SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   ----------

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 1999
                             Commission File Number
                                     0-28308

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


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


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


                                 (215) 579-7388
                         -------------------------------
                         (Registrant's Telephone Number,
                              Including Area Code)


301 South State Street, Newtown, PA 18940
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)


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

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

      Indicate  the  number of shares  outstanding  of each of the  Registrant's
classes of common stock as of June 30, 1999:

                Class                                  Number of Shares
     ---------------------------                   ---------------------------
     Common Stock $.01 par value                           8,589,704


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.

                                TABLE OF CONTENTS


                                                                          Page
                                                                          ----

PART I.  FINANCIAL INFORMATION............................................  1

      Item 1.  Financial Statements.......................................  1

               Condensed Consolidated Balance Sheets as of December
                   31, 1998 and June 30, 1999 (unaudited).................  2

               Condensed Consolidated Statements of Operations for
                   the Three Months Ended June 30, 1998 and 1999
                   (unaudited)............................................  3

               Condensed Consolidated Statements of Operations for
                   the Six Months Ended June 30, 1998 and 1999
                   (unaudited)............................................  4

               Condensed Consolidated Statements of Cash Flows for
                   the Six Months Ended June 30, 1998 and 1999
                   (unaudited)............................................  5

               Notes to Condensed Consolidated Financial Statements
                   (unaudited)............................................  6

      Item 2.  Management's Discussion and Analysis of Financial
               Condition and Results of Operations........................  9

               Results of Operations......................................  10

               Liquidity and Capital Resources............................  12

      Item 3.  Quantitative and Qualitative Disclosures About Market
               Risk.......................................................  15

PART II. OTHER INFORMATION................................................  16

      Item 2.  Changes in Securities......................................  16

      Item 4.  Submission of Matters to a Vote of Security Holders........  16

      Item 5.  Other Information..........................................  17

      Item 6.  Exhibits and Reports on Form 8-K...........................  18

SIGNATURES................................................................  19


                                     - i -

<PAGE>















                          PART I. FINANCIAL INFORMATION


                          ITEM 1. FINANCIAL STATEMENTS.
















                                     - 1 -


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                       December 31, 1998 and June 30, 1999

                                                        DECEMBER 31,    JUNE 30,
                      ASSETS                               1998          1999
                                                        ------------   ---------
                                                                     (unaudited)

                                                        (dollars in thousands,
                                                        except per share data)

Current assets:
  Cash and cash equivalents ..........................    $  3,286     $ 21,640
  Short term investments .............................       6,964         --
  Accounts receivable, net of allowance of $293
   and $337 in 1998 and 1999, respectively ...........       3,045        1,036
  Inventories ........................................         342          634
  Prepaid expenses and other current assets ..........         823          736
                                                          --------     --------
      Total current assets ...........................      14,460       24,046

Equipment, net .......................................         267          613
Other assets .........................................          13           39
                                                          --------     --------
      Total assets ...................................    $ 14,740     $ 24,698
                                                          ========     ========

         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of note payable ....................    $   --       $     65
  Accounts payable ...................................       2,914        2,870
  Accrued expenses ...................................       2,545        3,008
                                                          --------     --------
      Total current liabilities ......................       5,459        5,943
                                                          --------     --------
Note payable, less current portion....................        --            143
                                                          --------     --------
Stockholders' equity:
  Preferred stock, $0.01 par value,
   5,000,000 shares authorized;  no shares and
   200,000 shares of Series D Cumulative
   Convertible Preferred Stock, $0.01 par value,
   issued and outstanding in 1998 and 1999,
   respectively ......................................        --              2
  Common stock, $0.01 par value, 25,000,000 shares
   authorized; 8,587,204 and 8,589,704 shares
   issued and outstanding in 1998 and 1999,
   respectively (liquidation value of $20,235,000
   at June 30, 1999)..................................          86           86
  Additional paid in capital .........................      47,317       65,840
  Deferred compensation ..............................        (194)        (135)
  Accumulated deficit ................................     (37,928)     (47,181)
                                                          --------     --------
      Stockholders' equity ...........................       9,281       18,612
                                                          --------     --------
Commitments
      Total liabilities and stockholders' equity .....    $ 14,740     $ 24,698
                                                          ========     ========


See accompanying notes to unaudited condensed consolidated financial statements.

                                     - 2 -


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
                For the Three Months Ended June 30, 1998 and 1999
                                   (unaudited)

                                                    THREE MONTHS ENDED JUNE 30,
                                                    ---------------------------
                                                         1998           1999
                                                      ---------      ---------
                                                       (dollars in thousands,
                                                       except per share data)

Revenues:
  Product sales.................................      $      --      $   3,210
  Contract revenues.............................              4            128
  License revenues..............................             --            100
                                                      ---------      ---------
      Total revenues............................              4          3,438
                                                      ---------      ---------
Operating expenses:
  Cost of product sales.........................             --            710
  Research and development......................          1,320          1,291
  Selling, general and administrative...........          1,474          5,677
                                                      ---------      ---------
      Total operating expenses..................          2,794          7,678
                                                      ---------      ---------
      Operating loss............................          2,790          4,240

Other income (expense):
Interest income.................................            270            245
Interest expense................................             --           (145)
Other income (expense)..........................              1             (2)
                                                      ---------      ---------
      Net loss..................................      $  (2,519)     $  (4,142)
                                                      ==========     =========
Preferred stock dividend........................             --            235
                                                      ---------      ---------
Net loss allocable to common stockholders.......         (2,519)        (4,377)
                                                      =========      =========
Net loss per share allocable to common
 stockholders:
  Basic and Diluted.............................      $   (0.29)       $ (0.51)
                                                      =========      =========

Shares used in computing net loss per share
 allocable to common stockholders:
  Basic and Diluted.............................      8,574,115      8,589,704
                                                      =========      =========


See accompanying notes to unaudited condensed consolidated financial statements.

                                     - 3 -


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
                 For the Six Months Ended June 30, 1998 and 1999
                                   (unaudited)

                                                     SIX MONTHS ENDED JUNE 30,
                                                     -------------------------
                                                         1998          1999
                                                      ---------      ---------
                                                       (dollars in thousands,
                                                       except per share data)

Revenues:
  Product sales.................................      $      --      $   5,620
  Contract revenues.............................              7            136
  License revenues..............................             --            100
                                                      ---------      ---------
      Total revenues............................              7          5,856
                                                      ---------      ---------
Operating expenses:
  Cost of product sales.........................             --          1,253
  Research and development......................          2,271          2,229
  Selling, general and administrative...........          2,936         11,772
                                                      ---------      ---------
      Total operating expenses..................          5,207         15,254
                                                      ---------      ---------
      Operating loss............................          5,200          9,398

Other income (expense):
Interest income.................................            573            359
Interest expense................................             --           (189)
Other income (expense)..........................              1             (2)
                                                      ---------      ---------
      Net loss..................................      $  (4,626)     $  (9,230)
                                                      ==========     =========
Preferred stock dividend........................             --            235
                                                      ---------      ---------
Net loss allocable to common stockholders.......         (4,626)        (9,465)
                                                      =========      =========
Net loss per share allocable to common
 stockholders:
  Basic and Diluted.............................      $   (0.54)       $ (1.10)
                                                      =========      =========

Shares used in computing net loss per share
 allocable to common stockholders:
  Basic and Diluted.............................      8,571,139      8,589,371
                                                      =========      =========


See accompanying notes to unaudited condensed consolidated financial statements.

                                     - 4 -


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
                 For the Six Months Ended June 30, 1998 and 1999
                                   (unaudited)

                                                     SIX MONTHS ENDED JUNE 30,
                                                     -------------------------
                                                         1998          1999
                                                       --------      --------
                                                       (dollars in thousands)

Cash flows from operating activities:
  Net loss .............................................   $ (4,626)   $ (9,230)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
     Noncash compensation expense ......................         61          58
     Depreciation and amortization expense .............         18          66
     Change in assets and liabilities:
      Decrease in accounts receivable ..................       --         2,009
      Increase in inventories ..........................       --          (292)
      (Increase) decrease in prepaid expenses and
        other assets ...................................       (241)         61
      Increase (decrease) in accounts payable ..........        242         (44)
      Increase (decrease) in accrued expenses ..........       (112)        463
                                                           --------    --------
            Net cash used in operating activities ......     (4,658)     (6,909)
                                                           --------    --------
Cash flows from investing activities:
  Capital expenditures .................................        (13)       (412)
  Proceeds from the sale of short term investments .....      5,389       7,464
  Purchase of short term investments ...................     (2,493)       (500)
                                                           --------    --------
            Net cash provided by investing activities...      2,883       6,552
                                                           --------    --------
Cash flows from financing activities:
  Proceeds from the issuance of convertible note
    payable.............................................       --        10,000
  Repayment of convertible note payable.................       --       (10,000)
  Proceeds from the issuance of preferred stock ........       --        18,500
  Proceeds from the issuance of common stock ...........         16           3
  Proceeds from the issuance of note payable ...........       --           219
  Payments on note payable .............................       --           (11)
                                                           --------    --------
            Net cash provided by financing activities...         16      18,711
                                                           --------    --------
Net increase (decrease) in cash and cash equivalents ...     (1,759)     18,354
Cash and cash equivalents at beginning of period .......     16,379       3,286
                                                           --------    --------
Cash and cash equivalents at end of period .............   $ 14,620    $ 21,640
                                                           ========    ========
Supplemental schedule of non-cash financing
activities:
  Common stock dividend declared on Series D
   Cumulative Convertible Preferred Stock ..............       --           235


See accompanying notes to unaudited condensed consolidated financial statements.

                                     - 5 -


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1998 AND 1999
                                   (UNAUDITED)


NOTE 1 -- BASIS OF PRESENTATION:

      The unaudited condensed  consolidated financial statements included herein
have been prepared by the Company,  pursuant to the rules and regulations of the
Securities  and Exchange  Commission and in accordance  with generally  accepted
accounting  principles.  Certain information and footnote  disclosures  normally
included in financial  statements prepared in accordance with generally accepted
accounting  principles have been condensed or omitted pursuant to such rules and
regulations.  These unaudited condensed consolidated financial statements should
be read in conjunction  with the Company's 1998 audited  consolidated  financial
statements and footnotes.

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

      In the opinion of the Company's  management,  the  accompanying  unaudited
condensed  consolidated  financial  statements  have  been  prepared  on a basis
substantially  consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present  fairly its  financial  position  as of June 30,  1999,  its  results of
operations  for the three and six months  ended June 30, 1998 and 1999,  and its
cash flows for the six months ended June 30, 1998 and 1999.  Interim results are
not  necessarily  indicative  of results  anticipated  for the full fiscal year.
Certain  amounts  in  the  1998  unaudited  condensed   consolidated   financial
statements have been reclassified to conform to the current year presentation.


NOTE 2 -- EQUITY FINANCING AND SENIOR SECURED CONVERTIBLE NOTE:

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

      The  issuance  of the  Preferred  Stock was  approved by a majority of the
Company's  stockholders  at the Company's  Annual Meeting of Stockholders on May
11, 1999. A portion of the proceeds of the Financing were used for the repayment
of a $10.0 million Senior Secured  Convertible Note provided by OCM on March 19,
1999 in connection with the Financing.  The remaining  proceeds will be used for
general working capital purposes.


                                     - 6 -


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1998 AND 1999
                                   (UNAUDITED)
                                   (CONTINUED)

      The Preferred Stock is convertible at any time into shares of Common Stock
of the Company at an initial  conversion  price of $11.00 per common share.  The
conversion  price of the  Preferred  Stock is subject to  adjustment  in certain
circumstances  including,  but not  limited  to, the  failure of the  Company to
declare and pay dividends  when due or the issuance of new equity  securities or
convertible  securities  by the  Company  at a  price  per  share  or  having  a
conversion  price per share lower than the then applicable  conversion  price of
the Preferred Stock.

      During the first three years following issuance,  holders of the Preferred
Stock  will be  entitled  to  receive  dividends  payable  in  shares  of  fully
registered Common Stock at a rate of 8.4% per annum. Thereafter,  dividends will
be payable in cash at a rate of 8.0% per annum.

      The holders of  the Preferred Stock are  entitled to vote with the holders
of the Company's  Common  Stock on all  matters  to be voted on by the Company's
stockholders on an as-converted to Common Stock basis, subject to adjustment.

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

      In connection with the issuance of the Preferred  Stock, the rights of the
holders of the Company's  Common Stock may be limited to certain  instances with
respect to dividend rights, rights on liquidation, winding up and dissolution of
the Company,  and the right to vote in connection with certain matters submitted
to the Company's stockholders.

NOTE 3 -- NOTE PAYABLE:

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

                                     - 7 -


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1998 AND 1999
                                  (UNAUDITED)
                                  (CONTINUED)

interest.  The note is secured by a third party  irrevocable  standby  letter of
credit for an amount not less than 90% of the financed property.

NOTE 4 -- STOCK OPTION PLAN:

      The stockholders of the Company approved a proposal to amend the Company's
1996 Stock  Option Plan to increase  the maximum  aggregate  number of shares of
Common Stock available for issuance  thereunder from 750,000 to 1,500,000 shares
and to reserve an additional  750,000  shares of Common Stock of the Company for
issuance in connection with awards granted under the 1996 Stock Option Plan.



                                     - 8 -


<PAGE>

                       COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS.


OVERVIEW

      CollaGenex   Pharmaceuticals,   Inc.   (the  "Company")   is  a  specialty
pharmaceutical  company focused on providing innovative medical therapies to the
dental  market.  The  Company's  first  product,  Periostat,  is a  prescription
pharmaceutical  capsule  that was  approved  by the United  States Food and Drug
Administration  (the "FDA") in September  1998 as an adjunct to scaling and root
planing,  the most prevalent therapy for  periodontitis,  to promote  attachment
level gain and to reduce pocket depth in patients with adult periodontitis.  The
Company  is  marketing  Periostat  to  the  dental  community  through  its  own
professional  dental  pharmaceutical  sales  force of  approximately  130  sales
representatives and managers.  This sales force also co-promotes  Denavir(R),  a
prescription  cold sore  medication  developed by  SmithKline  Beecham,  and the
Company is actively pursuing other prescription products to market to the dental
community.

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

      The  Company has  incurred  losses  each year since  inception  and had an
accumulated  deficit of $47.2 million at June 30, 1999.  The Company  expects to
continue  to incur  losses  in the  near  future  from  expenditures  on  sales,
marketing, manufacturing, drug development and administrative activities.

      Statements contained or incorporated by reference in this Quarterly Report
on Form  10-Q  that  are not  based  on  historical  fact  are  "forward-looking
statements" within the meaning of Section 21E of the Securities  Exchange Act of
1934,  as amended.  Forward-looking  statements  may be identified by the use of
forward-looking   terminology  such  as  "may,"  "will,"  "expect,"  "estimate,"
"anticipate,"  "continue,"  or similar  terms,  variations  of such terms or the
negative of those terms. This Form 10-Q contains forward-looking statements that
involve risks and uncertainties.  The Company's  business of selling,  marketing
and  developing  pharmaceutical  products is subject to a number of  significant
risks, including risks relating to the implementation of the Company's sales and
marketing  plans for  Periostat,  risks  inherent  in research  and  development
activities,  risks  associated  with conducting  business in a highly  regulated
environment,  risks relating to the Company's Year 2000  compliance and the Year
2000   compliance   of  the   Company's   vendors,   suppliers,   manufacturers,
distributors,  marketing  partners  and certain  other  parties and  uncertainty
relating to clinical  trials of products under  development.  The success of the
Company  depends to a large  degree upon the market  acceptance  of Periostat


                                     - 9 -



<PAGE>


by periodontists,  dental practitioners,  other health care providers,  patients
and insurance companies. In addition,  there can be no assurance that any of the
Company's product  candidates (other than the FDA's approval of Periostat in the
United States, as set forth above) will be approved by any regulatory  authority
for marketing in any jurisdiction  or, if approved,  that any such products will
be successfully  commercialized by the Company. The Company's actual results may
differ materially from the results discussed in the  forward-looking  statements
contained herein.


RESULTS OF OPERATIONS

      From its  founding  through the quarter  ended  September  30,  1998,  the
Company  had no  revenues  from  sales of its own  products.  During  the fourth
quarter  of 1998,  the  Company  achieved  net  product  sales  of $3.1  million
following the  commercial  launch of Periostat in November  1998.  Most of these
sales represented wholesale and retail stocking under introductory market launch
terms.  During the three  months ended March 31, 1999 and the three months ended
June 30, 1999,  the Company  achieved net product sales of $2.4 million and $3.2
million,  respectively,  from the marketing of Periostat. The Company realized a
net loss during the first six months of 1999, resulting primarily from sales and
marketing expenses incurred during such period. Total operating expenses consist
of the cost of product  sales,  research and  development  expenses and selling,
general and administrative expenses. Cost of product sales consists primarily of
direct manufacturing  expenses and royalties.  Research and development expenses
consist  primarily of payments to third  parties,  including  contract  research
organizations,   universities  and  clinical  investigators,  for  services  and
materials for research, drug development and clinical trials.  Selling,  general
and  administrative   expenses  consist  primarily  of  personnel  salaries  and
benefits,  direct marketing costs,  professional and consulting fees,  insurance
and general office expenses.


THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998

      REVENUES.  Total revenues  increased to $3.4 million in the second quarter
of 1999 from  $4,000 in the  second  quarter  of 1998.  Revenues  for the second
quarter of 1999  included  $3.2 million in net sales of  Periostat,  $128,000 in
contract  revenues  and  $100,000 in license  revenues.  Revenues  for the three
months ended June 30, 1998 were derived  solely from  contract  revenues.  There
were no product  sales or license  revenues  for the three months ended June 30,
1998.

      COST OF PRODUCT  SALES.  Cost of product sales were $710,000 for the three
months  ended June 30, 1999,  while there were no cost of product  sales for the
three months ended June 30, 1998.  Such  increase  resulted  from the  Company's
sales of Periostat, which did not commence until November 1998.

      RESEARCH  AND  DEVELOPMENT  EXPENSES.  Research and  development  expenses
decreased 2.0% to $1.29 million in the second quarter of 1999 from $1.32 million
in the second quarter of 1998. This decrease resulted  primarily from a shift in
the  Company's  research  and  development  expenditures  from the FDA  approval
process relating to Periostat to manufacturing  and formulation  development for
Periostat.


                                     - 10 -


<PAGE>


      SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.   Selling,  general  and
administrative  expenses increased 285% to $5.7 million in the second quarter of
1999 from $1.5  million in the second  quarter of 1998.  This  increase  was due
primarily to the Company's post-launch marketing activities related to Periostat
and the hiring of additional sales personnel.

      OTHER  INCOME/EXPENSE.  Interest  income  decreased to $245,000 during the
three  months  ended June 30, 1999 from  $270,000  during the three months ended
June  30,  1998.  This  decrease  was a  function  of the  cash  and  short-term
investments  on hand during the quarter.  Interest  expense was $145,000 for the
three  months  ended June 30, 1999  primarily  due to the  interest on the $10.0
million short term convertible note executed by the Company in March 1999. There
was no interest  expense  during the three months ended June 30, 1998,  as there
was no debt then  outstanding.

      PREFERRED STOCK DIVIDEND.  Preferred  stock  dividends  increased $235,000
during  the  three  months  ended  June 30,  1999 as a result  of the  Company's
obligations  in  connection  with  the  issuance  of  its  Preferred  Stock  (as
hereinafter  defined) in May 1999. No dividends  were declared  during the three
months  ended June 30,  1998 as no shares of  Preferred  Stock were  outstanding
during that period.


SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

      REVENUES.  Total  revenues  increased  to $5.9  million for the six months
ended June 30,  1999 from $7,000 in the first six months of 1998.  Revenues  for
the first six months of 1999  included  $5.6 million in net sales of  Periostat,
$136,000 in contract revenues and $100,000 in license revenues. Revenues for the
six months ended June 30, 1998 were derived solely from contract revenues. There
were no product  sales or  license  revenues  for the six months  ended June 30,
1998.

      COST OF PRODUCT  SALES.  Cost of product  sales were $1.25 million for the
six months  ended June 30, 1999,  while there were no cost of product  sales for
the six months ended June 30, 1998.  Such  increase  resulted from the Company's
sales of Periostat, which did not commence until November 1998.

      RESEARCH  AND  DEVELOPMENT  EXPENSES.  Research and  development  expenses
decreased  2.0% to $2.2 million for the six months ended June 30, 1999 from $2.3
million in the first six months of 1998. This decrease resulted primarily from a
shift  in the  Company's  research  and  development  expenditures  from the FDA
approval  process  relating  to  Periostat  to  manufacturing   and  formulation
development for Periostat.

      SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.   Selling,  general  and
administrative expenses increased 301% to $11.8 million for the six months ended
June 30, 1999 from $2.9 million in the first six months of 1998.  This  increase
was due primarily to the Company's  post-launch  marketing activities related to
Periostat and the hiring of additional sales personnel.

      OTHER INCOME/EXPENSE. Interest income decreased to $359,000 during the six
months  ended June 30, 1999 from  $573,000  during the six months ended June 30,
1998.  This decrease


                                     - 11 -


<PAGE>

was a  function  of the cash  and  short-term  investments  on hand  during  the
quarter.  Interest  expense was  $189,000 for the six months ended June 30, 1999
primarily due to the interest on the $10.0 million short term  convertible  note
executed by the Company in March 1999.  There was no interest expense during the
six months ended June 30, 1998, as there was no debt then outstanding.

      PREFERRED STOCK DIVIDEND.  Preferred  stock dividends  increased  $235,000
during  the six  months  ended  June  30,  1999  as a  result  of the  Company's
obligations  in  connection  with  the  issuance  of  its  Preferred  Stock  (as
hereinafter  defined) in May 1999.  No dividends  were  declared  during the six
months  ended June 30,  1998 as no shares of  Preferred  Stock were  outstanding
during that period.

LIQUIDITY AND CAPITAL RESOURCES

      Since its origin in January 1992,  the Company has financed its operations
through  private  placements  of preferred  stock and common  stock,  an initial
public  offering  of  2,000,000  shares of common  stock,  which  generated  net
proceeds to the Company of approximately  $18.0 million after  underwriting fees
and related  expenses,  and a subsequent  public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million  after  underwriting  fees and related  expenses.  On May 12, 1999,  the
Company  consummated a $20.0 million  financing  (the  "Financing")  through the
issuance of its Series D Cumulative  Convertible Preferred Stock (the "Preferred
Stock"), which  generated  net  proceeds  to the Company of $18.5  million.  The
issuance of the  Preferred  Stock was  approved  by a majority of the  Company's
stockholders at the Company's  Annual Meeting of Stockholders on May 11, 1999. A
portion of the  proceeds of such  Financing  were used to repay a $10.0  million
Senior  Secured  Convertible  Note provided by one of the investors on March 19,
1999 in connection with the Financing.  The remaining  proceeds will be used for
general working capital purposes. The Preferred Stock is convertible at any time
into  shares of Common  Stock of the Company at an initial  conversion  price of
$11.00 per common share.  The conversion price is not subject to reset except in
the event that the Company  should fail to declare and pay dividends when due or
the Company should issue new equity  securities or  convertible  securities at a
price per  share or having a  conversion  price  per share  lower  than the then
applicable conversion price of the Preferred Stock. During the first three years
following  issuance,  holders of the Preferred Stock will be entitled to receive
dividends  payable in shares of fully registered  Common Stock at a rate of 8.4%
per annum.  Thereafter,  dividends will be payable in cash at a rate of 8.0% per
annum. At June 30, 1999, the Company had cash,  cash  equivalents and short-term
investments of  approximately  $21.6 million,  an increase of $11.3 million from
the $10.3 million balance at December 31, 1998.

      In accordance with investment  guidelines  approved by the Company's Board
of Directors,  cash balances in excess of those required to fund operations have
been invested in short-term  United States  Treasury  securities  and commercial
paper with a credit rating no lower than A1/P1. The Company's working capital at
June 30, 1999 was $18.1  million,  an increase of $9.1 million from December 31,
1998. This increase was primarily attributable to the Financing,  offset in part
by cash loss from operations incurred during the first six months of 1999.

                                     - 12 -


<PAGE>

      In April 1999, the Company received $219,000 in proceeds from the issuance
of a note  payable.  The proceeds of such note were used to fund the purchase of
equipment,  fixtures and  furniture  for the  Company's  newly leased  corporate
offices in Newtown,  Pennsylvania.  The term of the note is three years at 9.54%
per annum, with monthly minimum payments of principal and interest.  The note is
secured by a third party irrevocable  standby letter of credit for an amount not
less than 90% of the financed  property.  On June 26, 1997, the Company  entered
into a credit  arrangement  consisting  of a $5.0  million  line of credit  (the
"LOC") to support the future working capital needs of the Company.  The LOC will
be unsecured as long as the Company's  cash and investment  balances  maintained
with the lender or an affiliate of the lender equal or exceed $10.0 million.  At
the  Company's  option,  the LOC will bear  interest  at either  the prime  rate
charged by the lender or LIBOR plus 2.15%.  The LOC is  terminable by the lender
at any time. No balance was outstanding under the LOC at June 30, 1999.

      The  Company  anticipates  that  its  existing  working  capital  will  be
sufficient to fund the Company's  operations through at least mid-year 2000. The
Company's  future capital  requirements  and the adequacy of its available funds
will  depend on many  factors,  including,  the size and scope of the  Company's
marketing  effort and sales of Periostat,  the terms of agreements  entered into
with corporate partners, if any, and the results of research and development and
pre-clinical and clinical  studies for other  applications of the Company's core
technology.  Over the long-term,  the Company's liquidity is dependent on market
acceptance of its products and technology.


YEAR 2000 ISSUES

      ASSESSMENT

      The Company  believes its exposure to Year 2000 problems lies primarily in
two areas: (i) its own internal operating systems; and (ii) Year 2000 compliance
by third parties with whom the Company has a material relationship.  The Company
has  completed an assessment of its principal  internal  systems.  However,  the
Company is  continuing  to assess its Year 2000  exposure  with respect to third
parties.  While the costs of these  assessment  efforts  are not  expected to be
material  to  the  Company's  financial  condition  or  any  year's  results  of
operations, there can be no assurance that this will be the case.


      INTERNAL OPERATING SYSTEMS

      The Company  believes  that its principal  internal  systems are Year 2000
compliant.  The Company  recently  installed  upgraded  versions of its internal
accounting, management and financial reporting applications which the vendor has
represented  are  Year  2000  compliant.  Some  of  the  Company's  non-critical
applications, however, may not be Year 2000 compliant. The Company is conducting
a program to identify and resolve any such exposure.  Although the costs related
to these  efforts are not  expected to be  material to the  Company's  business,
financial condition or results of operations, no assurance can be made that this
will be the case.


                                     - 13 -


<PAGE>

      THIRD-PARTY RELATIONSHIPS

      The  Company is  conducting  a program to identify  and resolve  Year 2000
exposure from third parties.  The Company is presently  conducting  inquiries of
its  outside  vendors,  suppliers,  manufacturers,  distributors  and  marketing
partners to assess their Year 2000 readiness.  Any failure of third parties with
whom the Company has a material  relationship to resolve Year 2000 problems in a
timely   manner  could  materially  adversely  affect  the  Company's  business,
financial condition or results of operations.

      RISKS OF THE COMPANY'S YEAR 2000 ISSUES

      The Company  expects to identify and resolve all Year 2000  problems  that
could materially adversely affect the Company's business, financial condition or
results of operations.  However, the Company believes that it is not possible to
determine with complete  certainty that all Year 2000 problems affecting it have
been  identified or will be corrected.  Further,  the Company cannot  accurately
predict how many  failures  related to the Year 2000  problem  will occur or the
severity,  duration or financial consequences of such failures. As a result, the
Company expects that it could possibly suffer the following consequences:

      o     A   significant    number   of   operational    inconveniences   and
            inefficiencies for the Company and the Company's  customers that may
            divert the  Company's  time and  attention  and  financial and human
            resources from the Company's ordinary business activities; and

      o     A lesser number of serious  system  failures  (whether the Company's
            systems  or  those  of  its   vendors,   suppliers,   manufacturers,
            distributors  and marketing  partners) that may require  significant
            efforts by the Company, its customers or third parties to prevent or
            alleviate material business disruptions.

      COSTS

      Other than time spent by the Company's own personnel,  to date the Company
has not incurred any significant  costs in identifying and remediating Year 2000
problems.

      THE COMPANY'S CONTINGENCY PLANS

      The Company  believes its plans for  addressing  the Year 2000 problem are
adequate. The Company does not believe it will incur a material financial impact
from system failures, or from the costs associated with assessing and addressing
the risks of failure,  arising  from the Year 2000  problem.  Consequently,  the
Company does not intend to create a detailed contingency plan. In the event that
the Company does not adequately  identify and resolve its Year 2000 issues,  the
absence of a  detailed  contingency  plan may  materially  adversely  affect its
business, financial condition and results of operations.


                                     - 14 -


<PAGE>


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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






                                      -15-
<PAGE>


                           PART II. OTHER INFORMATION


ITEM 2.    CHANGES IN SECURITIES.

      On May 12, 1999,  the Company  consummated a $20.0 million  financing (the
"Financing")  through  the  issuance  of its  Series  D  Cumulative  Convertible
Preferred  Stock  representing  21.2%  of  the  issued  and  outstanding  equity
securities of the Company (the "Preferred Stock"),  which generated net proceeds
to the  Company  of $18.5  million.  The  issuance  of the  Preferred  Stock was
approved by a majority of the Company's  stockholders  at the  Company's  Annual
Meeting of  Stockholders on May 11, 1999 (the "Annual  Meeting").  The Preferred
Stock is  convertible  at any time into shares of Common Stock of the Company at
an initial  conversion price of $11.00 per common share. The conversion price is
not subject to reset except in the event that the Company should fail to declare
and pay dividends when due or the Company should issue new equity  securities or
convertible  securities  at a price per share or having a  conversion  price per
share lower than the then applicable  conversion  price of the Preferred  Stock.
During the first three years following issuance,  holders of the Preferred Stock
will be  entitled  to receive  dividends  payable in shares of fully  registered
Common Stock at a rate of 8.4% per annum. Thereafter,  dividends will be payable
in cash at a rate of 8.0% per annum.

      In connection with the issuance of the Preferred  Stock, the rights of the
holders of the Company's  Common Stock may be limited in certain  instances with
respect to dividend rights, rights on liquidation, winding up and dissolution of
the Company,  and the right to vote in connection with certain matters submitted
to the Company's stockholders.

      A portion of the  proceeds  of such  Financing  were used to repay a $10.0
million  Senior  Secured  Convertible  Note  provided by one of the investors on
March 19, 1999 in connection with the Financing.  The remaining proceeds will be
used for general working capital purposes.


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

      The Annual Meeting was held on May 11, 1999.

      There  were  present  at  the  Annual   Meeting  in  person  or  by  proxy
stockholders  holding an  aggregate  of 7,011,234  shares of Common  Stock.  The
results of the vote taken at such Annual  Meeting  with  respect to each nominee
for director were as follows:

  Common Stock Nominees                       For                 Withheld
  ---------------------                       ---                 --------
Helmer P.K. Agersborg, Ph.D.            6,850,099 Shares       161,135 Shares
Brian M. Gallagher, Ph.D.               6,850,099 Shares       161,135 Shares
James E. Daverman                       6,850,099 Shares       161,135 Shares
Pieter J. Schiller                      6,850,099 Shares       161,135 Shares
Peter R. Barnett, D.M.D.                6,850,099 Shares       161,135 Shares
Robert J. Easton                        6,850,099 Shares       161,135 Shares
Stephen W. Ritterbush, Ph.D.            6,850,099 Shares       161,135 Shares
Terence E. Winters, Ph.D.               6,850,099 Shares       161,135 Shares


                                     - 16 -


<PAGE>


      In addition, a vote of the stockholders was taken at the Annual Meeting on
the  proposal to amend the  Company's  1996 Stock  Option  Plan to increase  the
maximum  aggregate  number  of shares of Common  Stock  available  for  issuance
thereunder from 750,000 to 1,500,000 shares and to reserve an additional 750,000
shares of Common  Stock of the Company for  issuance in  connection  with awards
granted under the 1996 Stock Option Plan.  Of the shares  present at the meeting
in person or by proxy,  4,226,815  shares of Common Stock were voted in favor of
such  proposal,  903,445 shares of Common Stock were voted against such proposal
and 22,372 shares of Common Stock abstained from voting.

      In addition, a vote of the stockholders was taken at the Annual Meeting on
the proposal to approve the consummation of the Financing. Of the shares present
at the  meeting  in person or by proxy,  4,921,420  shares of Common  Stock were
voted in favor of such  proposal,  200,615  shares of Common  Stock  were  voted
against such proposal and 26,122 shares of Common Stock abstained from voting.

      In addition, a vote of the shareholders was taken at the Annual Meeting on
the proposal to ratify the appointment of KPMG LLP as the  independent  auditors
of the  Company  for the fiscal year ending  December  31,  1999.  Of the shares
present at the meeting in person or by proxy,  6,987,972  shares of Common Stock
were voted in favor of such  proposal,  13,912 shares of Common Stock were voted
against such proposal and 9,350 shares of Common Stock abstained from voting.


ITEM 5.    OTHER INFORMATION.

      EQUITY FINANCING AND SENIOR SECURED CONVERTIBLE NOTE

      On May 12,  1999,  the  Company  consummated  the  Financing  in which OCM
Principal  Opportunities  Fund,  L.P.  ("OCM") led an investor  group  including
certain current stockholders of the Company.

      In connection therewith,  the issuance of the Preferred Stock was approved
by a majority of the Company's  stockholders at the Annual Meeting. A portion of
the proceeds of the  Financing  were used for the  repayment of a $10.0  million
Senior Secured  Convertible Note provided by OCM on March 19, 1999 in connection
with the  Financing.  The remaining  proceeds  will be used for general  working
capital purposes.

      The Preferred Stock is convertible at any time into shares of Common Stock
of the Company at an initial  conversion  price of $11.00 per common share.  The
conversion  price is not  subject to reset  except in the event that the Company
should fail to declare and pay  dividends  when due or the Company  should issue
new equity securities or convertible securities at a price per share or having a
conversion  price per share lower than the then applicable  conversion  price of
the Preferred Stock.

      During the first three years following issuance,  holders of the Preferred
Stock  will be  entitled  to  receive  dividends  payable  in  shares  of  fully
registered Common Stock at a rate of 8.4% per annum. Thereafter,  dividends will
be payable in cash at a rate of 8.0% per annum.


                                     - 17 -


<PAGE>


      LICENSING AGREEMENT

      The  Company  executed  a  licensing  agreement  with  Pharmascience  Inc.
("Pharmascience") in June 1999 pursuant to which Pharmascience will manufacture,
market  and  distribute   Periostat  in  Canada.   Pursuant  to  the  agreement,
Pharmascience  paid the  Company  a  $100,000  non-refundable  license  fee.  In
addition,  Pharmascience  agreed  to pay  additional  fees  and  royalties  upon
achievement   of  future   milestones.   Under  the  terms  of  the   agreement,
Pharmascience  will be  responsible  for the submission of an application to the
Canadian  Therapeutic  Products Program of Health Canada for Canadian  marketing
approval of Periostat.  The non-refundable  license fee was recorded as contract
revenue in the second quarter of 1999.

      CO-PROMOTION AGREEMENT

      The Company  executed a  Co-Promotion  Agreement with  SmithKline  Beecham
Consumer Healthcare,  L.P.  ("SmithKline") in April 1999, upon the expiration of
its prior agreement with SmithKline, pursuant to which the Company will continue
promoting SmithKline's Denavir(R) product to the United States dental community.
Denavir is an FDA  approved  prescription  pharmaceutical  for the  treatment of
recurrent  cold sores in healthy  adults.  The  agreement  provides  for certain
payments by SmithKline to the Company upon future sales of Denavir.

      RESIGNATION OF DIRECTOR

      On June 15, 1999, Mr. Pieter J. Schiller resigned his position as a member
of the Company's Board of Directors to pursue other interests.

      RELOCATION OF PRINCIPAL EXECUTIVE OFFICES

      In May 1999,  the Company moved its Principal  Executive  Offices from 301
South State  Street,  Newtown,  Pennsylvania  to 41 University  Drive,  Newtown,
Pennsylvania.


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K.

      (a)   Exhibits

            27 - Financial Data Schedule.

      (b)   Reports on Form 8-K.

            During the quarter ended June 30, 1999,  the Company  filed,  on May
            26,  1999,  a  Current  Report on Form 8-K with the  Securities  and
            Exchange  Commission  relating  to the  Company's  issuance of $20.0
            million  of  Series  D  Cumulative  Convertible  Preferred  Stock to
            certain  investors  and  the  repayment  of a $10.0  million  Senior
            Secured Convertible Note.


                                     - 18 -


<PAGE>


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                    CollaGenex Pharmaceuticals, Inc.



Date: August 12, 1999               By:  /s/ Brian M. Gallagher, Ph.D.
                                         ---------------------------------
                                         Brian M. Gallagher, Ph.D.
                                         President and Chief Executive Officer
                                         (Principal Executive Officer)



Date: August 12, 1999               By:  /s/ Nancy C. Broadbent
                                         ---------------------------------
                                         Nancy C. Broadbent
                                         Chief Financial Officer (Principal
                                         Financial and Accounting Officer)


                                     - 19 -