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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





Form 10-K


FOR ANNUAL AND TRANSITION REPORTS


PURSUANT TO SECTIONS 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|OR        
|          
|o          |  | 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
    Incorporation or Organization)                     |  | (I.R.S. Employer
    Identification No.)
|41 University Drive,
    Newtown, Pennsylvania(Address of Principal Executive Offices) |  | 18940(Zip Code)                         

Registrants telephone number, including are 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)


Preferred Stock Purchase Rights, $0.01 par value


(Title of Class)




þ o


o




þ o






|                              |  |                 
|----------------------------- |  | ----------------
|Class                         |  | Number of Shares
|                              |  |                 
|Common Stock, $0.01 par value |  | 14,410,677      











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TABLE OF CONTENTS


|                                                                                |     |  |     |                                                                                                                          |      |  |    | 
|------------------------------------------------------------------------------- | --- |  | --- | ------------------------------------------------------------------------------------------------------------------------ | ---- |  | -- | 
|Item                                                                            |     |  |     |                                                                                                                          | Page | 
|                                                                                |     |  |     |                                                                                                                          |      | 
|PART I                                                                         
|                                                                                | 1.  |  |     | Business                                                                                                                 |      |  | 1  | 
|                                                                                | 2.  |  |     | Properties                                                                                                               |      |  | 26 | 
|                                                                                | 3.  |  |     | Legal Proceedings                                                                                                        |      |  | 26 | 
|                                                                                | 4.  |  |     | Submission of Matters to a Vote of Security
    Holders                                                                  |      |  | 27 | 
|PART II                                                                        
|                                                                                | 5.  |  |     | Market for the Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities |      |  | 27 | 
|                                                                                | 6.  |  |     | Selected Consolidated Financial Data                                                                                     |      |  | 28 | 
|                                                                                | 7.  |  |     | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                |      |  | 31 | 
|                                                                                | 7A. |  |     | Quantitative and Qualitative Disclosures
    about Market Risk                                                           |      |  | 43 | 
|                                                                                | 8.  |  |     | Financial Statements and Supplementary
    Data                                                                          |      |  | 43 | 
|                                                                                | 9.  |  |     | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                                 |      |  | 43 | 
|                                                                                | 9A. |  |     | Controls and Procedures                                                                                                  |      |  | 43 | 
|                                                                                | 9B. |  |     | Other Information                                                                                                        |      |  | 45 | 
|PART III                                                                       
|                                                                                | 10. |  |     | Directors and Executive Officers of the
    Registrant                                                                   |      |  | 46 | 
|                                                                                | 11. |  |     | Executive Compensation                                                                                                   |      |  | 46 | 
|                                                                                | 12. |  |     | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                       |      |  | 46 | 
|                                                                                | 13. |  |     | Certain Relationships and Related
    Transactions                                                                       |      |  | 46 | 
|                                                                                | 14. |  |     | Principal Accountant Fees and Services                                                                                   |      |  | 46 | 
|PART IV                                                                        
|                                                                                | 15. |  |     | Exhibits and Financial Statement
    Schedules                                                                           |      |  | 46 | 
|SIGNATURES                                                                      |     |  | 47  |                                                                                                                         
|EXHIBIT INDEX                                                                   |     |  | 48  |                                                                                                                         
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    AND FINANCIAL STATEMENT SCHEDULE |     |  | F-1 |                                                                                                                         
|NONSTATUTORY STOCK OPTION AGREEMENT                                            
|SALE OF ASSETS AGREEMENT                                                       
|NON-EMPLOYEE DIRECTOR COMPENSATION SUMMARY                                     
|EXECUTIVE OFFICER COMPENSATION SUMMARY                                         
|LIST OF SUBSIDIARIES OF THE REGISTRANT                                         
|CONSENT OF KPMG LLP                                                            
|CERTIFICATION PURSUANT TO SECTION 302                                          
|CERTIFICATION PURSUANT TO SECTION 302                                          
|CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350                               



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PART I







|        |          
|------- | ---------
|Item 1. | Business.

General
















tm tm






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tm tm


















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CollaGenex Pharmaceuticals, Inc.  United States
trademarks:


tm tm tm tm tm


CollaGenex Pharmaceuticals, Inc.  European
Community trademarks:




CollaGenex International, Ltd. (our wholly-owned
subsidiary)  United Kingdom trademarks:




CollaGenex International, Ltd.  European
Community and United Kingdom trademarks:




CollaGenex International, Ltd.  European
Community Trademarks:


tm tm




Products and Product Agreements




| |                              
| | -----------------------------
| | Our Current Marketed Products



|                  |  |                          |                               |  |                   |  |                                        | 
|----------------- |  | ------------------------ | ----------------------------- |  | ----------------- |  | -------------------------------------- | 
|Products          |  | Territory Where Marketed |                               |  | Marketing Partner | 
|                  |  |                          |                               |  |                   | 
|Periostat         |  |                          | United States and Puerto Rico |  |                   |  | Not applicable                         | 
|Periostat         |  |                          | Canada                        |  |                   |  | Pharmascience, Inc.                    | 
|Atridox           |  |                          | United States and Puerto Rico |  |                   |  | Atrix Laboratories, Inc./QLT USA, Inc. | 
|Atrisorb FreeFlow |  |                          | United States and Puerto Rico |  |                   |  | Atrix Laboratories, Inc./QLT USA, Inc. | 
|Atrisorb-D        |  |                          | United States and Puerto Rico |  |                   |  | Atrix Laboratories, Inc./QLT USA, Inc. | 
|Pandel            |  |                          | United States and Puerto Rico |  |                   |  | Altana, Inc.                           | 



| |          
| | ---------
| | Periostat





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| |                                          
| | -----------------------------------------
| | Atridox, Atrisorb FreeFlow and Atrisorb-D







4



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| |       
| | ------
| | Pandel





| |                                 
| | --------------------------------
| | Our Previously Marketed Products



| |      
| | -----
| | Vioxx





| |     
| | ----
| | AVAR

tm


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| |        
| | -------
| | Denavir



Sales and Marketing




| |              
| | -------------
| | United States









| |              
| | -------------
| | International



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Manufacturing, Distribution and Suppliers










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Customers/ Backlog






Research and Development




| |         
| | --------
| | Overview





| |           
| | ----------
| | Technology









8



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| |        
| | -------
| | Rosacea









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| |                             
| | ----------------------------
| | Modified Release Formulation







| |            
| | -----------
| | Restoraderm







| |       
| | ------
| | IMPACs





| |                  
| | -----------------
| | Cancer Metastasis



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| |                                                          
| | ---------------------------------------------------------
| | Preclinical and Other Research and Development Activities





Patents, Trade Secrets and Licenses




| |            
| | -----------
| | Our Patents







11



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| |                      
| | ---------------------
| | Enforcing our Patents









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| |                             
| | ----------------------------
| | Protecting our Trade Secrets



Government Regulation








| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pre-clinical laboratory tests, animal studies, and formulation
    studies;                                                                                           
|
| |  | submission to the FDA of an investigational new drug exemption
    for human clinical testing, which must become effective before
    human clinical trials may begin;
|
| |  | adequate and well-controlled clinical trials to establish the
    safety and efficacy of the drug for each indication;                                                
|
| |  | submission to the FDA of an NDA for approval;                                                                                                                         
|
| |  | satisfactory completion of an FDA inspection of the
    manufacturing facility or facilities at which the drug is
    produced to assess compliance with cGMP; and    
|
| |  | FDA review and approval of the NDA.                                                                                                                                   



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Competition






|        |           |         |               |                                                      |  |           |     |  |          |  |          |              |  |  |           |  |  |                                                        |          |                                                                                                                            |  |                                                                                                                                                          |  | 
|------- | --------- | ------- | ------------- | ---------------------------------------------------- |  | --------- | --- |  | -------- |  | -------- | ------------ |  |  | --------- |  |  | ------------------------------------------------------ | -------- | -------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|        |           | Product |               |                                                      |  |           |     |  |          |  |          |              | 
|Product |           |         | Manufacturer/ |                                                      |  | Dental    |     |  | Delivery |  |          | Patient      |  |  | Treatment |  |  |                                                       
|Name    |           |         | Marketer      |                                                      |  | Procedure |     |  | Route    |  |          | Administered |  |  | Focus     |  |  | Indication                                            
|        |           |         |               |                                                      |  |           |     |  |          |  |          |              |  |  |           |  |  |                                                       
|        | Periostat |         |               | CollaGenex Pharmaceuticals, Inc.                     |  |           | No  |  |          |  | Systemic |              |  |  | Yes       |  |  | Tissue degradation and enhanced bone protein synthesis |          | As an adjunct to SRP to promote attachment level gain and to
    reduce pocket depth in patients with adult periodontitis.
|        | Atridox   |         |               | Atrix Laboratories/ CollaGenex Pharmaceuticals, Inc. |  |           | Yes |  |          |  | Local    |              |  |  | No        |  |  |                                                        | Bacteria |                                                                                                                            |  | For treatment of chronic adult periodontitis for a gain in
    clinical attachment, reduction in probing depth and reduction in
    bleeding on probing.
|        | Periochip |         |               | Vendent on behalf of Dexcel                          |  |           | Yes |  |          |  | Local    |              |  |  | No        |  |  |                                                        | Bacteria |                                                                                                                            |  | As an adjunct to SRP procedures for reduction of pocket depth in
    patients with adult periodontitis.                                                 
|        | Arestin   |         |               | Orapharma, a Division of Johnson & Johnson, Inc.     |  |           | Yes |  |          |  | Local    |              |  |  | No        |  |  |                                                        | Bacteria |                                                                                                                            |  | As an adjunct to SRP procedures for reduction of pocket depth in
    patients with adult periodontitis.                                                 

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|                              |  |                                  |                 |                           |               |                        |                    |         |            |                       |        |                                                                                                                                           |               |                                                                                                                                                                                              |              |                                                                                                                                                                                   |  |                                                                                                                                                                                    |  | 
|----------------------------- |  | -------------------------------- | --------------- | ------------------------- | ------------- | ---------------------- | ------------------ | ------- | ---------- | --------------------- | ------ | ----------------------------------------------------------------------------------------------------------------------------------------- | ------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|                              |  | Product                          |                 |                           |               |                        |                    |         |            |                       |       
|Product                       |  |                                  | Manufacturer/   |                           |               |                        |                    | Generic |            |                       | Dosing |                                                                                                                                           |               |                                                                                                                                                                                             
|Name                          |  |                                  | Marketer        |                           |               | Generic name           |                    |         | Equivalent |                       |        | Schedule                                                                                                                                  |               |                                                                                                                                                                                              | Indication  
|                              |  |                                  |                 |                           |               |                        |                    |         |            |                       |        |                                                                                                                                           |               |                                                                                                                                                                                              |             
|Pandel cream 0.01%            |  | CollaGenex Pharmaceuticals, Inc. |                 | Hydrocortisone probutrate |               |                        | No                 |         |            | Once or twice per day |        | For relief of the inflammatory and pruritic manifestations of
    corticosteroid-responsive dermatoses in patients 18 years
    or older.
|                             
|Cloderm cream 0.1%            |  |                                  | Healthpoint     |                           |               | Clocortolone pivalate  |                    |         | No         |                       |        | Three times per day                                                                                                                       |               | For the relief of the inflammatory and pruritic manifestations
    of corticosteroid-responsive dermatoses.                                                                                 
|                             
|Cutivate cream 0.05%          |  |                                  | GlaxoSmithKline |                           |               | Fluticasone propionate |                    |         | Yes        |                       |        | Once or twice per day                                                                                                                     |               | For the relief of the inflammatory and pruritic manifestations
    of corticosteroid-responsive dermatoses. May be used with
    caution in pediatric patients three months of age or older.
|                             
|Dermatop emollient cream 0.1% |  | Dermik (Sanofi Aventis)          |                 |                           | Prednicarbate |                        |                    |         | No         |                       |        |                                                                                                                                           | Twice per day |                                                                                                                                                                                              |              | For the relief of the inflammatory and pruritic manifestations
    of corticosteroid-responsive dermatoses. May be used with
    caution in pediatric patients one year or older.
|                             
|Elocon cream 0.1%             |  |                                  | Schering        |                           |               |                        | Mometasone furoate |         |            |                       | Yes    |                                                                                                                                           |               |                                                                                                                                                                                              | Once per day |                                                                                                                                                                                   |  | For the relief of the inflammatory and pruritic manifestations
    of corticosteroid-responsive dermatoses. May be used with
    caution in pediatric patients two years or older.

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|                            |  |                       |               |                         |  |                        |    |         |            |                            |        |                                                                                                             |  |                                                                                                                          |            |  |  |  |  | 
|--------------------------- |  | --------------------- | ------------- | ----------------------- |  | ---------------------- | -- | ------- | ---------- | -------------------------- | ------ | ----------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ | ---------- |  |  |  |  | 
|                            |  | Product               |               |                         |  |                        |    |         |            |                            |       
|Product                     |  |                       | Manufacturer/ |                         |  |                        |    | Generic |            |                            | Dosing |                                                                                                             |  |                                                                                                                         
|Name                        |  |                       | Marketer      |                         |  | Generic name           |    |         | Equivalent |                            |        | Schedule                                                                                                    |  |                                                                                                                          | Indication
|                            |  |                       |               |                         |  |                        |    |         |            |                            |        |                                                                                                             |  |                                                                                                                          |           
|                           
|Locoid Lipocream cream 0.1% |  | Ferndale Laboratories |               | Hydrocortisone butyrate |  |                        | No |         |            | Two or three times per day |        | For the relief of the inflammatory and pruritic manifestations
    of corticosteroid-responsive dermatoses.
|                           
|Luxiq foam 0.12%            |  |                       | Connetics     |                         |  | Betamethasone valerate |    |         | No         |                            |        | Two times per day                                                                                           |  | For the relief of the inflammatory and pruritic manifestations
    of corticosteroid-responsive dermatoses of the scalp.





Employees




Additional Factors That May Affect Future Results






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| |                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Rely on One Product, Periostat, and Mutuals
    Branded Version of Periostat, for Most of Our Revenue. The
    Commercial Launch of Generic Versions of Periostat Would
    Materially Reduce Our Revenues and Profitability and Force
    Changes in Our Organization and Activities.









| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If a Generic Version of Periostat Becomes Available on the
    Market, We will Likely Have to Pay Substantial Rebates or
    Provide Credits to Mutual, and Mutual will be Permitted to
    Manufacture its Own Generic Version of Periostat.







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| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | We Cannot Assure You that Our Clinical Trials will be
    Timely Completed or will Meet Agreed Upon End-Points.









| |   |                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interim results of preclinical or clinical studies do not
    necessarily predict their final results, and results in early
    studies might not be seen in later studies;                                                                                                                                          
|
| |  | potential products that appear promising at early stages of
    development may ultimately fail for a number of reasons,
    including the possibility that the products may be ineffective,
    less effective than products of our competitors or cause harmful
    side effects;                                  
|
| |  | any preclinical or clinical test may fail to produce results
    satisfactory to the FDA or foreign regulatory authorities;                                                                                                                                                                                          
|
| |  | preclinical and clinical data can be interpreted in different
    ways, which could delay, limit or prevent regulatory approval;                                                                                                                                                                                     
|
| |  | negative or inconclusive results from a preclinical study or
    clinical trial or adverse medical events during a clinical trial
    could cause a preclinical study or clinical trial to be repeated
    or a program to be terminated, even if other studies or trials
    relating to the program are successful;
|
| |  | the FDA can place a hold on a clinical trial if, among other
    reasons, it finds that patients enrolled in the trial are or
    would be exposed to an unreasonable and significant risk of
    illness or injury;                                                                                                 
|
| |  | we may encounter delays or rejections based on changes in
    regulatory agency policies during the period in which we develop
    a drug or the period required for review of any application for
    regulatory agency approval; and                                                                               
|
| |  | our clinical trials may not demonstrate the safety and efficacy
    needed for our products to receive regulatory approval.                                                                                                                                                                                          



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| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Our Products, and Our Products Under Development, are
    Subject to Extensive Regulation by the FDA.











| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We Depend Upon Third Party Researchers and Providers of
    Clinical Services to Perform as Contractually Required if We are
    to be Successful in Bringing New Products to Market.





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| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | We Cannot Assure You that Our Pursuit of Business in the
    Dermatology Market will be Successful.











| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Our Current Competitive Position in the Marketplace
    Depends on Successfully Enforcing and Defending Our Periostat
    Patents.





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| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Our Future Competitive Position in the Marketplace Depends
    on Obtaining, Enforcing and Successfully Defending Our
    Patents.











| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | We Depend Upon Certain Key Relationships to Generate Much
    of the Technology Required to Maintain Our Competitive Position
    in the Marketplace.



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| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If We Lose Our Sole Supplier of Doxycycline Hyclate or Our
    Current Manufacturer of Periostat, Our Sales of Periostat and
    Mutuals Branded Version of Periostat will be Interrupted,
    Halted or Less Profitable.











| |                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A Small Number of Wholesale Customers, Large Retail
    Chains, and Mutual, Account for the Majority of Our Sales, and
    the Loss of One of Them, or Changes in Their Purchasing Patterns
    or Business Model, Could Result in Reduced Sales and/or Higher
    Costs, Thereby Adversely Affecting Our Operating Results.



23



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| |                                                                                    
| | -----------------------------------------------------------------------------------
| | If Our Products Cause Injuries, We May Incur Significant
    Expense and Liability.









| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Changes in Stock Option Accounting Rules May have a
    Significant Adverse Affect on Our Operating Results.



24



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| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Our Stock Price is Highly Volatile and, Therefore, the
    Value of Your Investment May Fluctuate Significantly.





|                   |  |      |       |  |     |   |       | 
|------------------ |  | ---- | ----- |  | --- | - | ----- | 
|Quarter Ended      |  | High |       |  | Low |  
|                   |  |      |       |  |     |  
|March 31, 2001     |  | $    | 6.00  |  |     | $ | 4.47  | 
|June 30, 2001      |  | $    | 8.80  |  |     | $ | 5.06  | 
|September 30, 2001 |  | $    | 10.00 |  |     | $ | 7.25  | 
|December 31, 2001  |  | $    | 9.50  |  |     | $ | 7.50  | 
|March 31, 2002     |  | $    | 12.00 |  |     | $ | 7.72  | 
|June 30, 2002      |  | $    | 11.65 |  |     | $ | 5.75  | 
|September 30, 2002 |  | $    | 7.34  |  |     | $ | 4.70  | 
|December 31, 2002  |  | $    | 9.93  |  |     | $ | 4.05  | 
|March 31, 2003     |  | $    | 11.03 |  |     | $ | 6.66  | 
|June 30, 2003      |  | $    | 13.27 |  |     | $ | 8.62  | 
|September 30, 2003 |  | $    | 15.84 |  |     | $ | 10.50 | 
|December 31, 2003  |  | $    | 11.82 |  |     | $ | 8.90  | 
|March 31, 2004     |  | $    | 14.16 |  |     | $ | 10.07 | 
|June 30, 2004      |  | $    | 13.21 |  |     | $ | 8.70  | 
|September 30, 2004 |  | $    | 9.49  |  |     | $ | 6.23  | 
|December 31, 2004  |  | $    | 7.49  |  |     | $ | 5.37  | 

25



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|        |            
|------- | -----------
|Item 2. | Properties.








|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.











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|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.






PART II







|        |                                                                                                                          
|------- | -------------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities.





|                   |  |      |       |  |     |   |       | 
|------------------ |  | ---- | ----- |  | --- | - | ----- | 
|Quarter Ended      |  | High |       |  | Low |  
|                   |  |      |       |  |     |  
|March 31, 2003     |  | $    | 11.03 |  |     | $ | 6.66  | 
|June 30, 2003      |  | $    | 13.27 |  |     | $ | 8.62  | 
|September 30, 2003 |  | $    | 15.84 |  |     | $ | 10.50 | 
|December 31, 2003  |  | $    | 11.82 |  |     | $ | 8.90  | 
|March 31, 2004     |  | $    | 14.16 |  |     | $ | 10.07 | 
|June 30, 2004      |  | $    | 13.21 |  |     | $ | 8.70  | 
|September 30, 2004 |  | $    | 9.49  |  |     | $ | 6.23  | 
|December 31, 2004  |  | $    | 7.49  |  |     | $ | 5.37  | 







Option Grants




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|                  |        |                  |  |   |      | 
|----------------- | ------ | ---------------- |  | - | ---- | 
|Number of Options |        | Weighted Average
|Granted           |        | Exercise Price  
|                  |        |                 
|                  | 25,000 |                  |  | $ | 5.59 | 








|        |                                      
|------- | -------------------------------------
|Item 6. | Selected Consolidated Financial Data.



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|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |            |        |        |   |           |        |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------ | ---------- | ------ | ----- | - | ---------- | ------ | ----- | - | ---------- | ------ | --- | ---- | ---------- | ------ | ------ | - | --------- | ------ | ------ | -
|                                                                                                                                              |                                                 | Years Ended December 31,                         |           
|                                                                                                                                              |                                                 |                                                  |           
|                                                                                                                                              |                                                 | 2004                                             |            |        | 2003  |   |            | 2002   |       |   | 2001       |        |     | 2000 |           
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|                                                                                                                                              |                                                 | (Dollars in thousands except for per share data) |           
|Consolidated Statement of Operation Data:                                                                                                     |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |            |        |        |   |           |       
|Revenues:                                                                                                                                     |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |            |        |        |   |           |       
|                                                                                                                                              | Net product sales                               |                                                  | $          | 51,739 |       |   | $          | 49,038 |       |   | $          | 42,111 |     |      | $          | 31,358 |        |   | $         | 20,501 |       
|                                                                                                                                              | Contract revenues                               |                                                  |            | 237    |       |   |            | 3,122  |       |   |            | 2,332  |     |      |            | 3,386  |        |   |           | 3,240  |       
|                                                                                                                                              | License revenues                                |                                                  |            | 170    |       |   |            | 699    |       |   |            | 176    |     |      |            | 488    |        |   |           | 530    |       
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|Total revenues                                                                                                                                |                                                 |                                                  | 52,146     |        |       |   | 52,859     |        |       |   | 44,619     |        |     |      | 35,232     |        |        |   | 24,271    |       
|Operating expenses:                                                                                                                           |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |            |        |        |   |           |       
|                                                                                                                                              | Cost of product sales                           |                                                  |            | 7,446  |       |   |            | 7,362  |       |   |            | 6,713  |     |      |            | 5,825  |        |   |           | 4,070  |       
|                                                                                                                                              | Research and development                        |                                                  |            | 8,843  |       |   |            | 5,462  |       |   |            | 4,394  |     |      |            | 3,764  |        |   |           | 3,128  |       
|                                                                                                                                              | Selling, general and administrative             |                                                  |            | 31,765 |       |   |            | 33,668 |       |   |            | 32,699 |     |      |            | 34,010 |        |   |           | 25,746 |       
|                                                                                                                                              | Gain on sale of U.K. and European Dental assets |                                                  |            | (2,980 | )     |   |            |       |       |   |            |       |     |      |            |       |        |   |           |       |       
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|                                                                                                                                              |                                                 | Operating income (loss)                          |            |        | 7,072 |   |            |        | 6,367 |   |            |        | 813 |      |            |        | (8,367 | ) |           |        | (8,673 | )
|Interest income                                                                                                                               |                                                 |                                                  | 421        |        |       |   | 148        |        |       |   | 77         |        |     |      | 232        |        |        |   | 613       |       
|Interest expense                                                                                                                              |                                                 |                                                  |           |        |       |   |           |        |       |   | (5         | )      |     |      | (17        | )      |        |   | (15       | )     
|Other (expense) income                                                                                                                        |                                                 |                                                  | 2          |        |       |   | (3         | )      |       |   | 17         |        |     |      | 8          |        |        |   | 9         |       
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|Income (loss) before income taxes and cumulative effect of
    change in accounting principle                                                 |                                                 |                                                  | 7,495      |        |       |   | 6,512      |        |       |   | 902        |        |     |      | (8,144     | )      |        |   | (8,066    | )     
|Income taxes                                                                                                                                  |                                                 |                                                  | 967        |        |       |   | 85         |        |       |   |           |        |     |      |           |        |        |   |          |       
|Cumulative effect of change in accounting principle(1)                                                                                        |                                                 |                                                  |           |        |       |   |           |        |       |   |           |        |     |      |           |        |        |   | (764      | )     
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|Net income (loss)                                                                                                                             |                                                 | $                                                | 6,528      |        |       | $ | 6,427      |        |       | $ | 902        |        |     | $    | (8,144     | )      |        | $ | (8,830    | )     
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|Net income (loss) allocable to common stockholders                                                                                            |                                                 | $                                                | 4,928      |        |       | $ | 4,827      |        |       | $ | (727       | )      |     | $    | (9,824     | )      |        | $ | (10,519   | )     
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|Basic net income (loss) per share allocable to common
    stockholders before cumulative effect of change in accounting
    principle(1)(2)   |                                                 | $                                                | 0.35       |        |       | $ | 0.40       |        |       | $ | (0.06      | )      |     | $    | (0.94      | )      |        | $ | (1.12     | )     
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|Diluted net income (loss) per share allocable to common
    stockholders before cumulative effect of change in accounting
    principle(1)(2) |                                                 | $                                                | 0.34       |        |       | $ | 0.38       |        |       | $ | (0.06      | )      |     | $    | (0.94      | )      |        | $ | (1.12     | )     
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|Basic net income (loss) per share allocable to common
    stockholders(2)                                                                     |                                                 | $                                                | 0.35       |        |       | $ | 0.40       |        |       | $ | (0.06      | )      |     | $    | (0.94      | )      |        | $ | (1.21     | )     
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|Diluted net income (loss) per share allocable to common
    stockholders(2)                                                                   |                                                 | $                                                | 0.34       |        |       | $ | 0.38       |        |       | $ | (0.06      | )      |     | $    | (0.94      | )      |        | $ | (1.21     | )     
|                                                                                                                                              |                                                 |                                                  |            |        |       |   |            |        |       |   |            |        |     |      |           
|Shares used in computing basic per share amounts(2)                                                                                           |                                                 |                                                  | 14,264,687 |        |       |   | 12,094,638 |        |       |   | 11,234,652 |        |     |      | 10,413,663 |        |        |   | 8,711,668 |       
|Shares used in computing diluted per share amounts(2)                                                                                         |                                                 |                                                  | 14,500,637 |        |       |   | 12,836,364 |        |       |   | 11,234,652 |        |     |      | 10,413,663 |        |        |   | 8,711,668 |       

29



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|                                                  |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                  |  | As of December 31, |        
|                                                  |  |                    |        
|                                                  |  | 2004               |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                  |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |        
|                                                  |  | (In thousands)     |        
|Consolidated Balance Sheet Data:                  |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash, cash equivalents and short-term investments |  | $                  | 38,645  |   |      | $ | 32,670  |      |  | $ | 10,112  |   |  | $    | 6,171   |   |  | $ | 5,448   |  
|Working capital                                   |  |                    | 39,714  |   |      |   | 32,010  |      |  |   | 5,992   |   |  |      | 6,194   |   |  |   | 5,308   |  
|Total assets                                      |  |                    | 52,121  |   |      |   | 44,132  |      |  |   | 17,634  |   |  |      | 14,698  |   |  |   | 10,431  |  
|Note payable, less current portion                |  |                    |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | 47      |  
|Accumulated deficit                               |  |                    | (64,926 | ) |      |   | (69,854 | )    |  |   | (74,681 | ) |  |      | (73,954 | ) |  |   | (64,130 | )
|Total stockholders equity                        |  | $                  | 41,215  |   |      | $ | 33,956  |      |  | $ | 8,352   |   |  | $    | 7,127   |   |  | $ | 5,264   |  






|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Refers to the Companys adoption of Staff Accounting
    Bulletin No. 101 during 2000 and the corresponding
    cumulative effect of the change in accounting principle.
|   
|(2) | See Note 2 of Notes to Consolidated Financial Statements
    for information concerning computation of net income (loss) per
    share allocable to common stockholders.

30



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##### Table of Contents








|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations.



Overview




tm tm tm tm








31



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Results of Operations




| |                                                        
| | -------------------------------------------------------
| | Years Ended December 31, 2004 and December 31,
    2003



| |         
| | --------
| | Revenues

|                  |       |                        |        |        |        |  |       |      |    |   |        |        | 
|----------------- | ----- | ---------------------- | ------ | ------ | ------ |  | ----- | ---- | -- | - | ------ | ------ | 
|                  |       | 2004                   |        |        | Change |  |       | 2003 |   
|                  |       |                        |        |        |        |  |       |      |   
|                  |       | (Dollars in thousands) |       
|Net Product Sales |       | $                      | 51,739 |        |        |  | 5.5   | %    |    | $ | 49,038 |       
|Contract Revenues |       |                        | 237    |        |        |  | (92.4 | )%   |    |   | 3,122  |       
|License Revenues  |       |                        | 170    |        |        |  | (75.7 | )%   |    |   | 699    |       
|                  |       |                        |        |        |        |  |       |      |   
|                  | Total |                        | $      | 52,146 |        |  |       | (1.3 | )% |   | $      | 52,859 | 
|                  |       |                        |        |        |        |  |       |      |   







32



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| |                      
| | ---------------------
| | Cost of Product Sales

|                             |  |                        |       |   |        |  |     |      |  |   |       |  
|---------------------------- |  | ---------------------- | ----- | - | ------ |  | --- | ---- |  | - | ----- | -
|                             |  | 2004                   |       |   | Change |  |     | 2003 | 
|                             |  |                        |       |   |        |  |     |      | 
|                             |  | (Dollars in thousands) |      
|Cost of Product Sales        |  | $                      | 7,446 |   |        |  | 1.1 | %    |  | $ | 7,362 |  
|Percent of Net Product Sales |  |                        | 14.4  | % |        |  |     |      |  |   | 15.0  | %







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

|                         |  |                        |       |  |        |  |      |      |  |   |       | 
|------------------------ |  | ---------------------- | ----- |  | ------ |  | ---- | ---- |  | - | ----- | 
|                         |  | 2004                   |       |  | Change |  |      | 2003 | 
|                         |  |                        |       |  |        |  |      |      | 
|                         |  | (Dollars in thousands) |      
|Research and development |  | $                      | 8,843 |  |        |  | 61.9 | %    |  | $ | 5,462 | 









| |   |                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our continuing clinical and manufacturing development work for
    Oracea, our once-daily, modified formulation of doxycycline,
    40 mg, for the treatment of rosacea, which accounted for
    total costs of approximately $2.7 million;                                      
|
| |  | our continuing clinical and manufacturing development and
    formulation work for Periostat-MR, our-once daily, modified
    formulation of doxycycline, 40 mg, for the treatment of
    adult periodontitis, which accounted for total costs of
    approximately $2.2 million;
|
| |  | in-process research and development charges associated with
    developing our Restoraderm technology, including milestone fees
    and formulation and stability testing costs for two potential
    products, which accounted for total costs of approximately
    $868,000;   
|
| |  | the completion of a Phase III clinical trial to evaluate
    Periostat for the treatment of rosacea, which accounted for
    $417,000 in expense; and                                                                                                                            
|
| |  | our clinical and manufacturing development work for COL-3, a
    second generation IMPACs compound, totaling $673,000.                                                                                                                                                           



33



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| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the manufacturing, development and formulation work for
    Periostat-MR and Oracea, which accounted for total costs of
    approximately $269,000;                         
|
| |  | stability testing and milestone fees for several potential
    products utilizing the Restoraderm technology, which accounted
    for total costs of approximately $817,000;
|
| |  | several Phase IV studies for Periostat in various dental
    applications, which accounted for total costs of approximately
    $391,000; and                               
|
| |  | a Phase III clinical trial to evaluate Periostat for the
    treatment of rosacea, which accounted for total costs of
    approximately $2.0 million.                       





| |                                    
| | -----------------------------------
| | Selling, General and Administrative

|                                    |  |                        |        |  |        |  |      |      |  |   |        | 
|----------------------------------- |  | ---------------------- | ------ |  | ------ |  | ---- | ---- |  | - | ------ | 
|                                    |  | 2004                   |        |  | Change |  |      | 2003 | 
|                                    |  |                        |        |  |        |  |      |      | 
|                                    |  | (Dollars in thousands) |       
|Selling, General and Administrative |  | $                      | 31,765 |  |        |  | (5.7 | )%   |  | $ | 33,668 | 







tm


34



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| |                                                
| | -----------------------------------------------
| | Gain on Sale of U.K. and European Dental Assets





| |                      
| | ---------------------
| | Other Income/ Expense

|                |  |                        |     |  |        |  |       |      |  |   |     | 
|--------------- |  | ---------------------- | --- |  | ------ |  | ----- | ---- |  | - | --- | 
|                |  | 2004                   |     |  | Change |  |       | 2003 | 
|                |  |                        |     |  |        |  |       |      | 
|                |  | (Dollars in thousands) |    
|Interest income |  | $                      | 421 |  |        |  | 184.5 | %    |  | $ | 148 | 





| |                         
| | ------------------------
| | Preferred Stock Dividend





| |                                                        
| | -------------------------------------------------------
| | Years Ended December 31, 2003 and December 31,
    2002



| |         
| | --------
| | Revenues

|                  |       |                        |        |        |        |  |       |      |   |   |        |        | 
|----------------- | ----- | ---------------------- | ------ | ------ | ------ |  | ----- | ---- | - | - | ------ | ------ | 
|                  |       | 2003                   |        |        | Change |  |       | 2002 |  
|                  |       |                        |        |        |        |  |       |      |  
|                  |       | (Dollars in thousands) |       
|Net Product Sales |       | $                      | 49,038 |        |        |  | 16.4  | %    |   | $ | 42,111 |       
|Contract Revenues |       |                        | 3,122  |        |        |  | 33.9  | %    |   |   | 2,332  |       
|License Revenues  |       |                        | 699    |        |        |  | 297.2 | %    |   |   | 176    |       
|                  |       |                        |        |        |        |  |       |      |  
|                  | Total |                        | $      | 52,859 |        |  |       | 18.5 | % |   | $      | 44,619 | 
|                  |       |                        |        |        |        |  |       |      |  





35



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| |                      
| | ---------------------
| | Cost of Product Sales

|                             |  |                        |       |   |        |  |     |      |  |   |       |  
|---------------------------- |  | ---------------------- | ----- | - | ------ |  | --- | ---- |  | - | ----- | -
|                             |  | 2003                   |       |   | Change |  |     | 2002 | 
|                             |  |                        |       |   |        |  |     |      | 
|                             |  | (Dollars in thousands) |      
|Cost of Product Sales        |  | $                      | 7,362 |   |        |  | 9.7 | %    |  | $ | 6,713 |  
|Percent of Net Product Sales |  |                        | 15.0  | % |        |  |     |      |  |   | 15.9  | %







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

|                         |  |                        |       |  |        |  |      |      |  |   |       | 
|------------------------ |  | ---------------------- | ----- |  | ------ |  | ---- | ---- |  | - | ----- | 
|                         |  | 2003                   |       |  | Change |  |      | 2002 | 
|                         |  |                        |       |  |        |  |      |      | 
|                         |  | (Dollars in thousands) |      
|Research and development |  | $                      | 5,462 |  |        |  | 24.3 | %    |  | $ | 4,394 | 









| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the manufacturing development and formulation work for
    Periostat-MR and Oracea, which accounted for total costs of
    approximately $269,000;                          
|
| |  | stability testing and milestone fees for several potential
    products utilizing the Restoraderm technology, which accounted
    for total costs of approximately $817,000;
|
| |  | several Phase IV studies for Periostat in various dental
    applications, which accounted for total costs of approximately
    $391,000; and                               
|
| |  | a Phase III clinical trial to evaluate Periostat for the
    treatment of rosacea, which accounted for total costs of
    approximately $2.0 million.                       

36



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| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our formulation development work for a once-a-day formulation of
    Periostat and formulation and stability testing for several
    potential products utilizing the Restoraderm technology for
    total costs of approximately $1.3 million;                                                                           
|
| |  | several Phase IV studies for Periostat in various dental
    indications, initiation of a 70-patient clinical study to
    evaluate the efficacy of Periostat to treat meibomianitis, which
    accounted for total costs of approximately $173,000; and                                                                  
|
| |  | clinical development work relating to Periostat in
    dermatological indications, limited clinical testing of
    Restoraderm formulations and initiation of a Phase III
    trial in 134 patients to evaluate Periostat for the
    treatment of rosacea, which accounted for total costs of
    approximately $927,000.





| |                                    
| | -----------------------------------
| | Selling, General and Administrative

|                                    |  |                        |        |  |        |  |     |      |  |   |        | 
|----------------------------------- |  | ---------------------- | ------ |  | ------ |  | --- | ---- |  | - | ------ | 
|                                    |  | 2003                   |        |  | Change |  |     | 2002 | 
|                                    |  |                        |        |  |        |  |     |      | 
|                                    |  | (Dollars in thousands) |       
|Selling, General and Administrative |  | $                      | 33,668 |  |        |  | 2.9 | %    |  | $ | 32,699 | 









| |                      
| | ---------------------
| | Other Income/ Expense

|                       |  |                        |     |     |        |  |        |      |  |   |    | 
|---------------------- |  | ---------------------- | --- | --- | ------ |  | ------ | ---- |  | - | -- | 
|                       |  | 2003                   |     |     | Change |  |        | 2002 | 
|                       |  |                        |     |     |        |  |        |      | 
|                       |  | (Dollars in thousands) |    
|Interest Income        |  | $                      | 148 |     |        |  | 92.2   | %    |  | $ | 77 | 
|Interest Expense       |  | $                      |    |     |        |  | (100   | )%   |  | $ | 5  | 
|Other (Expense) Income |  | $                      |     | (3) |        |  | (117.6 | )%   |  | $ | 17 | 



37



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Preferred Stock Dividend




Liquidity and Capital Resources




| |                                            
| | -------------------------------------------
| | Cash Requirements/ Sources and Uses of Cash





| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | Public offerings and private placements of our preferred and
    common stock;
|
| |  | Cash from operations; and                                                     
|
| |  | Exercise of stock options and warrants.                                       





| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The presence or absence of generic competition, which will be
    influenced by the outcome and consequences of our litigation
    with IVAX Pharmaceuticals Inc. and CorePharma LLC;
|
| |  | The effect of our arrangement with Mutual, including product
    payment terms and potential retroactive price adjustments;                                                          
|
| |  | Revenues and profits from sales of Periostat, Mutuals
    branded version of Periostat and other products and contracted
    services;                                              
|
| |  | The success of our efforts to build a dermatology franchise;                                                                                                                         
|
| |  | The success of our pre-clinical, clinical and development
    programs;                                                                                                              
|
| |  | Our ability to continue to meet the covenant requirements under
    our revolving credit facility with Silicon Valley Bank; and                                                      
|
| |  | The receptivity of the capital markets to our future financings.                                                                                                                     





38



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| |                            
| | ---------------------------
| | Cash Flows/ Cash Management









| |                        
| | -----------------------
| | Contractual Obligations





|                                           |  |                        |            |     |      |   |           |               |  |   |               |     |  |                |           |     |  |  |   |    
|------------------------------------------ |  | ---------------------- | ---------- | --- | ---- | - | --------- | ------------- |  | - | ------------- | --- |  | -------------- | --------- | --- |  |  | - | ---
|                                           |  | Payments Due by Period |           
|                                           |  |                        |           
|Contractual Obligations                    |  | Total                  |            |     | 2005 |   |           | 2006 and 2007 |  |   | 2008 and 2009 |     |  | 2010 and after |          
|                                           |  |                        |            |     |      |   |           |               |  |   |               |     |  |                |          
|Operating Leases(1)                        |  | $                      | 1,997,000  |     |      | $ | 554,000   |               |  | $ | 914,000       |     |  | $              | 529,000   |     |  |  |  |    
|Co-Promotional Commitments                 |  |                        |            | (2) |      |   |           | (2)           |  |   |               | (2) |  |                |           | (2) |  |  |   | (2)
|Cash Dividends on Series D Preferred Stock |  | $                      | 10,640,000 | (3) |      | $ | 1,744,000 | (3)           |  | $ | 4,008,000     | (3) |  | $              | 4,888,000 | (3) |  |  |   | (3)
|Consulting Payments                        |  | $                      | 304,000    | (4) |      | $ | 304,000   | (4)           |  |   |              |     |  |                |          |     |  |  |  |    
|Total Contractual Obligations              |  | $                      | 12,941,000 |     |      | $ | 2,602,000 |               |  | $ | 4,922,000     |     |  | $              | 5,417,000 |     |  |  |   |    






|    |                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Such amounts primarily include minimum rental payments for our
    office lease in Newtown, Pennsylvania, as well as payments for
    sales force computer equipment leases. In May 1999, we entered
    into a lease agreement relating to our office space in Newtown,
    Pennsylvania. The lease has an initial term of ten years. Rent
    is expected to be approximately $337,000 per year.

39



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | We will be required to make certain annual minimum expenditures
    for advertising and promotional activities amounting to:
    (i) the lesser of $4.0 million or 30% of our
    contribution margin (as defined in the agreement) relating to a
    specific Atrix product that we market, and (ii) the lesser
    of $2.0 million or 30% of our contribution margin (as
    defined in the agreement) relating to a separate Atrix product
    that we market.                                                                                                                    
|   
|(3) | Pursuant to the terms of our Series D Cumulative
    Convertible preferred stock and unless earlier converted
    pursuant to its terms, the holders of the Series D
    preferred stock are entitled to dividends payable in cash at a
    rate of 8.0% per annum, which are declared and paid every
    six months. Beginning on the sixth anniversary of the date of
    the original issuance (May 12, 2005) of the Series D
    preferred stock dividends payable will increase by 1% per
    annum if the Series D preferred stock has not then been
    converted or redeemed.
|   
|(4) | Such amount represents consulting payments to be made to Brian
    M. Gallagher, our former chief executive officer and president,
    upon his separation from the Company and pursuant to the terms
    of a consulting agreement executed March 18, 2003.                                                                                                                                                                                                                                                                                                                         





Critical Accounting Policies and Estimates






| |                    
| | -------------------
| | Revenue Recognition



40



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##### Table of Contents











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





| |               
| | --------------
| | Deferred Taxes





| |                        
| | -----------------------
| | Acquired Product Rights



41



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| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | The intended use of the product rights and the expected future
    cash flows resulting directly from such use.
|
| |  | Generic competitor activities and regulatory initiatives that
    affect our dental and dermatology franchise. 
|
| |  | Customer preferences and expected managed care reimbursement.                                                  





| |                       
| | ----------------------
| | Inventory Obsolescence







| |                                     
| | ------------------------------------
| | Recently Issued Accounting Standards



42



---



##### Table of Contents










|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk.








|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary Data.








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure.








|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.



|   |                                   
|-- | ----------------------------------
|1. | Disclosure Controls and Procedures





|   |                                           
|-- | ------------------------------------------
|2. | Internal Controls Over Financial Reporting





43



---



##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of the assets of the company;                                                                                                                                                                                          
|
| |  | Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of the company are being made
    only in accordance with authorizations of management and
    directors of the company; and
|
| |  | Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    companys assets that could have a material effect on the
    financial statements.                                                                                                                                       









Report of Independent Registered Public Accounting Firm












44



---



##### Table of Contents













| |                 
| | ----------------
| | /s/     KPMG LLP














|         |                   
|-------- | ------------------
|Item 9B. | Other Information.



45



---



##### Table of Contents






PART III







|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant.



www.collagenex.com.







|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters.








|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.








|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal Accountant Fees and Services.






PART IV







|         |                                            
|-------- | -------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules.

Financial Statements.




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

Financial Statement Schedule.




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

Exhibits.




| |                                                       
| | ------------------------------------------------------
| | Reference is made to the Index to Exhibits on Page 48.

46



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##### Table of Contents






SIGNATURES


th




| |                                     
| | ------------------------------------
| | COLLAGENEX
    PHARMACEUTICALS, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ Colin W. Stewart

| |                                              
| | ---------------------------------------------
| |                                              
| | Colin W. Stewart, Chief Executive Officer and
| | President                                    



|                                                             |  |                                                                                                   |  |                |  | 
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                    |  | Title                                                                                             |  | Date          
|                                                             |  |                                                                                                   |  |               
|                                                            
|/s/ Colin W. StewartColin
    W. Stewart                     |  | President, Chief Executive Officer and Director (Principal
    Executive Officer)                 |  | March 10, 2005
|                                                            
|/s/ Nancy C. BroadbentNancy
    C. Broadbent                 |  | Chief Financial Officer, Treasurer and Secretary (Principal
    Financial and Accounting Officer) |  | March 10, 2005
|                                                            
|/s/ Brian M. GallagherBrian
    M. Gallagher, Ph.D.          |  | Director                                                                                          |  | March 10, 2005
|                                                            
|/s/ Peter R. Barnett, D.M.D.Peter
    R. Barnett, D.M.D.     |  | Director                                                                                          |  | March 10, 2005
|                                                            
|/s/ Robert C. BlackRobert
    C. Black                       |  | Director                                                                                          |  | March 10, 2005
|                                                            
|/s/ James E. DavermanJames
    E. Daverman                   |  | Chairman of the Board and Director                                                                |  | March 10, 2005
|                                                            
|/s/ Robert J. EastonRobert
    J. Easton                     |  | Director                                                                                          |  | March 10, 2005
|                                                            
|/s/ Robert A. Beardsley, Ph.D.Robert
    A. Beardsley, Ph.D. |  | Director                                                                                          |  | March 4, 2005 
|                                                            
|/s/ W. James OSheaW.
    James OShea                       |  | Director                                                                                          |  | March 4, 2005 

47



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##### Table of Contents






EXHIBIT INDEX


|            |     |           |                        |                                                                                                                                                                                                                                                                            
|----------- | --- | --------- | ---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |           | Description of Exhibit
|            |     |           |                       
|            | 3   | .1(a)     |                        | Amended and Restated Certificate of Incorporation.                                                                                                                                                                                                                         
|           
|            | 3   | .2(r)     |                        | Amended and Restated Bylaws.                                                                                                                                                                                                                                               
|           
|            | 3   | .3(k)     |                        | Amended Certificate of Designation, Preferences and Rights of
    the Series D Cumulative Convertible Preferred Stock of
    CollaGenex Pharmaceuticals, Inc. dated as of October 15,
    2001.                                                                            
|           
|            | 3   | .4(p)     |                        | Amended Certificate of Designation of Series A
    Participating Preferred Stock, as filed with the Secretary of
    State of the State of Delaware on June 5, 2002.                                                                                                       
|           
|            | 4   | .1(a)     |                        | Registration Rights Agreement dated September 29, 1995 by
    and among the Company and certain investors, as supplemented.                                                                                                                                                
|           
|            | 4   | .2(a)     |                        | Fourth Investment Agreement as of September 29, 1995 by and
    among the Company and certain Investors.                                                                                                                                                                   
|           
|            | 4   | .3(p)     |                        | Amended and Restated Shareholder Protection Rights Agreement,
    dated as of May 29, 2002, by and between CollaGenex
    Pharmaceuticals, Inc. and American Stock Transfer &
    Trust Company.                                                                           
|           
|            | 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)     |                        | Form of Non-Disclosure Agreement executed by all Employees as
    employed from time to time.                                                                                                                                                                              
|           
|            | 10  | .4(a)(b)  |                        | Form of Non-Competition Agreement executed by each of Nancy C.
    Broadbent and David Pfeiffer.                                                                                                                                                                           
|           
|            | 10  | .5(a)     |                        | Form of Mutual Non-Disclosure Agreement executed by certain
    consultants and research collaborators as retained from time to
    time.                                                                                                                                  
|           
|            | 10  | .6(a)(b)  |                        | Form of Indemnification Agreement executed by each of the
    Companys directors and officers.                                                                                                                                                                            
|           
|            | 10  | .7(a)     |                        | Forms of Consulting Agreement executed by each of Lorne M. Golub
    and Thomas F. McNamara.                                                                                                                                                                               
|           
|            | 10  | .8(a)     |                        | Form of Material Transfer Agreement between the Company and
    Researchers.                                                                                                                                                                                               
|           
|            | 10  | .9(a)(b)  |                        | 1992 Stock Option Plan of the Company.                                                                                                                                                                                                                                     
|           
|            | 10  | .10(a)(b) |                        | 1996 Stock Plan of the Company.                                                                                                                                                                                                                                            
|           
|            | 10  | .11(a)(b) |                        | 1996 Non-Employee Director Stock Option Plan of the Company.                                                                                                                                                                                                               
|           
|            | 10 | .12(c)    |                        | Distribution Services Agreement dated August 15, 1998
    between Cord Logistics, Inc. and the Company.                                                                                                                                                                    
|           
|            | 10  | .13(d)    |                        | Stock Purchase Agreement dated March 19, 1999, between the
    Company, OCM Principal Opportunities Fund, L.P. and other
    Purchasers set forth therein.                                                                                                                 
|           
|            | 10  | .14(e)    |                        | Lease Agreement dated March 15, 1999 between the Company
    and Newton Venture IV Associates, effective May 15,
    1999.                                                                                                                                                 
|           
|            | 10  | .15(f)    |                        | 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  | .16(g)    |                        | 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  | .17(h)    |                        | Loan and Security Agreement dated March 19, 2001, between
    the Company and Silicon Valley Bank.                                                                                                                                                                         

48



---



##### Table of Contents



|            |     |        |                        |                                                                                                                                                                                                                                 
|----------- | --- | ------ | ---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |        | Description of Exhibit
|            |     |        |                       
|           
|            | 10 | .18(i) |                        | Services and Supply Agreement dated as of September 26,
    2000 as amended by letter agreement dated as of December 1,
    2000, by and between the Company and Pharmaceutical
    Manufacturing Research Services, Inc.       
|           
|            | 10  | .19(j) |                        | Letter Agreement dated as of June 26, 2001 by and between
    the Company and Pharmaceutical Manufacturing Research Services,
    Inc.                                                                                          
|           
|            | 10  | .20(k) |                        | Amendment No. 1 to 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  | .21(k) |                        | Amendment No. 2 to 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 | .22(l) |                        | License Agreement dated August 24, 2001 by and between
    CollaGenex Pharmaceuticals, Inc. and Atrix Laboratories, Inc.                                                                                                        
|           
|            | 10 | .23(l) |                        | Stock Purchase Agreement dated August 24, 2001 by and
    between CollaGenex Pharmaceuticals, Inc. and Atrix Laboratories,
    Inc.                                                                                             
|            | 10 | .24(m) |                        | First Addendum December 10, 2001 to the Supply Agreement
    dated January 23, 1995 by and between CollaGenex, Inc. and
    Hovione International Limited.                                                                      
|           
|            | 10  | .25(n) |                        | Common Stock Purchase Agreement dated February 14, 2002 by
    and between CollaGenex Pharmaceuticals, Inc. and Kingsbridge
    Capital Limited.                                                                                
|           
|            | 10  | .26(n) |                        | Warrant dated February 14, 2002 issued to Kingsbridge
    Capital Limited.                                                                                                                                                      
|           
|            | 10 | .27(o) |                        | Wholesale Service Agreement effective as of November 1,
    2001, by and between CollaGenex Pharmaceuticals, Inc. and
    National Specialty Services, Inc.                                                                     
|           
|            | 10 | .28(o) |                        | First Amendment to Wholesale Service Agreement effective as of
    November 12, 2001, by and between CollaGenex
    Pharmaceuticals, Inc. and National Specialty Services, Inc.                                                 
|           
|            | 10 | .29(o) |                        | Exclusive Distribution Agreement dated as of March 1, 2002,
    by and between CollaGenex Pharmaceuticals, Inc. and Cord
    Logistics, Inc.                                                                                    
|           
|            | 10  | .30(o) |                        | First Loan Modification Agreement dated as of March 22,
    2002 by and between CollaGenex Pharmaceuticals, Inc. and Silicon
    Valley Bank.                                                                                   
|           
|            | 10  | .31(o) |                        | Second Loan Modification Agreement dated as of March 27,
    2002 by and between CollaGenex Pharmaceuticals, Inc. and Silicon
    Valley Bank.                                                                                  
|           
|            | 10 | .32(q) |                        | Agreement by and between Altana Inc. and CollaGenex
    Pharmaceuticals, Inc., dated May 24, 2002.                                                                                                                              
|           
|            | 10  | .33(r) |                        | Form of Change of Control Agreement executed with each of Colin
    Stewart, Nancy C. Broadbent, David Pfeiffer and Andrew Powell.                                                                                              
|           
|            | 10 | .34(t) |                        | Letter Agreement dated as of September 12, 2002 by and
    between the Company and Pharmaceutical Manufacturing Research
    Services, Inc.                                                                                     
|           
|            | 10  | .35(s) |                        | Transition Agreement and Release dated March 18, 2003 by
    and between Brian Gallagher and CollaGenex Pharmaceuticals, Inc.                                                                                                   
|           
|            | 10  | .36(s) |                        | Consulting Agreement dated March 18, 2003 by and between
    Brian Gallagher and CollaGenex Pharmaceuticals, Inc.                                                                                                               
|           
|            | 10  | .37(u) |                        | Form of Incentive Bonus Agreement executed with David F.
    Pfeiffer.                                                                                                                                                          
|           
|            | 10 | .38(v) |                        | License and Supply Agreement dated April 8, 2004 by and
    among Mutual Pharmaceutical Company, Inc. United Research
    Laboratories, Inc. and the Company.                                                                   
|           
|            | 10  | .39(w) |                        | Fourth Loan Modification Agreement, dated June 7, 2004, by
    and between Silicon Valley Bank and the Company.                                                                                                                 
|           
|            | 10  | .40(x) |                        | Nonstatutory Stock Option Agreement dated September 23,
    2004 by and between Andrew Powell and the Company.                                                                                                                  
|           
|            | 10  | .41(x) |                        | Asset Purchase and Product Development Agreement dated
    August 19, 2004 by and between Thomas Skold and the Company.                                                                                                         

49



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##### Table of Contents



|            |     |      |                        |                                                                                                                                                                                    
|----------- | --- | ---- | ---------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |      | Description of Exhibit
|            |     |      |                       
|           
|            | 10  | .42* |                        | Nonstatutory Stock Option Agreement dated December 7, 2004
    by and between Robert A. Beardsley, Ph.D. and the Company.                                                          
|           
|            | 10  | .43* |                        | Sale of Assets Agreement dated November 3, 2004 by and
    among CollaGenex International Limited, Alliance Pharmaceuticals
    Limited and Alliance Pharma plc.                   
|           
|            | 10  | .44* |                        | Non-Employee Director Compensation Summary.                                                                                                                                        
|           
|            | 10  | .45* |                        | Executive Officer Compensation Summary.                                                                                                                                            
|           
|            | 21* |      |                        | List of subsidiaries of the Registrant.                                                                                                                                            
|           
|            | 23  | .1*  |                        | Consent of KPMG LLP.                                                                                                                                                               
|           
|            | 31  | .1*  |                        | Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of
    the Exchange Act, as Adopted Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
|           
|            | 31  | .2*  |                        | Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of
    the Exchange Act, as Adopted Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
|           
|            | 32  | .1*  |                        | Certification Pursuant to 18 U.S.C. Section 1350.                                                                                                                                  






|    |  |                                                                                                                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | Filed herewith                                                                                                                                                                                                                                                                                        
|   
|   |  | Confidential treatment has been requested and granted for a
    portion of this Exhibit.                                                                                                                                                                                                              
|   
|(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, 1998,
    which was filed with the Securities and Exchange Commission on
    November 16, 1998.                                                                                      
|   
|(d) |  | 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.                                                                                                               
|   
|(e) |  | 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.                                                                                                
|   
|(f) |  | 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.                                                                                                                       
|   
|(g) |  | 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.                                                                                                               
|   
|(h) |  | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2000, which
    was filed with the Securities and Exchange Commission on
    March 26, 2001. The Company amended such Form 10-K by
    filing a Form 10-K/ A on January 2, 2002.            
|   
|(i) |  | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2001,
    which was filed with the Securities and Exchange Commission on
    May 15, 2001.                                                                                               
|   
|(j) |  | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2001,
    which was filed with the Securities and Exchange Commission on
    August 14, 2001.                                                                                             
|   
|(k) |  | Incorporated by reference to the Companys Current Report
    on Form 8-K, dated October 15, 2001, which was filed
    with the Securities and Exchange Commission on October 18,
    2001.                                                                                                           
|   
|(l) |  | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2001,
    which was filed with the Securities and Exchange Commission on
    November 14, 2001. The Company amended such Form 10-Q
    by filing a Form 10-Q/ A on February 14, 2002.
|   
|(m) |  | Incorporated by reference to the Companys Current Report
    on Form 8-K, dated December 10, 2001, which was filed
    with the Securities and Exchange Commission on December 10,
    2001.                                                                                                         
|   
|(n) |  | Incorporated by reference to the Companys Current Report
    on Form 8-K, dated February 14, 2002, which was filed
    with the Securities and Exchange Commission on February 15,
    2002.                                                                                                         

50



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##### Table of Contents





|    |  |                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(o) |  | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2002,
    which was filed with the Securities and Exchange Commission on
    May 15, 2002.         
|   
|(p) |  | Incorporated by reference to the Companys Current Report
    on Form 8-K, dated May 29, 2002, which was filed with
    the Securities and Exchange Commission on June 5, 2002.                                 
|   
|(q) |  | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2002,
    which was filed with the Securities and Exchange Commission on
    August 14, 2002.       
|   
|(r) |  | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2002,
    which was filed with the Securities and Exchange Commission on
    November 14, 2002.
|   
|(s) |  | Incorporated by reference to the Companys Current Report
    on Form 8-K, dated March 18, 2003, which was filed
    with the Securities and Exchange Commission on March 19,
    2003.                         
|   
|(t) |  | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2002, which
    was filed with the Securities and Exchange Commission on
    March 31, 2003.          
|   
|(u) |  | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2003,
    which was filed with the Securities and Exchange Commission on
    November 14, 2003.
|   
|(v) |  | Incorporated by reference to the Companys Current Report
    on Form 8-K, dated April 8, 2004, which was filed with
    the Securities and Exchange Commission on April 8, 2004.                               
|   
|(w) |  | Incorporated by reference to the Companys Current Report
    on Form 8-K, dated June 7, 2004, which was filed with
    the Securities and Exchange Commission on June 7, 2004.                                 
|   
|(x) |  | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2004,
    which was filed with the Securities and Exchange Commission on
    November 9, 2004. 

51



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


AND FINANCIAL STATEMENT SCHEDULE


|                                                                                                                              |  |      |      | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                              |  | Page |     
|                                                                                                                              |  |      |     
|Report of Independent Registered Public
    Accounting Firm                                                                   |  |      | F-2  | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                                              |  |      | F-3  | 
|Consolidated Statements of Operations for
    the years ended December 31, 2004, 2003, and 2002                               |  |      | F-4  | 
|Consolidated Statements of
    Stockholders Equity for the years ended December 31,
    2004, 2003 and 2002                  |  |      | F-5  | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2004, 2003 and 2002                                |  |      | F-6  | 
|Notes to Consolidated Financial
    Statements                                                                                |  |      | F-7  | 
|Financial Statement Schedule 
    Valuation and Qualifying Accounts for the years ended
    December 31, 2004, 2003 and 2002 |  |      | F-26 | 

F-1



---



##### Table of Contents






Report of Independent Registered Public Accounting Firm
















| |             
| | ------------
| | /s/ KPMG LLP





F-2



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES





Consolidated Balance Sheets


December 31, 2004 and 2003


|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |        |       |         |        |       | 
|---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------- | ------- | ------ | ------ | ----- | ------- | ------ | ----- | 
|                                               |                                                                                                                                                                                                                                                                                                                                                                            | 2004                                       |                           |         | 2003   |       
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       
|                                               |                                                                                                                                                                                                                                                                                                                                                                            | (Dollars in thousands,                     |                          
|                                               |                                                                                                                                                                                                                                                                                                                                                                            | except per share data)                     |                          
|ASSETS                                        
|Current assets:                                |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |        |       |        
|                                               | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                  |                                            | $                         | 11,889  |        |        | $     | 32,670  |       
|                                               | Short-term investments                                                                                                                                                                                                                                                                                                                                                     |                                            |                           | 26,756  |        |        |       |        |       
|                                               | Accounts receivable, net of allowances of $483 and $481 in 2004
    and 2003, respectively                                                                                                                                                                                                                                                                                 |                                            |                           | 6,983   |        |        |       | 5,786   |       
|                                               | Inventories                                                                                                                                                                                                                                                                                                                                                                |                                            |                           | 2,692   |        |        |       | 1,672   |       
|                                               | Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                  |                                            |                           | 2,096   |        |        |       | 1,732   |       
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       
|                                               |                                                                                                                                                                                                                                                                                                                                                                            | Total current assets                       |                           |         | 50,416 |        |       |         | 41,860 |      
|Equipment and leasehold improvements, net      |                                                                                                                                                                                                                                                                                                                                                                            |                                            | 498                       |         |        |        | 496   |        
|Acquired product rights, net                   |                                                                                                                                                                                                                                                                                                                                                                            |                                            | 1,164                     |         |        |        | 1,749 |        
|Other assets                                   |                                                                                                                                                                                                                                                                                                                                                                            |                                            | 43                        |         |        |        | 27    |        
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       
|                                               |                                                                                                                                                                                                                                                                                                                                                                            | Total assets                               |                           | $       | 52,121 |        |       | $       | 44,132 |      
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY          
|Current liabilities:                           |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |        |       |        
|                                               | Accounts payable                                                                                                                                                                                                                                                                                                                                                           |                                            |                           | 4,105   |        |        |       | 3,729   |       
|                                               | Accrued expenses                                                                                                                                                                                                                                                                                                                                                           |                                            |                           | 5,797   |        |        |       | 5,321   |       
|                                               | Preferred dividends payable                                                                                                                                                                                                                                                                                                                                                |                                            |                           | 800     |        |        |       | 800     |       
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            | Total current liabilities |         |        | 10,702 |       |         |        | 9,850 | 
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       
|Deferred revenue                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            | 204                       |         |        |        | 326   |        
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       
|Commitments and contingencies (Notes 6 and 12) |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |        |       |        
|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 2004 and
    2003, (liquidation value $20,800); 150,000 shares of
    Series A participating preferred stock, $0.01 par
    value, designated and no shares issued and outstanding in 2004
    and 2003 |                                            |                           | 2       |        |        |       | 2       |       
|                                               | Common stock, $0.01 par value; 25,000,000 shares
    authorized, 14,385,877 and 13,842,200 shares issued and
    outstanding in 2004 and 2003, respectively                                                                                                                                                                                                                |                                            |                           | 144     |        |        |       | 138     |       
|                                               | Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                 |                                            |                           | 106,016 |        |        |       | 103,670 |       
|                                               | Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                                                       |                                            |                           | (21     | )      |        |       |        |       
|                                               | Accumulated deficit                                                                                                                                                                                                                                                                                                                                                        |                                            |                           | (64,926 | )      |        |       | (69,854 | )     
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       
|                                               |                                                                                                                                                                                                                                                                                                                                                                            | Stockholders equity                       |                           |         | 41,215 |        |       |         | 33,956 |      
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       
|                                               |                                                                                                                                                                                                                                                                                                                                                                            | Total liabilities and stockholders equity |                           | $       | 52,121 |        |       | $       | 44,132 |      
|                                               |                                                                                                                                                                                                                                                                                                                                                                            |                                            |                           |         |        |       



F-3



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES





Consolidated Statements of Operations


Years ended December 31, 2004, 2003 and 2002


|                                                                         |                                                         |                                               |       |            |        |   |       |            |        |   |       |            |        | 
|------------------------------------------------------------------------ | ------------------------------------------------------- | --------------------------------------------- | ----- | ---------- | ------ | - | ----- | ---------- | ------ | - | ----- | ---------- | ------ | 
|                                                                         |                                                         | 2004                                          |       |            | 2003   |   |       | 2002       |       
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|                                                                         |                                                         | (Dollars in thousands, except per share data) |      
|Revenues:                                                                |                                                         |                                               |       |            |        |   |       |            |        |   |       |           
|                                                                         | Net product sales                                       |                                               | $     | 51,739     |        |   | $     | 49,038     |        |   | $     | 42,111     |       
|                                                                         | Contract revenues                                       |                                               |       | 237        |        |   |       | 3,122      |        |   |       | 2,332      |       
|                                                                         | License revenues                                        |                                               |       | 170        |        |   |       | 699        |        |   |       | 176        |       
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|                                                                         |                                                         | Total revenues                                |       |            | 52,146 |   |       |            | 52,859 |   |       |            | 44,619 | 
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|Operating expenses:                                                      |                                                         |                                               |       |            |        |   |       |            |        |   |       |           
|                                                                         | Cost of product sales                                   |                                               |       | 7,446      |        |   |       | 7,362      |        |   |       | 6,713      |       
|                                                                         | Research and development                                |                                               |       | 8,843      |        |   |       | 5,462      |        |   |       | 4,394      |       
|                                                                         | Selling, general and administrative  other             |                                               |       | 31,765     |        |   |       | 33,668     |        |   |       | 32,699     |       
|                                                                         | Gain on sale of UK and European Dental assets (note 11) |                                               |       | (2,980     | )      |   |       |           |        |   |       |           |       
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|                                                                         |                                                         | Total operating expenses                      |       |            | 45,074 |   |       |            | 46,492 |   |       |            | 43,806 | 
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|                                                                         |                                                         | Operating income                              |       |            | 7,072  |   |       |            | 6,367  |   |       |            | 813    | 
|Other income (expense):                                                  |                                                         |                                               |       |            |        |   |       |            |        |   |       |           
|                                                                         | Interest income                                         |                                               |       | 421        |        |   |       | 148        |        |   |       | 77         |       
|                                                                         | Interest expense                                        |                                               |       |           |        |   |       |           |        |   |       | (5         | )     
|                                                                         | Other, net                                              |                                               |       | 2          |        |   |       | (3         | )      |   |       | 17         |       
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|                                                                         |                                                         | Income before income taxes                    |       |            | 7,495  |   |       |            | 6,512  |   |       |            | 902    | 
|                                                                         | Income taxes                                            |                                               |       | 967        |        |   |       | 85         |        |   |       |           |       
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|                                                                         |                                                         | Net income                                    |       |            | 6,528  |   |       |            | 6,427  |   |       |            | 902    | 
|Preferred stock dividends                                                |                                                         |                                               | 1,600 |            |        |   | 1,600 |            |        |   | 1,629 |           
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|Net income (loss) allocable to common stockholders                       |                                                         | $                                             | 4,928 |            |        | $ | 4,827 |            |        | $ | (727  | )         
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|Basic net income (loss) per share allocable to common
    stockholders   |                                                         | $                                             | 0.35  |            |        | $ | 0.40  |            |        | $ | (0.06 | )         
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|Diluted net income (loss) per share allocable to common
    stockholders |                                                         | $                                             | 0.34  |            |        | $ | 0.38  |            |        | $ | (0.06 | )         
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|Weighted average shares used in computing per share amounts:             |                                                         |                                               |       |            |        |   |       |            |        |   |       |           
|                                                                         | Basic                                                   |                                               |       | 14,264,687 |        |   |       | 12,094,638 |        |   |       | 11,234,652 |       
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       
|                                                                         | Diluted                                                 |                                               |       | 14,500,637 |        |   |       | 12,836,364 |        |   |       | 11,234,652 |       
|                                                                         |                                                         |                                               |       |            |        |   |       |            |       



F-4



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES





Consolidated Statements of Stockholders Equity


Years ended December 31, 2004, 2003 and 2002


|                                                                                       |  |                     |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |        |               |             |       |         |              |  |        |               |   |        |   |         |   |  |   |        |   |  |   |       |  
|-------------------------------------------------------------------------------------- |  | ------------------- | ------- |  | ------------ | - | --------- | ---------------------- |  |  | ---------- | ----------- |  | ------ | ------- |  | ------- | ------------- | ------ | ------------- | ----------- | ----- | ------- | ------------ |  | ------ | ------------- | - | ------ | - | ------- | - |  | - | ------ | - |  | - | ----- | -
|                                                                                       |  | Series D Cumulative |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |       
|                                                                                       |  | Convertible         |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |        
|                                                                                       |  | Preferred Stock     |         |  | Common Stock |   |           |                        |  |  |            | Accumulated |  |        |         |  |         |               |       
|                                                                                       |  |                     |         |  |              |   |           | Common                 |  |  | Additional |             |  | Other  |         |  |         |               | Total  |               |             | Total |        
|                                                                                       |  | Number of           |         |  |              |   | Number of |                        |  |  |            | Stock to be |  |        | Paid-In |  |         | Comprehensive |        |               | Accumulated |       |         | Stockholders |  |        | Comprehensive |  
|                                                                                       |  | Shares              |         |  | Par Value    |   |           | Shares                 |  |  | Par Value  |             |  | Issued |         |  | Capital |               |        | Income (loss) |             |       | Deficit |              |  | Equity |               |   | Income |  
|                                                                                       |  |                     |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |        |               |             |       |         |              |  |        |               |   |        |  
|                                                                                       |  |                     |         |  |              |   |           | (Dollars in thousands) |  |  |            |             |  |        |         |  |        
|Balance, December 31, 2001                                                             |  |                     | 200,000 |  |              | $ | 2         |                        |  |  | 10,999,573 |             |  | $      | 110     |  |         | $             | 840    |               |             | $     | 80,129  |              |  | $      |              |   |        | $ | (73,954 | ) |  | $ | 7,127  |   |  |   |       |  
|Exercise of common stock options and warrants                                          |  |                     |        |  |              |   |          |                        |  |  | 35,704     |             |  |        |        |  |         |               |       |               |             |       | 165     |              |  |        |              |   |        |   |        |   |  |   | 165    |   |  |   |       |  
|Issuance of common stock, net of issuance cost                                         |  |                     |        |  |              |   |          |                        |  |  | 151,522    |             |  |        | 2       |  |         |               |       |               |             |       | 1,174   |              |  |        |              |   |        |   |        |   |  |   | 1,176  |   |  |   |       |  
|Common stock dividends declared on Series D cumulative
    convertible preferred stock |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               | 611    |               |             |       |        |              |  |        |              |   |        |   | (611    | ) |  |   |       |   |  |   |       |  
|Common stock dividends issued on Series D cumulative
    convertible preferred stock   |  |                     |        |  |              |   |          |                        |  |  | 190,832    |             |  |        | 2       |  |         |               | (1,451 | )             |             |       | 1,449   |              |  |        |              |   |        |   |        |   |  |   |       |   |  |   |       |  
|Cash dividends paid on Series D cumulative convertible
    preferred stock             |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       |        |              |  |        |              |   |        |   | (218    | ) |  |   | (218   | ) |  |   |       |  
|Cash dividends declared on Series D cumulative convertible
    preferred stock         |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       |        |              |  |        |              |   |        |   | (800    | ) |  |   | (800   | ) |  |   |       |  
|Net income                                                                             |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       |        |              |  |        |              |   |        |   | 902     |   |  |   | 902    |   |  | $ | 902   |  
|                                                                                       |  |                     |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |        |               |             |       |         |              |  |        |               |   |        |  
|Balance, December 31, 2002                                                             |  |                     | 200,000 |  |              |   | 2         |                        |  |  | 11,377,631 |             |  |        | 114     |  |         |               |       |               |             |       | 82,917  |              |  |        |              |   |        |   | (74,681 | ) |  |   | 8,352  |   |  | $ | 902   |  
|                                                                                       |  |                     |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |        |               |             |       |         |              |  |        |               |   |        |  
|Exercise of common stock options and warrants                                          |  |                     |        |  |              |   |          |                        |  |  | 464,569    |             |  |        | 4       |  |         |               |       |               |             |       | 1,819   |              |  |        |              |   |        |   |        |   |  |   | 1,823  |   |  |   |       |  
|Issuance of common stock, net of issuance cost                                         |  |                     |        |  |              |   |          |                        |  |  | 2,000,000  |             |  |        | 20      |  |         |               |       |               |             |       | 18,683  |              |  |        |              |   |        |   |        |   |  |   | 18,703 |   |  |   |       |  
|Cash dividends declared on Series D cumulative convertible
    preferred stock         |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       |        |              |  |        |              |   |        |   | (1,600  | ) |  |   | (1,600 | ) |  |   |       |  
|Compensation expense resulting from the modification of options                        |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       | 251     |              |  |        |              |   |        |   |        |   |  |   | 251    |   |  |   |       |  
|Net income                                                                             |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       |        |              |  |        |              |   |        |   | 6,427   |   |  |   | 6,427  |   |  | $ | 6,427 |  
|                                                                                       |  |                     |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |        |               |             |       |         |              |  |        |               |   |        |  
|Balance, December 31, 2003                                                             |  |                     | 200,000 |  |              |   | 2         |                        |  |  | 13,842,200 |             |  |        | 138     |  |         |               |       |               |             |       | 103,670 |              |  |        |              |   |        |   | (69,854 | ) |  |   | 33,956 |   |  | $ | 6,427 |  
|                                                                                       |  |                     |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |        |               |             |       |         |              |  |        |               |   |        |  
|Exercise of common stock options and warrants                                          |  |                     |        |  |              |   |          |                        |  |  | 543,677    |             |  |        | 6       |  |         |               |       |               |             |       | 2,346   |              |  |        |              |   |        |   |        |   |  |   | 2,352  |   |  |   |       |  
|Cash dividends declared on Series D cumulative convertible
    preferred stock         |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       |        |              |  |        |              |   |        |   | (1,600  | ) |  |   | (1,600 | ) |  |   |       |  
|Net income                                                                             |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       |        |              |  |        |              |   |        |   | 6,528   |   |  |   | 6,528  |   |  | $ | 6,528 |  
|Net unrealized loss on short-term investments                                          |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       |        |              |  |        | (21           | ) |        |   |         |   |  |   | (21    | ) |  |   | (21   | )
|                                                                                       |  |                     |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |        |               |             |       |         |              |  |        |               |   |        |  
|Total comprehensive income                                                             |  |                     |        |  |              |   |          |                        |  |  |           |             |  |        |        |  |         |               |       |               |             |       |        |              |  |        |              |   |        |   |        |   |  |   |       |   |  | $ | 6,507 |  
|                                                                                       |  |                     |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |        |               |             |       |         |              |  |        |               |   |        |  
|Balance, December 31, 2004                                                             |  |                     | 200,000 |  |              | $ | 2         |                        |  |  | 14,385,877 |             |  | $      | 144     |  |         | $             |       |               |             | $     | 106,016 |              |  | $      | (21           | ) |        | $ | (64,926 | ) |  | $ | 41,215 |   |  |   |       |  
|                                                                                       |  |                     |         |  |              |   |           |                        |  |  |            |             |  |        |         |  |         |               |        |               |             |       |         |              |  |        |               |   |        |  



F-5



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES





Consolidated Statements of Cash Flows


Years ended December 31, 2004, 2003 and 2002


|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |     |        |        |       |     |       |        |  
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------- | ---------------------------------------------------- | ------ | ------ | ------- | ------ | --- | ------ | ------ | ----- | --- | ----- | ------ | -
|                                                                         |                                                                                       | 2004                                                    |                                   |                                                      | 2003   |        |         | 2002   |    
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|                                                                         |                                                                                       | (Dollars in thousands)                                  |                                  
|Cash flows from operating activities:                                    |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |     |        |        |      
|                                                                         | Net income                                                                            |                                                         | $                                 | 6,528                                                |        |        | $       | 6,427  |     |        | $      | 902   |    
|                                                                         | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                         |                                   |                                                      |        |        |         |        |     |        |        |       |    
|                                                                         |                                                                                       | Noncash compensation expense                            |                                   |                                                      |       |        |         |        | 251 |        |        |       |    |      
|                                                                         |                                                                                       | Depreciation and amortization expense                   |                                   |                                                      | 875    |        |         |        | 954 |        |        |       | 524 |      
|                                                                         |                                                                                       | Accounts receivable provisions                          |                                   |                                                      | 2      |        |         |        | 42  |        |        |       | 43  |      
|                                                                         |                                                                                       | Gain on sale of UK and European dental assets (note 11) |                                   |                                                      | (2,980 | )      |         |        |    |        |        |       |    |      
|                                                                         |                                                                                       | Charge for in-process research and development          |                                   |                                                      | 300    |        |         |        |    |        |        |       |    |      
|                                                                         |                                                                                       | Change in assets and liabilities:                       |                                   |                                                      |        |        |         |        |     |        |        |       |     |      
|                                                                         |                                                                                       |                                                         | Accounts receivable               |                                                      |        | (1,199 | )       |        |     | (2,713 | )      |       |     | 1,874 |       
|                                                                         |                                                                                       |                                                         | Inventories                       |                                                      |        | (1,020 | )       |        |     | (257   | )      |       |     | (13   | )     
|                                                                         |                                                                                       |                                                         | Prepaid expenses and other assets |                                                      |        | (380   | )       |        |     | (688   | )      |       |     | 156   |       
|                                                                         |                                                                                       |                                                         | Accounts payable                  |                                                      |        | 376    |         |        |     | (258   | )      |       |     | (163  | )     
|                                                                         |                                                                                       |                                                         | Accrued expenses                  |                                                      |        | 326    |         |        |     | 1,314  |        |       |     | 681   |       
|                                                                         |                                                                                       |                                                         | Deferred revenue                  |                                                      |        | (122   | )       |        |     | (235   | )      |       |     | (53   | )     
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|                                                                         |                                                                                       |                                                         |                                   | Net cash provided by operating activities            |        |        | 2,706   |        |     |        | 4,837  |       |     |       | 3,951  |  
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|Cash flows from investing activities:                                    |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |     |        |        |      
|                                                                         | Capital expenditures                                                                  |                                                         |                                   | (292                                                 | )      |        |         | (305   | )   |        |        | (298  | )  
|                                                                         | Net proceeds from the sale of UK and European dental assets
    (note 11)             |                                                         |                                   | 2,980                                                |        |        |         |       |     |        |        |      |    
|                                                                         | Acquisition of product rights                                                         |                                                         |                                   |                                                     |        |        |         | (900   | )   |        |        | (800  | )  
|                                                                         | Purchase of in-process research and development                                       |                                                         |                                   | (150                                                 | )      |        |         |       |     |        |        |      |    
|                                                                         | Purchase of short-term investments                                                    |                                                         |                                   | (26,777                                              | )      |        |         |       |     |        |        |      |    
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|                                                                         |                                                                                       |                                                         |                                   | Net cash used in investing activities                |        |        | (24,239 | )      |     |        | (1,205 | )     |     |       | (1,098 | )
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|Cash flows from financing activities:                                    |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |     |        |        |      
|                                                                         | Net proceeds from issuance of common stock                                            |                                                         |                                   | 2,352                                                |        |        |         | 20,526 |     |        |        | 1,341 |    
|                                                                         | Payment of preferred dividends                                                        |                                                         |                                   | (1,600                                               | )      |        |         | (1,600 | )   |        |        | (218  | )  
|                                                                         | Repayment of long-term debt                                                           |                                                         |                                   |                                                     |        |        |         |       |     |        |        | (35   | )  
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|                                                                         |                                                                                       |                                                         |                                   | Net cash provided by financing activities            |        |        | 752     |        |     |        | 18,926 |       |     |       | 1,088  |  
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|                                                                         |                                                                                       |                                                         |                                   | Net (decrease) increase in cash and cash equivalents |        |        | (20,781 | )      |     |        | 22,558 |       |     |       | 3,941  |  
|Cash and cash equivalents at beginning of year                           |                                                                                       |                                                         | 32,670                            |                                                      |        |        | 10,112  |        |     |        | 6,171  |      
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|Cash and cash equivalents at end of year                                 |                                                                                       | $                                                       | 11,889                            |                                                      |        | $      | 32,670  |        |     | $      | 10,112 |      
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|Supplemental schedule of noncash investing and financing
    activities: |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |     |        |        |      
|                                                                         | Common stock dividends issued or issuable on preferred stock                          |                                                         | $                                 |                                                     |        |        | $       |       |     |        | $      | 1,451 |    
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|                                                                         | Accrued liability for licenses                                                        |                                                         | $                                 | 150                                                  |        |        | $       |       |     |        | $      | 900   |    
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|                                                                         | Cash dividends declared but not paid on preferred stock                               |                                                         | $                                 | 800                                                  |        |        | $       | 800    |     |        | $      | 800   |    
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|                                                                         | Issuance of warrants to purchase common stock in connection with
    equity line      |                                                         | $                                 |                                                     |        |        | $       |       |     |        | $      | 248   |    
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|Supplemental disclosure of cash flow information:                        |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |     |        |        |      
|                                                                         | Cash paid during the year for interest                                                |                                                         | $                                 |                                                     |        |        | $       |       |     |        | $      | 5     |    
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    
|                                                                         | Cash paid during the year for income taxes                                            |                                                         | $                                 | 25                                                   |        |        | $       | 197    |     |        | $      |      |    
|                                                                         |                                                                                       |                                                         |                                   |                                                      |        |        |         |        |    



F-6



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES





Notes to Consolidated Financial Statements


December 31, 2004, 2003 and 2002


(Dollars in thousands, except per share data)




|    |         
|--- | --------
|(1) | Business



tm




|    |                                           
|--- | ------------------------------------------
|(2) | Summary of Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation





| |                                                  
| | -------------------------------------------------
| | Cash, Cash Equivalents and Short-term Investments





| |            
| | -----------
| | Inventories





| |                        
| | -----------------------
| | Acquired Product Rights



F-7



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




| |                                     
| | ------------------------------------
| | Equipment and Leasehold Improvements





| |                    
| | -------------------
| | Segment Information





| |                      
| | ---------------------
| | Financial Instruments





| |                  
| | -----------------
| | Net Product Sales





| |                  
| | -----------------
| | Contract Revenues





| |                
| | ---------------
| | License Revenue





F-8



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




| |                  
| | -----------------
| | Advertising Costs





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





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





| |                     
| | --------------------
| | Management Estimates





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





F-9



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                                                                         |                                                                                                                    |      |       |        |      |   |       |        |   |   |      |        |  
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------ | ---- | ----- | ------ | ---- | - | ----- | ------ | - | - | ---- | ------ | -
|                                                                         |                                                                                                                    | 2004 |       |        | 2003 |   |       | 2002   |  
|                                                                         |                                                                                                                    |      |       |        |      |   |       |        |  
|Net income (loss) allocable to common stockholders:                      |                                                                                                                    |      |       |        |      |   |       |        |   |   |      |       
|As reported                                                              |                                                                                                                    | $    | 4,928 |        |      | $ | 4,827 |        |   | $ | (727 | )     
|                                                                         | Add: Stock-based employee compensation expenses included in net
    income (loss) allocable to common stockholders |      |       |       |      |   |       | 251    |   |   |      |       |  
|                                                                         | Less: Stock-based employee compensation under fair value based
    method                                          |      |       | (3,679 | )    |   |       | (5,015 | ) |   |      | (3,735 | )
|                                                                         |                                                                                                                    |      |       |        |      |   |       |        |  
|                                                                         | Pro forma net income (loss)                                                                                        |      | $     | 1,249  |      |   | $     | 63     |   |   | $    | (4,462 | )
|                                                                         |                                                                                                                    |      |       |        |      |   |       |        |  
|Basic net income (loss) per share allocable to common
    stockholders:  |                                                                                                                    |      |       |        |      |   |       |        |   |   |      |       
|                                                                         | As reported                                                                                                        |      | $     | 0.35   |      |   | $     | 0.40   |   |   | $    | (0.06  | )
|                                                                         |                                                                                                                    |      |       |        |      |   |       |        |  
|                                                                         | Pro forma net income (loss)                                                                                        |      | $     | 0.09   |      |   | $     | 0.01   |   |   | $    | (0.40  | )
|                                                                         |                                                                                                                    |      |       |        |      |   |       |        |  
|Diluted net income (loss) per share allocable to common
    stockholders |                                                                                                                    |      |       |        |      |   |       |        |   |   |      |       
|                                                                         | As reported                                                                                                        |      | $     | 0.34   |      |   | $     | 0.38   |   |   | $    | (0.06  | )
|                                                                         |                                                                                                                    |      |       |        |      |   |       |        |  
|                                                                         | Pro forma net income (loss)                                                                                        |      | $     | 0.09   |      |   | $     | 0.01   |   |   | $    | (0.40  | )
|                                                                         |                                                                                                                    |      |       |        |      |   |       |        |  



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











| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets



F-10



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)






| |                            
| | ---------------------------
| | Net Income (Loss) Per Share







| |                                     
| | ------------------------------------
| | Recently Issued Accounting Standards





F-11



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)






| |                 
| | ----------------
| | Reclassification





|    |                                                    
|--- | ---------------------------------------------------
|(3) | Composition of Certain Financial Statement Captions



| |            
| | -----------
| | Inventories



|                |  |      |       |  |      |   |       | 
|--------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                |  | 2004 |       |  | 2003 |  
|                |  |      |       |  |      |  
|Raw materials   |  | $    | 395   |  |      | $ | 396   | 
|Work-in-process |  |      | 394   |  |      |   | 52    | 
|Finished goods  |  |      | 1,903 |  |      |   | 1,224 | 
|                |  |      |       |  |      |  
|                |  | $    | 2,692 |  |      | $ | 1,672 | 
|                |  |      |       |  |      |  



| |                                     
| | ------------------------------------
| | Equipment and Leasehold Improvements



|                                                |  |      |        |   |      |   |        |             |  |                                   |           | 
|----------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ----------- |  | --------------------------------- | --------- | 
|                                                |  | 2004 |        |   | 2003 |   |        | Useful Life | 
|                                                |  |      |        |   |      |   |        |             | 
|Computer and office equipment                   |  | $    | 1,365  |   |      | $ | 1,133  |             |  |                                   | 3-5 years | 
|Exhibit equipment                               |  |      | 496    |   |      |   | 451    |             |  |                                   | 5 years   | 
|Leasehold improvements                          |  |      | 60     |   |      |   | 45     |             |  | Shorter of 10 years or lease term
|                                                |  |      |        |   |      |   |        |             | 
|                                                |  |      | 1,921  |   |      |   | 1,629  |             |  |                                   |           | 
|Less: accumulated depreciation and amortization |  |      | (1,423 | ) |      |   | (1,133 | )           |  |                                   |           | 
|                                                |  |      |        |   |      |   |        |             | 
|                                                |  | $    | 498    |   |      | $ | 496    |             |  |                                   |           | 
|                                                |  |      |        |   |      |   |        |             | 



| |                        
| | -----------------------
| | Acquired Product Rights



|                               |  |      |        |   |      |   |       |  
|------------------------------ |  | ---- | ------ | - | ---- | - | ----- | -
|                               |  | 2004 |        |   | 2003 |  
|                               |  |      |        |   |      |  
|Acquired product rights        |  | $    | 2,700  |   |      | $ | 2,700 |  
|Less: accumulated amortization |  |      | (1,536 | ) |      |   | (951  | )
|                               |  |      |        |   |      |  
|                               |  | $    | 1,164  |   |      | $ | 1,749 |  
|                               |  |      |        |   |      |  

F-12



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|           |  |   |       | 
|---------- |  | - | ----- | 
|2005       |  | $ | 586   | 
|2006       |  |   | 100   | 
|2007       |  |   | 100   | 
|2008       |  |   | 100   | 
|2009       |  |   | 100   | 
|Thereafter |  |   | 178   | 
|           |  |   |      
|           |  | $ | 1,164 | 
|           |  |   |      



| |                 
| | ----------------
| | Accrued Expenses



|                                               |  |      |       |  |      |   |       | 
|---------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                                               |  | 2004 |       |  | 2003 |  
|                                               |  |      |       |  |      |  
|Contracted development and manufacturing costs |  | $    | 1,648 |  |      | $ | 835   | 
|Sales and marketing costs                      |  |      | 212   |  |      |   | 202   | 
|Payroll and related costs                      |  |      | 1,731 |  |      |   | 1,925 | 
|Professional and consulting fees               |  |      | 159   |  |      |   | 922   | 
|Royalties                                      |  |      | 212   |  |      |   | 189   | 
|Deferred revenue                               |  |      | 54    |  |      |   | 52    | 
|Foreign taxes                                  |  |      | 945   |  |      |   | 85    | 
|Product returns                                |  |      | 592   |  |      |   | 827   | 
|Miscellaneous taxes                            |  |      | 99    |  |      |   | 139   | 
|Other                                          |  |      | 145   |  |      |   | 145   | 
|                                               |  |      |       |  |      |  
|                                               |  | $    | 5,797 |  |      | $ | 5,321 | 
|                                               |  |      |       |  |      |  



|    |                     
|--- | --------------------
|(4) | Stockholders Equity







F-13



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)












F-14



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)












|    |                                                
|--- | -----------------------------------------------
|(5) | Acquisition/ Licensing/ Co-Promotion Agreements

tm


F-15



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)














F-16



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)












|    |               
|--- | --------------
|(6) | Line of Credit





|    |                   
|--- | ------------------
|(7) | Stock Option Plans







F-17



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)










|                           |           |         |           |                  |                          |   |      |       | 
|-------------------------- | --------- | ------- | --------- | ---------------- | ------------------------ | - | ---- | ----- | 
|                           |           |         |           | Weighted Average |                         
|                           |           | Options |           |                  | Exercise Price Per Share |  
|                           |           |         |           |                  |                          |  
|Balance, December 31, 2001 |           |         | 2,452,609 |                  |                          | $ | 9.15 |      
|                           | Granted   |         |           | 616,086          |                          |   |      | 7.91  | 
|                           | Exercised |         |           | (31,050          | )                        |   |      | 4.70  | 
|                           | Cancelled |         |           | (82,475          | )                        |   |      | 9.90  | 
|                           |           |         |           |                  |                          |  
|Balance, December 31, 2002 |           |         | 2,955,170 |                  |                          |   | 8.91 |      
|                           | Granted   |         |           | 899,350          |                          |   |      | 10.23 | 
|                           | Exercised |         |           | (374,374         | )                        |   |      | 4.52  | 
|                           | Cancelled |         |           | (47,142          | )                        |   |      | 10.38 | 
|                           |           |         |           |                  |                          |  
|Balance, December 31, 2003 |           |         | 3,433,004 |                  |                          |   | 9.72 |      
|                           | Granted   |         |           | 744,007          |                          |   |      | 9.12  | 
|                           | Exercised |         |           | (354,634         | )                        |   |      | 6.19  | 
|                           | Cancelled |         |           | (551,154         | )                        |   |      | 10.95 | 
|                           |           |         |           |                  |                          |  
|Balance, December 31, 2004 |           |         | 3,271,223 |                  |                          | $ | 9.76 |      
|                           |           |         |           |                  |                          |  



|                         |  |             |           |           |                 |  |          |                |  |   |           |          |  |                |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | --------- | --------------- |  | -------- | -------------- |  | - | --------- | -------- |  | -------------- | --------- |  |  | - | ----- | 
|                         |  | Outstanding |           |           |                
|                         |  |             |           |           | Exercisable     | 
|                         |  |             |           | Weighted  |                 |  |          |                |  |  
|                         |  |             |           | Average   |                 |  | Weighted |                |  |   |           | Weighted | 
|                         |  |             |           | Remaining |                 |  | Average  |                |  |   |           | Average  | 
|                         |  | Number of   |           |           | Contractual     |  |          | Exercise Price |  |   | Number of |          |  | Exercise Price |          
|Range of Exercise Prices |  | Options     |           |           | Life (in Years) |  |          | Per Share      |  |   | Options   |          |  | Per Share      |          
|                         |  |             |           |           |                 |  |          |                |  |   |           |          |  |                |          
|$ 0.33  $ 2.00          |  |             | 26,500    |           |                 |  | 0.3      |                |  | $ | 0.59      |          |  |                | 26,500    |  |  | $ | 0.59  | 
|$ 4.50  $ 6.99          |  |             | 622,553   |           |                 |  | 7.2      |                |  | $ | 5.82      |          |  |                | 335,975   |  |  | $ | 5.43  | 
|$ 7.01  $ 8.88          |  |             | 453,620   |           |                 |  | 6.9      |                |  | $ | 8.06      |          |  |                | 291,120   |  |  | $ | 8.05  | 
|$ 9.00  $11.88          |  |             | 1,693,720 |           |                 |  | 7.0      |                |  | $ | 10.10     |          |  |                | 677,037   |  |  | $ | 9.91  | 
|$12.00  $24.25          |  |             | 474,830   |           |                 |  | 4.5      |                |  | $ | 15.84     |          |  |                | 459,330   |  |  | $ | 15.77 | 
|                         |  |             |           |           |                 |  |          |                |  |   |           |          |  |                |          
|                         |  |             | 3,271,223 |           |                 |  | 6.6      |                |  | $ | 9.76      |          |  |                | 1,789,962 |  |  | $ | 10.13 | 
|                         |  |             |           |           |                 |  |          |                |  |   |           |          |  |                |          

F-18



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                         |                         |      |      |      |      |  |      |      |  |  |      |      | 
|------------------------ | ----------------------- | ---- | ---- | ---- | ---- |  | ---- | ---- |  |  | ---- | ---- | 
|                         |                         | 2004 |      |      | 2003 |  |      | 2002 | 
|                         |                         |      |      |      |      |  |      |      | 
|Expected life in years  |                         |      |      |      |      |  |      |      |  |  |      |     
|                         | Employees and directors |      |      | 7.02 |      |  |      | 7.00 |  |  |      | 7.00 | 
|Risk-free interest rate  |                         |      | 3.87 | %    |      |  | 3.52 | %    |  |  | 4.30 | %   
|Volatility               |                         |      | 80   | %    |      |  | 81   | %    |  |  | 83   | %   
|Expected dividend yield  |                         |      |     | %    |      |  |     | %    |  |  |     | %   









|    |             
|--- | ------------
|(8) | Income Taxes



|        |  |              |     |  |      |   |    |      |  |   |   | 
|------- |  | ------------ | --- |  | ---- | - | -- | ---- |  | - | - | 
|        |  | Year Ended  
|        |  | December 31,
|        |  |             
|Current |  | 2004         |     |  | 2003 |   |    | 2002
|        |  |              |     |  |      |   |    |     
|Federal |  | $            | 22  |  |      | $ | 80 |      |  | $ |  | 
|Foreign |  |              | 945 |  |      |   |   |      |  |   |  | 
|State   |  |              |    |  |      |   | 5  |      |  |   |  | 
|        |  |              |     |  |      |   |    |      | 
|        |  | $            | 967 |  |      | $ | 85 |      |  | $ |  | 
|        |  |              |     |  |      |   |    |      | 

F-19



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                             |                                         |                         |       |        |      |  |      |       |   |   |       |        |   |  |      |       |   |   |     |      |   |  |      |       |  
|---------------------------- | --------------------------------------- | ----------------------- | ----- | ------ | ---- |  | ---- | ----- | - | - | ----- | ------ | - |  | ---- | ----- | - | - | --- | ---- | - |  | ---- | ----- | -
|                             |                                         | Year Ended December 31, |      
|                             |                                         |                         |      
|                             |                                         | 2004                    |       |        | 2003 |  |      | 2002  |  
|                             |                                         |                         |       |        |      |  |      |       |  
|Statutory Federal income tax |                                         | $                       | 2,541 |        |      |  | 34.0 | %     |   | $ | 2,214 |        |   |  | 34.0 | %     |   | $ | 307 |      |   |  | 34.0 | %    
|Adjustments resulting from:  |                                         |                         |       |        |      |  |      |       |   |   |       |        |   |  |      |       |   |   |     |      |   |  |      |      
|                             | Foreign income taxed at different rates |                         |       | 16     |      |  |      | 0.2   |   |   |       |       |   |  |      |      |   |   |     |     |   |  |      |      |  
|                             | State taxes, net of Federal benefit     |                         |       |       |      |  |      |      |   |   |       | 3      |   |  |      |      |   |   |     | 16   |   |  |      | 1.8   |  
|                             | Permanent items and others              |                         |       | 87     |      |  |      | 1.1   |   |   |       | (316   | ) |  |      | (4.8  | ) |   |     | 221  |   |  |      | 24.5  |  
|                             | Decrease in valuation allowance         |                         |       | (1,677 | )    |  |      | (22.4 | ) |   |       | (1,816 | ) |  |      | (27.9 | ) |   |     | (544 | ) |  |      | (60.3 | )
|                             |                                         |                         |       |        |      |  |      |       |   |   |       |        |   |  |      |       |   |  
|Total income tax expense     |                                         | $                       | 967   |        |      |  | 12.9 | %     |   | $ | 85    |        |   |  | 1.3  | %     |   | $ |    |      |   |  |     | %    
|                             |                                         |                         |       |        |      |  |      |       |   |   |       |        |   |  |      |       |   |  



|                     |                                  |                             |                    |         |        |   |   |         |        |   | 
|-------------------- | -------------------------------- | --------------------------- | ------------------ | ------- | ------ | - | - | ------- | ------ | - | 
|                     |                                  | 2004                        |                    |         | 2003   |  
|                     |                                  |                             |                    |         |        |  
|Deferred tax assets: |                                  |                             |                    |         |        |   |   |        
|                     | Depreciation and amortization    |                             | $                  | 356     |        |   | $ | 244     |       
|                     | Net operating loss carryforwards |                             |                    | 20,184  |        |   |   | 21,737  |       
|                     | Tax credit carryforwards         |                             |                    | 1,043   |        |   |   | 973     |       
|                     | Accrued expenses                 |                             |                    | 921     |        |   |   | 1,190   |       
|                     | Deferred revenue                 |                             |                    | 96      |        |   |   | 134     |       
|                     |                                  |                             |                    |         |        |  
|                     |                                  | Total gross deferred assets |                    |         | 22,600 |   |   |         | 24,277 |  
|                     | Less valuation allowance         |                             |                    | (22,600 | )      |   |   | (24,277 | )     
|                     |                                  |                             |                    |         |        |  
|                     |                                  |                             | Net deferred taxes |         | $      |  |   |         | $      |  | 
|                     |                                  |                             |                    |         |        |  







F-20



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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)








|    |                   
|--- | ------------------
|(9) | Technology License







|     |                          
|---- | -------------------------
|(10) | Sales Force Restructuring





|     |                                        
|---- | ---------------------------------------
|(11) | Sale of U.K. and European Dental Assets

tm


F-21



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)






|     |                              
|---- | -----------------------------
|(12) | Commitments and Contingencies



|           |       |   |     |       | 
|---------- | ----- | - | --- | ----- | 
|2005       |       | $ | 554 |      
|2006       |       |   | 554 |      
|2007       |       |   | 360 |      
|2008       |       |   | 334 |      
|Thereafter |       |   | 195 |      
|           |       |   |    
|           | Total |   | $   | 1,997 | 
|           |       |   |    











F-22



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|     |                                  
|---- | ---------------------------------
|(13) | Legal Settlements and Proceedings











F-23



---



##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|     |                                           
|---- | ------------------------------------------
|(14) | Legal Expenses to Defend Periostat Patents





|     |                             
|---- | ----------------------------
|(15) | 401(k) Salary Reduction Plan





|     |                           
|---- | --------------------------
|(16) | Related Party Transactions





|     |                                     
|---- | ------------------------------------
|(17) | Quarterly Financial Data (Unaudited)



|                                                                                      |  |                    |        |   |          |   |        |               |  |   |              |  |  |   |        | 
|------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | -------- | - | ------ | ------------- |  | - | ------------ |  |  | - | ------ | 
|                                                                                      |  | Three Months Ended |       
|                                                                                      |  |                    |       
|                                                                                      |  | March 31,          |        |   | June 30, |   |        | September 30, |  |   | December 31, | 
|                                                                                      |  | 2004               |        |   | 2004     |   |        | 2004          |  |   | 2004         | 
|                                                                                      |  |                    |        |   |          |   |        |               |  |   |              | 
|Total revenues                                                                        |  | $                  | 13,406 |   |          | $ | 14,445 |               |  | $ | 11,075       |  |  | $ | 13,220 | 
|Gross margin on product sales                                                         |  |                    | 11,327 |   |          |   | 12,320 |               |  |   | 9,454        |  |  |   | 11,192 | 
|Net income (loss)                                                                     |  |                    | (34    | ) |          |   | 1,998  |               |  |   | 1,125        |  |  |   | 3,439  | 
|Net income allocable to common stockholders                                           |  |                    | (434   | ) |          |   | 1,598  |               |  |   | 725          |  |  |   | 3,039  | 
|Basic and diluted net income (loss) per share allocable to
    common stockholders(1) |  | $                  | (0.03  | ) |          | $ | 0.11   |               |  | $ | 0.05         |  |  | $ | 0.21   | 

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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


|                                                                 |  |                    |        |  |          |   |        |               |  |   |              |  |  |   |        | 
|---------------------------------------------------------------- |  | ------------------ | ------ |  | -------- | - | ------ | ------------- |  | - | ------------ |  |  | - | ------ | 
|                                                                 |  | Three Months Ended |       
|                                                                 |  |                    |       
|                                                                 |  | March 31,          |        |  | June 30, |   |        | September 30, |  |   | December 31, | 
|                                                                 |  | 2003               |        |  | 2003     |   |        | 2003          |  |   | 2003         | 
|                                                                 |  |                    |        |  |          |   |        |               |  |   |              | 
|Total revenues                                                   |  | $                  | 12,157 |  |          | $ | 12,686 |               |  | $ | 13,916       |  |  | $ | 14,099 | 
|Gross margin on product sales                                    |  |                    | 9,456  |  |          |   | 10,012 |               |  |   | 10,890       |  |  |   | 11,319 | 
|Net income                                                       |  |                    | 1,228  |  |          |   | 1,597  |               |  |   | 1,230        |  |  |   | 2,371  | 
|Net income allocable to common stockholders                      |  |                    | 828    |  |          |   | 1,197  |               |  |   | 830          |  |  |   | 1,971  | 
|Basic net income per share allocable to common stockholders(1)   |  | $                  | 0.07   |  |          | $ | 0.10   |               |  | $ | 0.07         |  |  | $ | 0.14   | 
|Diluted net income per share allocable to common stockholders(1) |  | $                  | 0.07   |  |          | $ | 0.10   |               |  | $ | 0.06         |  |  | $ | 0.14   | 






|    |                                                                           
|--- | --------------------------------------------------------------------------
|(1) | Quarterly figures do not summate to annualized figure due to
    rounding.

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##### Table of Contents



COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES





FINANCIAL STATEMENT SCHEDULE


Valuation and Qualifying Accounts


Years Ended December 31, 2004, 2003 and 2002


|                               |      |                |   |           |              |  |       |       |  |            |   |                |               |  |   |       |  |  |   |     | 
|------------------------------ | ---- | -------------- | - | --------- | ------------ |  | ----- | ----- |  | ---------- | - | -------------- | ------------- |  | - | ----- |  |  | - | --- | 
|Col A                          |      | Col B          |   |           | Col C        |  | Col D |       |  | Col E      |  
|                               |      |                |   |           |              |  |       |       |  |            |  
|                               |      |                |   | Additions |              |  |       |      
|                               |      |                |   |           |              |  |       |      
|                               |      | Balance at the |   |           | Charged to   |  |       |       |  |            |   |               
|                               |      | Beginning of   |   |           | Statement of |  |       |       |  |            |   | Balance at the |              
|Description                    |      | Period         |   |           | Operations   |  |       | Other |  | Deductions |   |                | End of Period | 
|                               |      |                |   |           |              |  |       |       |  |            |   |                |               | 
|                               |      | (In thousands) |  
|Accounts Receivable Allowance: |      |                |   |           |              |  |       |       |  |            |   |                |               |  |   |       |  |  |   |    
|                               | 2004 |                | $ | 481       |              |  | $     | 3,755 |  |            | $ |               |               |  | $ | 3,753 |  |  | $ | 483 | 
|                               | 2003 |                | $ | 475       |              |  | $     | 2,693 |  |            | $ |               |               |  | $ | 2,687 |  |  | $ | 481 | 
|                               | 2002 |                | $ | 530       |              |  | $     | 2,706 |  |            | $ |               |               |  | $ | 2,761 |  |  | $ | 475 | 

F-26