted SAB 101,  "Revenue
Recognition  in  Financial   Statements",   implementing  a  change  in  revenue
recognition  policy for  certain  upfront  payments  received  in  international
licensing  arrangements  for  Periostat.  Effective  January  1,  2000,  upfront
payments received from licensees,  where the Company has continuing involvement,
are now being  deferred and  recognized  as license  revenue over the  estimated
performance  period of the individual  license  agreements.  In previous  years,
prior to the Company's  adoption of SAB 101, the Company recognized revenue when
the  upfront  payments  were  received,  generally  upon the  execution  of each
agreement.  During 2000, the Company would have recognized approximately $505 in
license revenues under its historical  revenue  recognition  policy prior to the
adoption of SAB 101. In addition,  during  2000,  the Company  recorded  $397 in
license  revenues which were deferred upon the  implementation  of SAB 101 as of
January 1, 2000 and which were previously  recognized as license  revenues under
the historical revenue recognition policy prior to the adoption of SAB 101.

         The consolidated  statement of operations in 2000 has been presented in
the  accompanying  financial  statements  based on this  newly  adopted  revenue
recognition  policy.  The change increased revenue and decreased net loss by $25
during 2000,  excluding the cumulative  effect of the change.  The pro forma net
loss allocable to common stockholders and the related per share amounts for 1998
and 1999 as if the new accounting  principle had been applied  retroactively are
also presented in the accompanying consolidated statements of operations. During
2000, the Company recorded a $764 charge as a result of the cumulative effect of
the change in accounting  principle for revenue  recognized  prior to January 1,
2000 and, accordingly, has recorded approximately $739 in deferred revenues from
upfront  license  payments  received  from  licensees,  of  which  $63 has  been
classified as a current liability in the accompanying consolidated balance sheet
at December 31, 2000.




                                       F-18
<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

(8)      INCOME TAXES

         The Company  utilizes the asset and liability  method of accounting for
income taxes in accordance  with SFAS No. 109,  "Accounting  for Income  Taxes".
Under the asset and liability method, deferred taxes are determined based on the
differences  between  the  financial  statement  and tax  bases  of  assets  and
liabilities using currently enacted tax rates.

         The tax effects of temporary  differences that give rise to significant
portions of the deferred  tax assets and deferred tax  liability at December 31,
1999 and 2000 are presented below:

<TABLE>
<CAPTION>
                                                              1999              2000
                                                         --------------    -------------
        <S>                                              <C>               <C>

        Deferred tax assets:
           Capitalized start up costs...............     $         423     $         170
           Net operating loss carryforwards.........            19,543            23,530
           Tax credit carryforward..................               790               840
           Accrued expenses.........................               348                58
           Deferred revenue.........................                --               251
                                                         -------------     -------------
                Total gross deferred tax assets.....            21,104            24,849
           Less valuation allowance.................           (21,069)          (24,830)
                                                         -------------     -------------
                Total deferred tax assets...........                35                19
         Deferred tax liability:
           Depreciation.............................               (35)              (19)
                                                         -------------     -------------
                Net deferred taxes..................     $          --     $          --
                                                         =============     =============
</TABLE>


         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes and the amounts used for income tax  purposes.  In assessing
the  realizability of deferred tax assets,  management  considers  whether it is
more likely than not that some  portion or all of the  deferred  tax assets will
not be realized.  The ultimate  realization  of deferred tax assets is dependent
upon the  generation  of future  taxable  income  during  the  periods  in which
temporary differences are deductible and carryforwards are available. Due to the
uncertainty of the Company's  ability to realize the benefit of the deferred tax
assets, the net deferred tax assets are fully offset by a valuation allowance at
December 31, 1999 and 2000.

         The net change in the valuation  allowance for the years ended December
31,  1999  and  2000  were  increases  of   approximately   $5,619  and  $3,761,
respectively,  related  primarily to additional net operating losses incurred by
the Company.

                                       F-19
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

         At December 31, 2000, the Company had approximately  $59,800 of Federal
and $46,500 of state net operating loss carryforwards available to offset future
taxable  income.  The Federal and state net operating  loss  carryforwards  will
begin expiring in 2007 and 2005, respectively, if not utilized. The Company also
has research and  development tax credit  carryforwards  of  approximately  $840
available to reduce Federal income taxes which begin expiring in 2007.

         Section 382 of the Internal  Revenue  Code of 1986  subjects the future
utilization of net operating  losses and certain other tax  attributes,  such as
research and  development  credits,  to an annual  limitation in the event of an
ownership  change,   as  defined.   Due  to  the  Company's  prior  year  equity
transactions,  a portion  of the net  operating  losses  and tax  credits of the
Company are subject to an annual  limitation  of  approximately  $3,800.  To the
extent that any single-year limitation is not utilized to the full amount of the
limitation,  such unused amounts are carried over to subsequent  years until the
earlier  of its  utilization  or the  expiration  of the  relevant  carryforward
period. As of December 31, 2000, assuming no future ownership changes (including
the  financing  in March  2001 - see note  14),  approximately  $25  million  is
immediately  available  to offset  future  taxable  income.  In  addition to the
Section 382 limitation,  the state net operating loss carryforward is subject to
a $2,000 annual limitation.

(9)      TECHNOLOGY LICENSE

         At the time of its  formation  in 1992,  the  Company  entered  into an
agreement with SUNY whereby the Company  received an option to acquire a certain
technology license. The Company's option to acquire the license was exercised in
1995 and  remains in effect for a period not to exceed 20 years from the date of
the first sale of product incorporating the technology under license or the last
to expire of the licensed patents in each country. The Company is liable to SUNY
for annual royalty fees based on net sales, if any, as defined in the agreement.
A minimum annual royalty is required for the duration of the technology license.
The Company  incurred  royalty  expense of $200, $711 and $940 in 1998, 1999 and
2000, respectively.

         In  addition,  the Company is required  to  reimburse  SUNY for certain
patent related costs, as well as to support certain additional research efforts.




                                       F-20
<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

(10)     COMMITMENTS

         The Company maintains  various  operating leases,  primarily for office
space.   As  of  December  31,  2000,   future   minimum  rent  payments   under
noncancellable operation leases are as follows:

                 2001...................        $     337
                 2002...................              335
                 2003...................              335
                 2004...................              332
                 2005...................              334
                 Thereafter.............            1,195
                                                ---------
                        Total...........        $   2,868
                                                =========

         Rent  expense  for the years ended  December  31,  1998,  1999 and 2000
totaled $86, $204 and $326, respectively.

         During  1999,  the  Company  entered  into  a  three-year  co-promotion
agreement  under  which  the  Company  is  committed  to spend up to $1  million
annually for promotional  expenses,  unless the agreement is earlier  terminated
per the terms of the agreement.

         Subsequent to December 31, 2000, the Company  entered into an agreement
to purchase approximately $1,500 of inventory from its supplier.

(11)     401(K) SALARY REDUCTION PLAN

         In January 1995,  the Company  adopted a 401(k) Salary  Reduction  Plan
(the "401(k)  Plan")  available to all  employees  meeting  certain  eligibility
requirements.  The 401(k) Plan permits  participants  to contribute up to 15% of
their annual salary not to exceed the limits established by the Internal Revenue
Code.  All   contributions   made  by  participants   vest  immediately  in  the
participant's account. The Company did not make any "matching  contributions" in
1998, 1999 or 2000 in accordance with the terms of the 401(k) Plan.

(12)     CONTRACT RESEARCH AGREEMENT

         In May 1998, the Company entered into a three year  evaluation  testing
agreement  with SUNY  pursuant  to which SUNY will  evaluate  certain  compounds
supplied  by the Company  under  which the  Company  will pay SUNY up to $1,570.
Either party may  terminate  the agreement at any time.  Costs  incurred  during
1998, 1999 and 2000 were $333, $541 and $356, respectively.



                                       F-21
<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

(13)     QUARTERLY FINANCIAL DATA (UNAUDITED)

         The tables below summarize the Company's  unaudited quarterly operating
results for 1999 and 2000.  The first three  quarters of 2000 have been restated
pursuant to the adoption of SAB 101 in the fourth  quarter of 2000, as described
in note 7.

<TABLE>
<CAPTION>
                                                                      Three months ended
                                                ------------------------------------------------------------
                                                  March 31,       June 30,       Sept. 30,        Dec. 31,
                                                    1999           1999            1999             1999
                                                ------------    ------------    ------------    ------------
         <S>                                    <C>             <C>             <C>             <C>
         Total revenues.....................    $     2,418     $     3,438     $     4,345     $     5,880
         Gross margin on product
          sales.............................          1,867           2,500           3,359           4,346
         Net loss...........................         (5,089)         (4,142)         (3,286)         (2,074)
         Net loss allocable to
          common stockholders...............         (5,089)         (4,377)         (3,715)         (2,502)
         Basic and diluted net
          loss per share
          allocable to common
          stockholders......................          (0.59)          (0.51)          (0.43)         (0.29)

</TABLE>


                                       F-22
<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                      Three months ended
                                                ------------------------------------------------------------
                                                  March 31,       June 30,        Sept. 30,       Dec. 31,
                                                    2000            2000           2000            2000
                                                ------------    ------------    ------------    ------------
         <S>                                    <C>             <C>             <C>             <C>

         Total revenues.....................    $     6,530     $     6,612     $     5,259     $     5,870
         Gross margin on product
           sales............................          4,340           4,596           3,436           4,059
         Net loss...........................         (2,837)         (1,990)         (2,052)         (1,951)
         Net loss allocable to
           common stockholders
           before cumulative
           effect of change in
           accounting principle.............         (2,496)         (2,416)         (2,481)         (2,362)
         Net loss allocable to
           common stockholders..............         (3,260)         (2,416)         (2,481)         (2,362)
         Basic and diluted net
           loss per share
           allocable to common
           stockholders before
           cumulative effect of
           change in accounting
           principle........................          (0.29)          (0.28)          (0.28)          (0.27)
         Basic and diluted net
           loss per share
           allocable to common
           stockholders.....................          (0.38)          (0.28)          (0.28)          (0.27)

</TABLE>



                                       F-23
<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

         The  table  below  reflects  the  effect of the  change  in  accounting
principle on net loss allocable to common stockholders and basic and diluted net
loss per share allocable to common  stockholders under the Company's  historical
revenue  recognition policy as a result of the adoption of SAB 101 in the fourth
quarter of 2000.

<TABLE>
<CAPTION>
                                                                       Three months ended
                                                ------------------------------------------------------------
                                                  March 31,       June 30,       Sept. 30,        Dec. 31,
                                                    2000           2000            2000            2000
                                                ------------    ------------    ------------    ------------
         <S>                                    <C>             <C>             <C>             <C>

         Net loss  allocable to
           common  stockholders
           under  historical
           revenue recognition
           policy...........................         (2,866)         (2,327)         (2,276)         (2,311)
         Effect of change in
           accounting principle.............            370             (89)           (205)            (51)
         Cumulative effect of change in
           accounting principle.............           (764)             --              --              --
                                                ------------    ------------    ------------    ------------
         Net loss allocable to
          common stockholders
          after effect of
          change in accounting
          principle, as restated............    $    (3,260)    $    (2,416)    $    (2,481)    $    (2,362)
                                                ============    ============    ============    ============


</TABLE>

                                       F-24
<PAGE>



                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                        Three months ended
                                                ------------------------------------------------------------
                                                  March 31,       June 30,       Sept. 30,        Dec. 31,
                                                    2000           2000            2000            2000
                                                ------------    ------------    ------------    ------------
         <S>                                    <C>             <C>             <C>             <C>

         Basic and diluted net
           loss per share
           allocable to common
           stockholders under
           historical revenue
           recognition policy...............    $     (0.33)    $     (0.27)    $     (0.26)    $     (0.27)
         Effect of change in
           accounting principle.............           0.04           (0.01)          (0.02)             --
         Cumulative effect of
           change in accounting
           principle........................          (0.09)             --              --              --
                                                ------------    ------------    ------------    ------------
         Basic and diluted net
           loss per share
           allocable to common
           stockholders after
           effect of change in
           accounting principle,
           as restated......................    $     (0.38)    $     (0.28)    $     (0.28)    $     (0.27)
                                                ============    ============    ============    ============
</TABLE>

(14)     SUBSEQUENT EVENTS

         On March 12, 2001, the Company consummated a private equity offering of
1,500,000  shares of Common  Stock for an  aggregate  purchase  price of $7,500,
which  generated  net  proceeds  to the  Company  of  approximately  $6,900.  In
addition,  the  investors  in this  financing  were also issued an  aggregate of
400,000  warrants which are  exercisable  for up to three (3) years into 400,000
shares of the  Company's  Common Stock at an exercise  price per share of $6.00.
The  consideration  received  for such  warrants is  included  in the  aggregate
proceeds  received in the  financing.  The Company also issued to its  financial
advisor in this  financing,  warrants to purchase an aggregate of 150,000 shares
of the Company's  Common  Stock,  exercisable  for up to three (3) years,  at an
exercise price of $5.70 per share.  These  warrants may be deemed  automatically
exercised in certain  circumstances  based on the  Company's  stock  price.  The
Company  is  obligated  to  file  and  maintain  the  effectiveness  of a  shelf
registration  statement  with  respect to all such shares of Common Stock issued
and shares  underlying all such warrants  beginning no later than June 10, 2001.
Should the Company fail to obtain  effectiveness of such registration  statement
by June  10,  2001,  or to  maintain  the  effectiveness  of  such  registration
statement for a continuous  twenty-four (24) month period, the investors and the
financial  advisor shall  receive an  additional  27,500 shares of the Company's
Common Stock, in the aggregate, for no additional consideration.  As a result of
this  financing,  the  conversion  price  paid on the  Preferred  Stock has been
reduced to $9.94 per share.


                                      F-25
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1999 and 2000

                  (dollars in thousands, except per share data)

         On March 19, 2001, the Company  consummated a revolving credit facility
(the "Facility")  with Silicon Valley Bank (the "Bank").  The Company may borrow
up to the lesser of $3,000 or 80% of eligible accounts  receivable,  as defined.
The amount available is also reduced by outstanding  letters of credit which may
be issued under this agreement in amounts totaling up to $1,500.  The Company is
not  obligated to draw  amounts  under the Facility and any such draws will bear
interest, payable monthly, at the then prevailing prime rate plus 1.5% per annum
and may be used only for working  capital  purposes.  Without the consent of the
Bank, the Company,  among other things,  shall not (i) merge or consolidate with
another entity; (ii) acquire assets outside the ordinary course of business;  or
(iii) pay or declare any cash  dividends  on the  Company's  Common  Stock.  The
Company must also maintain a certain  tangible net worth and a minimum of $2,000
in cash, net of borrowings  under the Facility,  at all times during the term of
the Facility.  In addition,  the Company has secured its  obligations  under the
Facility  through the granting of a security  interest in favor of the Bank with
respect to all of the Company's assets, including its intellectual property.




                                       F-26
<PAGE>





                                                                     SCHEDULE II


                 COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARY
                          FINANCIAL STATEMENT SCHEDULE

                        Valuation and Qualifying Accounts

                   Years Ended December 31, 1998 1999 and 2000
                                 (in thousands)




--------------------------------------------------------------------------------
   Col A          Col B                 Col C              Col D        Col E
--------------------------------------------------------------------------------
                Balance at
                   the                                                Balance at
               Beginning of                                           the End of
 Description      Period              Additions          Deductions     Period
--------------------------------------------------------------------------------
                               Charged to
  Accounts                     Statement
 Receivable                       of
 Allowance:                    Operations      Other
--------------------------------------------------------------------------------

   1998        $      --      $      293    $      --    $      --    $     293

   1999        $     293      $      554    $      --    $     461    $     386

   2000        $     386      $      824    $      --    $     829    $     381
--------------------------------------------------------------------------------



                                      F-27