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 September 30, 2003
                             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
 Incorporation of Organization)                        Identification No.)



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

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

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

              Yes:   X                                  No:
                   ------

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

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

     Indicate  the  number of  shares  outstanding  of each of the  Registrant's
classes of Common Stock as of November 10, 2003:

                Class                              Number of Shares
     ---------------------------                   ----------------
     Common Stock $.01 par value                      13,838,167


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.

                                TABLE OF CONTENTS



                                                                          Page
                                                                          ----
PART I.  FINANCIAL INFORMATION........................................      1

      Item 1.  Financial Statements (unaudited).......................      1

               Condensed Consolidated Balance Sheets as of
                   September 30, 2003 and December 31, 2002
                   (unaudited).......................................       2

               Condensed Consolidated Statements of Operations for
                   the Three Months Ended September 30, 2003 and 2002
                   (unaudited).......................................       3

               Condensed Consolidated Statements of Operations for
                   the Nine Months Ended September 30, 2003 and 2002
                   (unaudited).......................................       4

               Condensed Consolidated Statements of Cash Flows for
                   the Nine Months Ended September 30, 2003 and 2002
                   (unaudited).......................................       5

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

      Item 2.  Management's Discussion and Analysis of Financial
               Condition and Results of Operations...................       13

               Results of Operations.................................       15

               Liquidity and Capital Resources.......................       23

               Additional Risks That May Affect Results..............       28

      Item 3.  Quantitative and Qualitative Disclosures About Market
               Risk..................................................       34

      Item 4.  Controls and Procedures...............................       35

PART II. OTHER INFORMATION...........................................       36

      Item 1.  Legal Proceedings.....................................       36

      Item 2.  Changes in Securities and Use of Proceeds.............       37

      Item 5.  Other Information.....................................       37

      Item 6.  Exhibits and Reports on Form 8-K......................       39

SIGNATURES...........................................................       40



<PAGE>



                          PART I. FINANCIAL INFORMATION

                    Item 1. Financial Statements (unaudited).

<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                      Condensed Consolidated Balance Sheets
                    September 30, 2003 and December 31, 2002
                 (dollars in thousands, except per share data)
                                   (unaudited)

                                                    September 30,  December 31,
                      Assets                             2003          2002
                                                    ------------   ------------
Current assets:
  Cash and cash equivalents.....................      $14,519      $   10,112
  Accounts receivable, net of allowances of $1,674
   and $1,412 at September 30, 2003 and December
   31, 2002, respectively.......................        1,465           2,142
  Inventories...................................        1,342           1,415
  Prepaid expenses and other current assets.....        2,304           1,630
                                                      -------          -------
      Total current assets......................       19,630          15,299

Equipment and leasehold improvements, net.......          590             559
Deferred license fees...........................        1,310           1,749
Other assets....................................           27              27
                                                       ------          -------
      Total assets..............................      $21,557        $ 17,634
                                                      =======        ========

       Liabilities and Stockholders' Equity
Current liabilities:

  Accounts payable..............................      $ 2,976        $  3,616
  Accrued expenses..............................        4,613           4,305
  Preferred dividends payable...................           --             800
                                                       ------          -------
      Total current liabilities.................        7,589           8,721
                                                       ------          -------
Deferred revenue................................          334             561

Commitments and Contingencies

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 at September  30, 2003 and
   December  31, 2002  (liquidation  value of
   $20,000); 150,000 shares of Series A participating
   preferred  stock,  $0.01 par value, designated and
   no shares issued and outstanding at September 30,
   2003 and December 31, 2002...................            2               2

  Common stock, $0.01 par value; 25,000,000 shares
   authorized, 11,831,833 and 11,377,631 shares
   issued and outstanding at September 30, 2003
   and December 31, 2002, respectively..........          118             114

  Additional paid in capital....................       84,938          82,917

  Accumulated deficit...........................      (71,424)        (74,681)
                                                      -------         -------
      Total stockholders' equity................       13,634           8,352
                                                      -------         -------
      Total liabilities and stockholders' equity      $21,557        $ 17,634
                                                      =======        ========

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 September 30, 2003 and 2002
                  (dollars in thousands, except per share data)
                                   (unaudited)

                                                        Three Months Ended
                                                          September 30,
                                                  -----------------------------
                                                       2003            2002
                                                  -----------      ------------
Revenues:
  Net product sales..........................      $   12,797        $   10,767
  Contract revenues..........................           1,111               422
  License revenues...........................               8                40
                                                   ----------        ----------
      Total revenues.........................          13,916            11,229
                                                   ----------        ----------
Operating expenses:
  Cost of product sales......................           1,907             1,713
  Research and development...................           1,777             1,344
  Selling, general and administrative........           9,038             7,431
                                                   ----------        ----------
      Total operating expenses...............          12,722            10,488
                                                   ----------        ----------
Other income (expense):
  Interest income............................              28                18
  Interest expense...........................              --                (3)
  Other income...............................               8                --
                                                   ----------        ----------
      Net income.............................           1,230               756
Preferred stock dividend.....................             400               400
                                                   ----------        ----------
Net income allocable to common stockholders..      $      830        $      356
                                                   ==========        ==========
Net income per basic share allocable to
  common stockholders........................      $     0.07       $      0.03
                                                   ==========        ==========
Weighted average shares used in computing
  net income per basic share allocable to
  common stockholders........................      11,738,583        11,321,679
                                                   ==========        ==========
Net income per diluted share allocable to
  common stockholders........................      $     0.06       $     0.03
                                                   ==========        ==========
Weighted average shares used in computing
  net income per diluted share allocable to
  common stockholders........................      12,813,907        11,589,483
                                                   ==========        ==========


See accompanying notes to unaudited condensed consolidated financial statements.

                                      -3-

<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                 Condensed Consolidated Statements of Operations
              For the Nine Months Ended September 30, 2003 and 2002
                  (dollars in thousands, except per share data)
                                   (unaudited)

                                                Nine Months Ended September 30,
                                                -------------------------------
                                                        2003          2002
                                                   ------------   -------------

Revenues:
  Net product sales.............................      $ 35,917       $ 31,026
  Contract revenues.............................         2,164          1,769
  License revenues..............................           679            162
                                                   -----------    -----------
      Total revenues............................        38,760         32,957
                                                   -----------    -----------
Operating expenses:
  Cost of product sales.........................         5,560          4,891
  Research and development......................         4,397          2,925
  Selling, general and administrative - other...        24,578         25,377
  Selling, general and administrative -
   stock compensation charge....................           251             --
                                                   -----------    -----------
      Total operating expenses..................        34,786         33,193
                                                   -----------    -----------
Other (expense) income:
  Interest income...............................            84             55
  Interest expense..............................            --             (5)
  Other expense.................................            (2)            --
                                                   -----------    -----------
      Net income (loss).........................         4,056           (186)
Preferred stock dividend........................         1,200          1,229
                                                   -----------    -----------
Net income (loss) allocable to common
  stockholders..................................      $  2,856       $ (1,415)
                                                   ===========    ===========
Net income (loss) per basic share allocable to
  common stockholders...........................      $   0.25       $  (0.13)
                                                   ===========    ===========
Weighted average shares used in computing net
  income (loss) per basic share allocable to
  common stockholders...........................    11,521,337     11,189,318
                                                   ===========    ===========
Net income (loss) per diluted share allocable
  to common stockholders........................      $   0.23       $  (0.13)
                                                    ===========    ===========
Weighted average shares used in computing net
  income (loss) per diluted share allocable to
  common stockholders...........................    12,303,922     11,189,318
                                                    ===========    ===========

See accompanying notes to unaudited condensed consolidated financial statements.

                                      -4-

<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                 Condensed Consolidated Statements of Cash Flows
              For the Nine Months Ended September 30, 2003 and 2002
                             (dollars in thousands)
                                   (unaudited)

                                                 Nine Months Ended September 30,
                                                 ------------------------------
                                                         2003           2002
                                                      ------------  -----------
Cash flows from operating activities:
  Net income (loss)...............................    $   4,056      $    (186)
  Adjustments to reconcile net income (loss) to
   net cash provided by (used in) operating
   activities:
      Non-cash compensation expense...............          251             --
      Depreciation and amortization expense.......          679            194
      Accounts receivable provisions..............          261            466
     Changes in operating assets and liabilities:
      Accounts receivable.........................          416         (1,368)
      Inventories.................................           73            (76)
      Prepaid expenses and other assets...........         (674)        (1,487)
      Accounts payable............................         (640)          (363)
      Accrued expenses............................        1,208          1,147
      Deferred revenue............................         (227)           (92)
                                                      ---------        --------
        Net cash provided by (used in) operating
        activities................................        5,403         (1,765)
                                                      ---------        --------
Cash flows from investing activities:
  Capital expenditures............................         (270)          (295)
  Payment for Altana license......................         (900)            --
                                                      ---------        --------
         Net cash used in investing activities....       (1,170)          (295)
                                                      ---------        --------
Cash flows from financing activities:
  Net proceeds from issuance of common stock......        1,774          1,279
  Payment of preferred dividends..................       (1,600)          (218)
  Repayment of long-term debt.....................           --            (35)
                                                      ---------        --------
         Net cash provided by financing activities          174          1,026
                                                      ---------        --------
         Net increase (decrease) in cash and cash
         equivalents..............................        4,407         (1,034)
Cash and cash equivalents at beginning of period..       10,112          6,171
                                                      ---------        --------
Cash and cash equivalents at end of period........    $  14,519      $   5,137
                                                      =========      =========
Supplemental schedule of noncash investing and
   financing activities:
   Common stock dividends issued or issuable on
      preferred stock.............................    $      --      $     611
                                                       =========      =========
   Cash dividends declared........................    $      --      $     218
                                                       =========      =========
   Issuance of warrants to purchase common stock
      in connection with equity line..............    $      --      $     248
                                                       =========      =========
Supplemental disclosure of cash flow information:
   Cash paid during the period for interest.......    $      --      $       5
                                                       =========      =========
See accompanying notes to unaudited condensed consolidated financial statements.

                                      -5-

<PAGE>
                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           September 30, 2003 and 2002
                             (dollars in thousands)
                                   (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 accounting  principles
generally  accepted in the United  States of America.  Certain  information  and
footnote  disclosures  normally  included in the annual  consolidated  financial
statements prepared in accordance with accounting  principles generally accepted
in the United States of America 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  2002  audited
consolidated financial statements and footnotes included in its Annual Report on
Form 10-K for the year ended December 31, 2002.

     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  consolidation.
Certain  amounts  in  the  2002  consolidated  financial  statements  have  been
reclassified to conform to the 2003 presentation.

     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 the Company's consolidated financial position as of September 30,
2003,  their results of operations for the three and nine months ended September
30, 2003 and 2002, and their cash flows for the nine months ended  September 30,
2003 and  2002.  Interim  results  are not  necessarily  indicative  of  results
anticipated for the full fiscal year.

     Statement  of  Financial  Accounting  Standards  (SFAS) No. 123 (SFAS 123),
"Accounting  for  Stock-Based  Compensation,"  encourages  but does not  require
companies to record  compensation  cost for  stock-based  employee  compensation
plans at fair  value.  Accordingly,  the  Company  has  elected to  account  for
stock-based  compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees"  and  compensation  cost for stock options  issued to employees is
measured as the excess,  if any, of the market price of the  Company's  stock at
the date both the  number of shares  and price per share are known  (measurement
date) over the exercise  price.  Such amounts are  amortized on a  straight-line
basis over the respective  vesting  periods of the option  grants.  Transactions
with nonemployees, in which goods or services are the consideration received for
the issuance of equity  instruments,  are accounted for on a fair value basis in
accordance with SFAS 123 and related interpretations.


                                      -6-
<PAGE>


     As set forth  below,  the pro forma  disclosures  of net loss  allocable to
common  stockholders and loss per share allocable to common  stockholders are as
if the  Company  had  adopted  the fair  value  based  method of  accounting  in
accordance with SFAS No. 123, as amended by SFAS No. 148, which assumes the fair
value based method of accounting had been adopted:

                                  Three Months Ended       Nine Months Ended
                                    September 30,            September 30,
                                  -------------------     -------------------
                                   2003        2002        2003        2002
                                   ----        ----        ----        ----
      Net income (loss)
         allocable to common
         stockholders:
         As reported.........    $  830       $  356      $ 2,856     $(1,415)
         Add: Stock-based
         employee
         compensation
         expenses included
         in net loss
         allocable to common
         stockholders........        --           --           --          --
         Less: Stock-based
         employee
         compensation under
         fair value based
         method..............    (1,288)        (934)      (3,825)     (2,801)
                                 ------       ------      -------     -------
         Pro forma...........    $ (458)      $ (578)     $  (969)    $(4,216)
                                 ======       ======      =======     =======

      Basic net income (loss)
         per share allocable to
         common stockholders:
         As reported.........    $  0.07      $ 0.03      $  0.25     $ (0.13)
                                  ======       ======      =======     =======
         Pro forma...........    $ (0.04)     $(0.05)     $ (0.08)    $ (0.38)
                                  ======       ======      =======     =======
      Diluted net income (loss)
         per share allocable to
         common stockholders:
         As reported.........    $  0.06      $ 0.03      $  0.23     $ (0.13)
                                  ======       ======      =======     =======
         Pro forma...........    $ (0.04)     $(0.05)     $ (0.08)    $ (0.38)
                                  ======       ======      =======     =======

                                      -7-

<PAGE>


Note 2 -- Inventories

      Inventories  at  September  30, 2003 and  December 31, 2002 consist of the
following:

                             2003             2002
                          ----------       ---------
Raw materials.......       $    330         $   233
Work-in-process.....             50              56
Finished goods......            962           1,126
                          ----------       ---------
                           $  1,342          $1,415

Note 3 -- Line of Credit

     The Company has a revolving credit facility with Silicon Valley Bank, which
expires on March 15, 2004.  The Company may borrow up to the lesser of $4,000 or
80% of eligible accounts receivable,  as defined under the credit facility.  The
amount available to the Company is also reduced by outstanding letters of credit
which may be issued under the credit facility in amounts  totaling up to $1,500.
On April 1, 2003, the Company  secured its expected  purchase order  commitments
for the next twelve months with a letter of credit for approximately  $1,061. As
of  September  30, 2003,  the letter of credit had been reduced to $592.  As the
Company  continues  to pay down amounts  under the letter of credit,  the amount
available to it under the Facility will  increase.  The Company is not obligated
to  draw  amounts  and any  such  borrowings  bear  interest,  payable  monthly,
currently at the prime rate plus 1.0% to 1.5% per annum and may be used only for
working  capital  purposes.  Without the  consent of Silicon  Valley  Bank,  the
Company,  among other things,  shall not (i) merge or  consolidate  with another
entity;  (ii) acquire assets outside the ordinary  course of business;  or (iii)
pay or declare any cash  dividends on the Company's  Common  Stock.  The Company
must also  maintain a certain  tangible net worth of $5,000,  subject to certain
upward adjustments,  as a result of profitable  operations or additional debt or
equity financings and a minimum of $2,000 in cash at Silicon Valley Bank, net of
borrowings under the credit facility.  In addition,  the Company has secured its
obligations  under the  credit  facility  through  the  granting  of a  security
interest  in favor of the bank  with  respect  to all of its  assets,  including
intellectual  property.  As of September 30, 2003, the Company had no borrowings
outstanding against the credit facility.

Note 4 -- Commitments and Contingencies

     During 1999, the Company entered into a three-year  co-promotion  agreement
with Merck & Co.,  Inc.  for  Vioxx(R)  under which the Company is  committed to
spend up to $1,000 annually for promotional  expenses,  or such lesser amount as
will be determined by mutual  agreement of the parties.  In September  2002, the
parties  amended  this  agreement  and extended the term thereof to December 31,
2003.

     On August 24, 2001, the Company signed an exclusive  License Agreement (the
"Atrix  License  Agreement")  with Atrix  Laboratories,  Inc. to market  Atrix's
proprietary dental products, Atridox(R), Atrisorb(R) FreeFlow and Atrisorb(R)-D,
to the United States dental  market.  Pursuant to the terms of the Atrix License
Agreement,  the  Company  will  be  required  to  make  certain  annual  minimum
expenditures  for the  lesser  of $4,000  or 30% of the  Company's  contribution
margin, as

                                      -8-

<PAGE>


defined in the agreement,  relating to a specific Atrix product that the Company
markets and the lesser of $2,000 or 30% of the Company's contribution margin, as
defined in the agreement,  relating to a separate Atrix product that the Company
markets commencing with fiscal year 2003.

     On February 11, 2002, the Company executed a Co-operation,  Development and
Licensing  Agreement  pursuant to which the  Company  was granted an  exclusive,
sublicenseable, transferable license with respect to the Restoraderm(TM) topical
drug  delivery  system which the Company  intends to develop for  dermatological
applications.  Pursuant to the terms of such  agreement,  upon the occurrence of
certain events,  the Company will be required to pay certain future  consulting,
royalty and milestone  payments in the aggregate  amount of up to  approximately
$3,225,  of which no more than $2,188 shall be payable  prior to January 1, 2004
and of which no more than an additional $1,037 shall be payable prior to January
1, 2005.  The Company  paid $565 under this  Agreement  in the nine months ended
September  30,  2003.  The term of such  agreement is for the life of any patent
that may be issued to the  Company for the first  product  the Company  develops
utilizing such technology, or, if such a patent fails to issue, seven years.

     On June  10,  2002,  the  Company  executed  a  Development  and  Licensing
Agreement  with Shire  Laboratories,  Inc.  pursuant  to which the  Company  was
granted an exclusive  worldwide  license  (including the right to sublicense) to
develop,  make,  have made,  use,  supply,  export,  import,  register  and sell
products for the treatment of various inflammatory disorders. In addition, under
the agreement,  certain product development functions shall be performed for the
Company.  Also under the  agreement,  the Company has committed to payments,  in
cash or at the Company's  option, a combination of cash and the Company's Common
Stock, upon the achievement of certain clinical and regulatory milestones in the
event the Company  pursues certain  applications  of the technology  which could
total up to $7,900 in the  aggregate.  Pursuant to the terms of such  agreement,
the Company  shall also pay a percentage  of certain net sales of  products,  if
any,  utilizing  any part of the  technology.  The  Company  may  terminate  the
agreement upon sixty days notice.

     In November  2002,  the Company  commenced  an action in the United  States
District Court for the Eastern District of New York seeking to prevent West-ward
Pharmaceutical  Corporation  ("West-ward")  from  selling  20  mg.  capsules  of
doxycycline  hyclate to treat  periodontal  disease,  which the Company believes
would infringe patents covering the Company's Periostat(R) product. As discussed
below, the Company has settled all pending litigation with West-ward.

     In July 2003,  the Company  commenced  an action  against  United  Research
Laboratories/Mutual  Pharmaceutical  Company  ("Mutual")  in the  United  States
District  Court for the Eastern  District of New York seeking to prevent  Mutual
from  introducing 20 mg.  tablets of doxycycline  hyclate into the market in the
United States. The Company's suit alleges infringement on patents to which it is
the exclusive licensee.

     In July 2003,  Mutual commenced an action against the Company in the United
States District Court for the Eastern District of  Pennsylvania.  Mutual alleges
that the Company has engaged in an overall  scheme to monopolize  the market for
low-dose doxycycline products. In

                                      -9-
<PAGE>

addition, the suit alleges that the Company has engaged in exclusionary, unfair,
and  anticompetitive  practices.  Mutual  seeks  an  award  of  treble  damages,
injunctive relief,  compensatory,  punitive and exemplary damages and reasonable
attorneys' fees.

     In June  2003,  the  Company  commenced  an action and filed a motion for a
preliminary injunction,  in the United States District Court for the District of
Columbia  seeking  to  prevent  the FDA  from  approving  any  application  from
West-ward,  Mutual or any other  marketers of generic drugs, to introduce 20 mg.
tablets or capsules of doxycycline  hyclate into the market until the expiration
of the period of market  exclusivity and up to a 30 month stay of approvals that
attaches while patent  infringement  litigation is pending, to which the Company
claims  entitlement under the Hatch Waxman Act.  West-ward and Mutual intervened
in this action.  On July 22, 2003,  the Court granted a  preliminary  injunction
temporarily  restraining  the  FDA  from  approving  any  Abbreviated  New  Drug
Applications ("ANDA") submitted for a generic version of Periostat  (doxycycline
hyclate) 20 mg.

     Until the United  States  District  Court for the  District of Columbia has
made a final  ruling on the  regulatory  status  of  Periostat,  the FDA  cannot
approve the ANDAs on file for West-ward's 20 mg.  doxycycline  hyclate  capsule,
Mutual's  20 mg.  doxycycline  hyclate  tablet or any  other  ANDA for a generic
version of Periostat.

     As a result  of the  ruling in the  United  States  District  Court for the
District  of  Columbia,  the  Company  withdrew  its then  pending  motion for a
temporary   restraining   order  and   preliminary   injunction  in  its  patent
infringement suit against Mutual,  which was filed in the United States District
Court for the  Eastern  District of New York,  although  its  complaint  remains
outstanding.

     On November 7, 2003, the Company settled all pending litigation between the
Company and  West-ward.  In the  settlement,  West-ward  agreed and confessed to
judgment  that the  Company's  Periostat  patents are valid and infringed by the
filing of West-ward's ANDA. West-ward also agreed and confessed to judgment that
the Company's  Periostat  patents would be infringed by the manufacture and sale
of a generic version of Periostat.  West-ward  consented to a judgment enjoining
West-ward and any party acting in concert with West-ward from making and selling
a generic  version  of  Periostat  until  the  Company's  patents  expire or are
declared invalid or unenforceable by a court of competent jurisdiction. Finally,
West-ward  agreed to withdraw from the FDA case in the District of Columbia.  In
connection  with  this  settlement,  the  Company  agreed  to pay a  portion  of
West-ward's  actual  legal  expenses  in the  amount  of  $700,  which  has been
reflected  in selling,  general and  administrative  expense in the three months
ended September 30, 2003 and selling, general and administrative - other expense
in the nine months ended September 30, 2003.

     The  Company  anticipates  that its  future  legal  costs in these  matters
relating to patent  infringement  and defense will be reimbursed by the Research
Foundation of the State University of New York ("SUNY") pursuant to a Technology
License  Agreement  with SUNY to the extent  that these  legal  expenses  do not
exceed royalties earned by SUNY during that period.  Legal costs relating to the
litigation  with  the FDA  and  certain  anti-trust  matters,  however,  are not
eligible  for  reimbursement  by SUNY.  During the three and nine  months  ended
September 30, 2003, the Company  incurred  $2,004 and $3,160,  respectively,  in
legal defense, litigation and

                                      -10-
<PAGE>

settlement  costs for the  aforementioned  law suits with  West-ward and Mutual,
$448 and $1,292, respectively,  of which were deducted from royalties payable to
SUNY during those periods.  In the event such cumulative  legal costs exceed the
amount of the royalties payable to SUNY, the Company will not be able to recover
such legal costs from SUNY. As of September 30, 2003,  the Company has $1,451 in
previously recognized legal expenses available to offset future royalties earned
by SUNY, if any.

Note 5 -- Stock Option Plans

     At the Company's 2003 Annual Meeting of Stockholders  held on May 20, 2003,
the  stockholders of the Company approved a proposal to amend the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan") to increase the maximum  number
of shares of the Company's  Common Stock available for issuance  thereunder from
2,500,000 to 3,000,000 shares and to reserve an additional 500,000 shares of the
Company's  Common Stock for issuance in connection with such increase for awards
to be granted under the 1996 Stock Option Plan.

Note 6 -- Succession Plan for Chief Executive Officer

     On March 19, 2003, the Company  announced that Brian M.  Gallagher,  Ph.D.,
the Company's chairman,  chief executive officer and president,  will be leaving
the Company to pursue other interests. Dr. Gallagher has agreed to remain in his
current  position until a successor is appointed,  and will work as a consultant
for a period of time thereafter to ensure a smooth transition.

     The Company has executed an agreement with Dr. Gallagher, pursuant to which
Dr. Gallagher will be compensated  for, among other things,  his services during
the  transition  period and to recognize  his  historical  contributions  to the
Company.  As a result of this  agreement,  the  Company  recognized  a  non-cash
compensation  charge relating to certain  modifications of Dr. Gallagher's stock
option  agreements of approximately  $251 during the nine months ended September
30, 2003.  The Company has also entered  into a  consulting  agreement  with Dr.
Gallagher  pursuant to which he will provide  consulting  services to CollaGenex
for a period of 24 months following the earlier of (i) employment of a new chief
executive officer,  (ii) such earlier date as may be determined by the Company's
Board of Directors, or (iii) December 31, 2003.

Note 7 -- Termination of License Agreement

     On March 14, 2003, the Company  terminated its license agreement with Roche
S.P.A. As a result of the termination of the agreement, during the first quarter
of 2003,  the Company  accelerated  the  recognition  of the  remaining  $222 of
unamortized  deferred  revenue related to the $400 up-front  payment received in
1996.

Note 8 -- Incentive Bonus Agreements

     The Company entered into Incentive Bonus Agreements with effective dates of
August 27,  2003,  with each of David F.  Pfeiffer,  the  Company's  Senior Vice
President,  Sales and Marketing, and Robert A. Ashley, the Company's Senior Vice
President, Commercial

                                      -11-
<PAGE>

Development,  pursuant  to  which  each of Mr.  Pfeiffer  and Mr.  Ashley  shall
receive, in certain circumstances,  an incentive bonus equal to their respective
annual base salary. Pursuant to the terms of each agreement, the incentive bonus
shall be payable only if (i) the executive  remains  actively  employed with the
Company through August 27, 2004, or (ii) the Company  terminates the executive's
employment  without  Cause (as  defined in each  Agreement)  prior to August 27,
2004. The incentive bonuses are being accrued quarterly and shall be payable, if
the requirements are met, in a lump sum on or before September 26, 2004.

Note 9 -- Appointment of Senior Vice President and General Counsel

     In  connection  with  the  appointment  of Paul  Lubetkin  as  senior  vice
president and general counsel to the Company, on September 29, 2003, the Company
entered into a Change of Control  Agreement and a Severance  Agreement  with Mr.
Lubetkin. In the event Mr. Lubetkin's employment is terminated as a result of an
Involuntary Termination within 24 months of a Change of Control (each as defined
in the Change of Control  Agreement),  the Change of Control Agreement  provides
for,  among other things (i) a lump sum payment of 1.5 times base salary and 1.5
times the average bonus paid for the three fiscal years prior to the Termination
Date (as defined in the Change of Control  Agreement),  (ii) health coverage and
benefits    for    a    period    of    24    months,    and    (iii)    certain
outplacement/administrative  support for a period of 18 months. The terms of Mr.
Lubetkin's  Severance  Agreement provide for certain severance  benefits upon an
Involuntary Termination (as defined in the Severance Agreement).

Note 10 -- Subsequent Events

     On  October  3,  2003,  the  Company  announced  that it had  entered  into
agreements  for the sale of  2,000,000  shares of its  Common  Stock  previously
registered on its Registration  Statement on Form S-3 for an aggregate  purchase
price of $20,000,  which generated net proceeds to the Company of  approximately
$18,800 after the payment of placement agent fees and related expenses.

                                      -12-

<PAGE>


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

Overview

     CollaGenex   Pharmaceuticals,   Inc.  and   subsidiaries   is  a  specialty
pharmaceutical   company  currently  focused  on  providing  innovative  medical
therapies  to  the  dental  and   dermatology   markets.   Our  first   product,
Periostat(R),  is an orally administered,  prescription  pharmaceutical  product
that was approved by the United States Food and Drug Administration in September
1998 and is the first and only  pharmaceutical  to treat adult  periodontitis by
inhibiting the enzymes that destroy periodontal support tissues.

     We are marketing Periostat and other pharmaceutical  products to the dental
and dermatology  communities through our own professional  pharmaceutical  sales
force of approximately 115 sales  representatives  and managers.  Pursuant to an
exclusive  License and Marketing  Agreement  with Atrix  Laboratories,  Inc., we
began, in October 2001, to actively market Atrix's  proprietary dental products,
Atridox(R) and Atrisorb FreeFlow(R),  and, in February 2002,  Atrisorb-D(R),  to
the United States dental market (the "Atrix Products"). In May 2002, we executed
a  sublicense  agreement  with Altana Inc. to,  among other  things,  market and
distribute,  in the United  States and Puerto  Rico,  Pandel(R),  a  mid-potency
topical  corticosteroid  product  developed  by Altana Inc.  In March  2003,  we
executed a co-promotion  agreement with Sirius  Laboratories,  Inc.  pursuant to
which we have begun to jointly market Sirius'  AVAR(TM)  product line and Pandel
to  dermatologists  in the United  States.  We  distribute  Periostat and Pandel
through drug wholesalers and large retail chains in the United States. Periostat
is also sold through  wholesalers  and direct to dentists in the United  Kingdom
through our  wholly-owned  subsidiary,  CollaGenex  International  Ltd.,  and by
distributors and licensees in certain other overseas markets. The Atrix Products
are distributed through specialty  distributors who sell these products directly
to dental  practitioners  in the United States and Puerto Rico.  Our sales force
also co-promotes Vioxx(R), a prescription non-steroidal,  anti-inflammatory drug
developed by Merck & Co., Inc., in the United States,  and, from October 1, 2002
to September 30, 2003, Denavir(R), for Novartis Consumer Health, Inc.

     For the year  ended  December  31,  2002,  and for each of the three  month
periods ended March 31, 2003,  June 30, 2003 and September 30, 2003, we achieved
net income of  approximately  $902,000,  $1.2  million,  $1.6  million  and $1.2
million,  respectively.  We have,  however,  incurred  losses  in each year from
inception  through  2002 and have an  accumulated  deficit  of $71.4  million at
September 30, 2003.

     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.  Our  business  of  selling,  marketing  and
developing  pharmaceutical products is subject to a number of significant risks,
including  risks  relating  to the  implementation  of  CollaGenex's  sales  and
marketing plans for Periostat and other products that we market, risks

                                      -13-

<PAGE>


inherent  in  research  and  development   activities,   risks  associated  with
enforcement of our intellectual property rights, including risks relating to the
outcome and consequences of our patent litigation against Mutual  Pharmaceutical
Company,  risks that the FDA will approve  products,  such as Mutual's  product,
that will compete with and limit the market for Periostat, risks relating to our
litigation with the FDA, risks  associated with conducting  business in a highly
regulated  environment and  uncertainty  relating to clinical trials of products
under  development.  CollaGenex's  success  depends to a large  degree  upon the
market acceptance of Periostat by  periodontists,  dental  practitioners,  other
health  care  providers,  patients  and  insurance  companies.  There  can be no
assurance that CollaGenex's product candidates (other than the FDA's approval of
Periostat  for  marketing in the United  States,  the United  Kingdom  Medicines
Control  Agency's  approval of Periostat for marketing in the United Kingdom and
Periostat's  marketing  approval  in  Austria,  Finland,  Switzerland,  Ireland,
Israel, Italy, Luxemborg, the Netherlands, Portugal and Canada) will be approved
by any regulatory  authority for marketing in any  jurisdiction or, if approved,
that any such products will be  successfully  commercialized  by CollaGenex.  In
addition,  there can be no assurance that CollaGenex will  successfully  promote
Vioxx, Pandel, Atridox, Atrisorb-FreeFlow,  Atrisorb-D or the AVAR product line.
As a result  of such  risks,  those  risks  set  forth in the  section  entitled
"Additional  Risks That May Affect  Results" and others  expressed  from time to
time in  CollaGenex's  filings  with the  Securities  and  Exchange  Commission,
CollaGenex's  actual results may differ materially from the results discussed in
or implied by the forward-looking  statements  contained herein. We undertake no
obligation  to update or revise  any  forward-looking  statements,  whether as a
result of new information, future events or otherwise.

     Periostat(R),  Metastat(R),  Dermostat(R),   Nephrostat(R),   Osteostat(R),
Arthrostat(R),  Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(R),
The Whole Mouth Treatment(R), Restoraderm(TM) and Dentaplex(R) are United States
trademarks  of CollaGenex  Pharmaceuticals,  Inc.  Periostat(R),  Nephrostat(R),
Optistat(R),  Xerostat(R)  and IMPACS(TM) are European  Community  trademarks of
CollaGenex  Pharmaceuticals,  Inc.  Periostat(R),   Nephrostat(R),  Optistat(R),
Xerostat(R),    IMPACS(R),    Dentaplex(R),    Restoraderm(R),     Dermastat(R),
Periocycline(R),  Periostatus(R)  and Periostan(R) are United Kingdom trademarks
of our wholly-owned  subsidiary,  CollaGenex  International Ltd.  CollaGenex(R),
PS20(R), "C" Logo(R) and The Whole Mouth Treatment(R) are European Community and
United Kingdom trademarks of CollaGenex International Ltd.  Periocycline(TM) and
Periostan(TM) are European Community Trademarks of CollaGenex International Ltd.
All other trade names,  trademarks or service marks  appearing in this Quarterly
Report are the  property  of their  respective  owners and are not  property  of
CollaGenex Pharmaceuticals, Inc. or any of our subsidiaries.

     Critical Accounting Policies and Estimates

     Management's  discussion and analysis of its financial position and results
of operations are based upon our consolidated  financial statements,  which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make  judgments  and  estimates  that affect the reported  amounts of assets,
liabilities,  revenues and expenses and related  disclosure of contingent assets
and liabilities.  Management believes the critical accounting policies and areas
that  require the most  significant  judgments  and  estimates to be used in the
preparation  of  the  consolidated   financial  statements  pertain  to  revenue
recognition.

                                      -14-
<PAGE>


     We recognize product sales revenue upon shipment, net of estimated returns,
provided  that  collection  is  determined  to be  probable  and no  significant
obligations  remain.  Sales  revenue from our customers is subject to agreements
allowing limited rights of return, rebates and price protection. Accordingly, we
reduce  revenue  recognized  for  estimated  future  returns,  rebates and price
protection  at the time the  related  revenue is  recorded.  The  estimates  for
returns  are  adjusted  periodically  based upon  historical  rates of  returns,
inventory  levels in the distribution  channel and other related factors.  While
management  believes it can make reliable  estimates for these  matters,  unsold
products  in  these   distribution   channels  may  be  exposed  to  expiration.
Accordingly,  it is possible that these  estimates  will change in the future or
that the actual  amounts could vary  materially  from our estimates and that the
amounts of such  changes  could  impact our  results  of  operations,  financial
condition and our  business.  Our contract  revenues are fee-based  arrangements
where  revenue is earned as  prescriptions  are written.  Accordingly,  since we
never take title to the product being promoted, no significant obligations exist
beyond the point that the fee is earned and is recognized as revenue.

     Since our  inception,  a portion of our  revenue  has been  generated  from
license and distribution agreements for our products. We recognize nonrefundable
signing or license fees that are not dependent on future performance under these
agreements as revenue when received and over the term of the  arrangement  if we
have continuing performance  obligations.  Any amounts deferred are amortized to
revenue over the expected performance period of each underlying  agreement.  The
expected  performance  period  is based on  management's  best  estimate  and is
subject  to  change  based  on  current  market  conditions.   Deferred  revenue
represents the portion of up front license  payments  received that has not been
earned.  Milestone  revenue  from  licensing  arrangements  is  recognized  upon
completion  of  the  milestone   event  or  requirement  if  it  represents  the
achievement  of a significant  step in the research,  development  or regulatory
process.

Results of Operations

     During the three months ended  September  30, 2003, we achieved net product
sales of $12.8 million from the sale of Periostat,  Atridox,  Atrisorb FreeFlow,
Atrisorb-D and Pandel. In addition,  during the three months ended September 30,
2003,  we  generated  $1.1  million  in  contract   revenues   mainly  from  our
co-promotion  activities  with respect to Vioxx,  Denavir and AVAR and $8,000 in
international licensing revenues.

     Three  Months  Ended  September  30, 2003  Compared to Three  Months  Ended
September 30, 2002

Revenues

--------------------------------------------------------------------------------
Revenues
(dollars in thousands)                  2003          Change          2002
--------------------------------------------------------------------------------
Net Product Sales...............      $  12,797        18.9%        $  10,767
--------------------------------------------------------------------------------
Contract Revenues...............          1,111       163.3%              422
--------------------------------------------------------------------------------
License Revenues................              8       (80.0)%              40
                                      ---------       -------       ---------
--------------------------------------------------------------------------------
   Total........................      $  13,916        23.9%        $  11,229
--------------------------------------------------------------------------------

                                      -15-
<PAGE>

     Total revenues  during the three months ended September 30, 2003 were $13.9
million,  representing  a 23.9%  increase  over total  revenues of $11.2 million
during the three months ended  September 30, 2002.  Such 2003 revenues  included
approximately  $12.8 million in net product  sales of Periostat,  Pandel and the
Atrix Products,  $1.1 million in contract revenues,  which were derived from our
co-promotion of Vioxx,  Denavir and AVAR, and $8,000 of international  licensing
revenues for Periostat.  Our agreement with Novartis  Consumer  Health,  Inc. to
co-promote  Denavir expired on September 30, 2003, and we and Novartis  mutually
decided not to renew our arrangement with respect to Denavir.  Net product sales
increased $2.0 million, or 18.9%, to $12.8 million during the three months ended
September  30, 2003  compared to $10.8  million  during the three  months  ended
September 30, 2002 primarily due to higher  Periostat  sales and the addition of
the Pandel product line which we began selling direct in July 2002.

     Contract  revenues for the three months ended  September 30, 2003 increased
163.3% to $1.1 million from $422,000 during the three months ended September 30,
2002,  primarily due to increased contract revenues relating to our co-promotion
activities with respect to Denavir and the AVAR product line partially offset by
lower Pandel contract revenues earned during 2003.

     We recorded  $8,000 and $15,000 in licensing  revenues for the three months
ended  September  30,  2003  and  September  30,  2002,  respectively,  that was
attributable to our  recognition of previously  received  up-front  license fees
recognized for various agreements that were deferred and are being recognized as
licensing  revenue over the expected  performance  period of the agreements.  We
also  recorded  licensing  revenues  of $25,000  during the three  months  ended
September  30,  2002,  that  represents  milestone  fees  received  from foreign
licensing partners upon the achievement of certain milestones.

Cost of Product Sales

--------------------------------------------------------------------------------
Cost of Product Sales
(dollars in thousands)                   2003         Change           2002
--------------------------------------------------------------------------------
Cost of Product Sales............       $ 1,907        11.3%         $ 1,713
--------------------------------------------------------------------------------
Percent of Net Product Sales.....         14.9%         N/A            15.9%
--------------------------------------------------------------------------------

     Cost of product sales includes product  packaging,  third-party  royalties,
amortization  of  product  licensing  fees,  and the costs  associated  with the
manufacturing,  storage  and  stability  of  Periostat,  Pandel  and  the  Atrix
products.

     Cost of product  sales were $1.9  million,  or 14.9% of net  product  sales
during the three months ended September 30, 2003,  compared to $1.7 million,  or
15.9% of net product  sales during the three months  ended  September  30, 2002.
During  the three  months  ended  September  30,  2003,  cost of  product  sales
increased  in absolute  dollars as a result of  increased  product  sales.  As a
percentage  of net product  sales,  cost of product sales  decreased  during the
three  months  ended  September  30,  2003,  compared to the three  months ended
September  30, 2002,  primarily due to product  price  increases for  Periostat,
offset in part by higher cost of product  sales (as a percentage  of net product
sales) for the Pandel product line, launched in July 2002.

                                      -16-
<PAGE>


Research and Development

--------------------------------------------------------------------------------
Research and Development
(dollars in thousands)                   2003          Change          2002
--------------------------------------------------------------------------------
Research and development.........       $ 1,777         32.2%        $ 1,344
--------------------------------------------------------------------------------
Percentage of Total Revenues.....         12.8%          N/A           12.0%
--------------------------------------------------------------------------------

     Research and development  expenses consist primarily of funds paid to third
parties  for the  provision  of services  and  materials  for drug  development,
including milestone fees, manufacturing and formulation  enhancements,  clinical
trials, statistical analysis and report writing and regulatory compliance costs.

     Research and development  expenses  increased  $433,000,  or 32.2%, to $1.8
million  during the three  months  ended  September  30, 2003 from $1.3  million
during the three months ended September 30, 2002.

     Development  projects conducted during the three months ended September 30,
2003  included  our  continuing  formulation  development  work for a once-a-day
formulation  of Periostat  and  formulation  and  stability  testing for several
potential  products  utilizing our licensed  Restoraderm(TM)  technology,  which
totaled $1.0  million and  $114,000,  respectively.  Future  development  of the
once-a-day  technology will be contingent on the outcome of the initial phase of
the  project,  which  should  be  determined  by the end of 2003.  If all of the
potential products are successful,  additional formulation  development expenses
and milestone fees could be as much as $8.6 million through 2006.

     Clinical  projects totaling $140,000 were conducted during the three months
ended September 30, 2003 and included  several Phase IV studies for Periostat in
various dental indications and continued  clinical  development work relating to
Periostat in  dermatological  indications and including a Phase III trial in 150
patients to evaluate  Periostat for the treatment of rosacea.  Until the outcome
of these  trials is  determined,  it is  premature  to estimate the future costs
associated with the clinical development of Periostat for any indication.

     Other research and  development  expenses  incurred during the three months
ended September 30, 2003 included $37,000 in regulatory consulting and legal and
filing  fees under the Mutual  Recognition  Procedure  in Europe and $85,000 for
various  regulatory  costs,  including  annual FDA filing fees,  patent fees and
regulatory  expenses  in  the  United  States,  and  $161,000  in  manufacturing
development costs for Metastat(R) and the Impacs(TM) compounds.  Direct salaries
and other  personnel  expenses  incurred during the three months ended September
30, 2003 were $135,000. Additionally,  during such period we incurred $84,000 in
consulting, travel and other office expenses.

     Development  projects conducted during the three months ended September 30,
2002  included  our  continuing  formulation  development  work for a once-a-day
formulation  of Periostat  and  formulation  and  stability  testing for several
potential products utilizing our licensed Restoraderm technology,  which totaled
$706,000 and $83,000, respectively.

                                      -17-
<PAGE>

     Clinical  projects totaling $176,000 were conducted during the three months
ended September 30, 2002 and included  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  meibomiantis (an ocular condition),
clinical  development work relating to Periostat in  dermatological  indications
and  initiation  of a Phase III trial in 150 patients to evaluate  Periostat for
the treatment of rosacea.

     Other research and  development  expenses  incurred during the three months
ended  September 30, 2002 included  $85,000 in regulatory  consulting and filing
fees under the Mutual  Recognition  Procedure  in Europe and $29,000 for various
regulatory costs,  including annual FDA filing fees, patent fees, and regulatory
expenses in the United  States.  Direct  salaries and other  personnel  expenses
incurred  during  the three  months  ended  September  30,  2002 were  $124,000.
Additionally,  during such period we incurred $141,000 in consulting, travel and
other office expenses.

Selling, General and Administrative

--------------------------------------------------------------------------------
Selling, General and Administrative
(dollars in thousands)                    2003         Change           2002
--------------------------------------------------------------------------------
Selling, General and Administrative     $ 9,038         21.6%        $ 7,431
--------------------------------------------------------------------------------
Percentage of Total Revenues.....         64.9%          N/A           66.2%
--------------------------------------------------------------------------------

     Selling, general and administrative expenses consist primarily of personnel
salaries  and  benefits,  direct  marketing  costs,   professional,   legal  and
consulting fees, insurance and general office expenses.

     Selling,  general  and  administrative  expenses  increased  21.6%  to $9.0
million  during the three  months  ended  September  30, 2003 from $7.4  million
during the three months ended  September 30, 2002. This increase of $1.6 million
was primarily the result of approximately  $1.5 million in additional legal fees
and settlement  costs relating to our ongoing  litigation,  net of  reimbursable
legal  expenses,  $636,000 in additional  promotional  expenses for the AVAR and
Pandel  product  lines and a $133,000  increase in other  administrative  costs,
offset in part by a $725,000 reduction in selling and marketing expenditures for
Periostat and the Atrix Products.

     Significant  components  of selling,  general and  administrative  expenses
incurred  during the three months ended September 30, 2003 included $3.8 million
in direct  selling  and sales  training  expenses,  $2.2  million  in  marketing
expenses (including  advertising and promotion  expenditures for Periostat,  the
Atrix Products and Pandel and co-promotion  expenses relating to Vioxx and AVAR)
and $3.0 million in general and administrative  expenses, which include business
development, finance, legal and corporate activities.  Significant components of
selling,  general and  administrative  expenses incurred during the three months
ended  September  30, 2002  included  $3.9  million in direct  selling and sales
training expenses, $2.2 million in marketing expenses (including advertising and
promotion  expenditures  for  Periostat,  the Atrix  Products  and  co-promotion
expenses  relating  to  Vioxx  and  Pandel)  and $1.3  million  in  general  and
administrative  expenses,  which  include  business  development,   finance  and
corporate activities.


                                      -18-

<PAGE>


Other Income/Expense

--------------------------------------------------------------------------------
Other Income/Expense                     2003          Change         2002
--------------------------------------------------------------------------------
Interest income..................       $28,000         55.6%        $18,000
--------------------------------------------------------------------------------
Interest expense.................       $    --        (100)%        $(3,000)
--------------------------------------------------------------------------------
Other income.....................       $ 8,000         N/A         $     --
--------------------------------------------------------------------------------

     Interest  income  increased to $28,000 for the three months ended September
30, 2003 compared to $18,000 for the three months ended September 30, 2002. This
increase was due to higher  average  investment  balances in 2003.  There was no
interest  expense for the three months  ended  September  30, 2003,  compared to
$3,000 for the three months ended  September  30, 2002.  Other income was $8,000
for the three months ended  September  30, 2003 compared to other income of zero
for the three months ended September 30, 2002.  Such income was  attributable to
foreign currency transaction gains experienced in 2003.

Preferred Stock Dividend

     Preferred  stock  dividends  included  in net  income  allocable  to common
stockholders  were $400,000  during each of the three months ended September 30,
2003 and September 30, 2002. Such preferred stock  dividends,  paid in shares of
our Common Stock through May 11, 2002, and thereafter in cash, are the result of
our  obligations in connection with the issuance of our Series D preferred stock
in May 1999. As more fully set forth in the Amended  Certificate of Designation,
Preferences and Rights of the Series D Cumulative  Convertible  Preferred Stock,
after May 11, 2002, we no longer pay  dividends on the Series D preferred  stock
in shares of our Common Stock at a rate of 8.4%, and we became  obligated to pay
such dividends in cash, at a rate equal to 8% per annum.

     Nine  Months  Ended  September  30,  2003  Compared  to Nine  Months  Ended
September 30, 2002

Revenues

--------------------------------------------------------------------------------
Revenues                                2003          Change          2002
(dollars in thousands)
--------------------------------------------------------------------------------
Net Product Sales...............      $  35,917        15.8%        $  31,026
--------------------------------------------------------------------------------
Contract Revenues...............          2,164        22.3%            1,769
--------------------------------------------------------------------------------
License Revenues................            679       319.1%              162
                                      ---------       ------        ---------
--------------------------------------------------------------------------------
   Total........................      $  38,760        17.6%        $  32,957
--------------------------------------------------------------------------------

     Total revenues  during the nine months ended  September 30, 2003 were $38.8
million,  representing  a 17.6%  increase  over total  revenues of $33.0 million
during the nine months ended  September 30, 2002.  Such 2003  revenues  included
approximately  $35.9 million in net product  sales of Periostat,  Pandel and the
Atrix Products,  $2.2 million in contract revenues,  which were derived from our
co-promotion of Vioxx, Denavir and AVAR, and $679,000 in international licensing
revenues for Periostat.  Our agreement with Novartis  Consumer  Health,  Inc. to
co-promote  Denavir expired on September 30, 2003, and we and Novartis  mutually
decided not to renew our arrangement with respect to Denavir.  Net product sales
increased $4.9 million, or

                                      -19-
<PAGE>

15.8%, to $35.9 million during the nine months ended September 30, 2003 compared
to $31.0 million  during the nine months ended  September 30, 2002 primarily due
to higher  Periostat  sales and the addition of the Pandel product line which we
began selling direct in July 2002.

     Contract  revenues for the nine months ended  September 30, 2003  increased
22.3% to $2.2 million from $1.8 million  during the nine months ended  September
30,  2002,  primarily  due  to  increased  contract  revenues  relating  to  our
co-promotion activities with respect to Denavir and the AVAR product line offset
by lower Pandel contract revenues earned during 2003.

     We recorded  $32,000 and $45,000 in licensing  revenues for the nine months
ended  September  30,  2003  and  September  30,  2002,  respectively,  that was
attributable to our  recognition of previously  received  up-front  license fees
recognized for various agreements that were deferred and are being recognized as
licensing  revenue over the expected  performance  period of the agreements.  We
also recorded  licensing revenues of $222,000 and $47,000 during the nine months
ended  September  30, 2003 and 2002,  respectfully,  that  represent  previously
deferred  foreign  up-front  licensing fees where the recognition of revenue was
accelerated in connection with certain  licensing  agreements that were mutually
terminated during the respective periods.  Additionally,  during the nine months
ended  September 30, 2003 and 2002,  respectively,  we  recognized  $425,000 and
$70,000 in license milestone fees received from foreign licensing  partners upon
the achievement of certain milestones.

Cost of Product Sales

--------------------------------------------------------------------------------
Cost of Product Sales                    2003          Change         2002
(dollars in thousands)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cost of Product Sales............       $ 5,560        13.7%         $ 4,891
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Percent of Net Product Sales.....          15.5%        N/A             15.8%
--------------------------------------------------------------------------------

     Cost of product sales includes product  packaging,  third-party  royalties,
amortization  of  product  licensing  fees,  and the costs  associated  with the
manufacturing,  storage  and  stability  of  Periostat,  Pandel  and  the  Atrix
Products.

     Cost of product  sales were $5.6  million,  or 15.5% of net  product  sales
during the nine months ended  September 30, 2003,  compared to $4.9 million,  or
15.8% of net product  sales  during the nine months  ended  September  30, 2002.
During the nine months ended September 30, 2003, cost of product sales increased
in absolute  dollars as a result of increased  product sales. As a percentage of
net product  sales,  cost of product  sales  decreased  as a result of Periostat
price increases, which was offset in part by higher costs of product sales (as a
percentage  of net product  sales) for the Pandel  product line launched in July
2002.

Research and Development

--------------------------------------------------------------------------------
Research and Development                 2003          Change         2002
(dollars in thousands)
--------------------------------------------------------------------------------
Research and development.........       $ 4,397         50.4%        $ 2,925
--------------------------------------------------------------------------------
Percentage of Total Revenues.....          11.3%         N/A             8.9%
--------------------------------------------------------------------------------

                                      -20-

<PAGE>

     Research and development  expenses consist primarily of funds paid to third
parties  for the  provision  of services  and  materials  for drug  development,
including milestone fees, manufacturing and formulation  enhancements,  clinical
trials, statistical analysis and report writing and regulatory compliance costs.

     Research and development expenses increased $1.5 million, or 50.4%, to $4.4
million during the nine months ended September 30, 2003 from $2.9 million during
the nine months ended September 30, 2002.

     Development  projects  conducted during the nine months ended September 30,
2003  included  our  continuing  formulation  development  work for a once-a-day
formulation  of Periostat  and  formulation  and  stability  testing for several
potential products utilizing our licensed Restoraderm technology,  which totaled
$1.8 million and $702,000,  respectively.  Future  development of the once-a-day
technology  will be  contingent  on the  outcome  of the  initial  phase  of the
project,  which should be determined by the end of 2003. If all of the potential
products are successful, additional formation development expenses and milestone
fees could be as much as $8.6 million through 2006.

     Clinical  projects  totaling $618,000 were conducted during the nine months
ended September 30, 2003 and included  several Phase IV studies for Periostat in
various dental indications and continued  clinical  development work relating to
Periostat in  dermatological  indications and including a Phase III trial in 150
patients to evaluate  Periostat for the treatment of rosacea.  Until the outcome
of these  trials is  determined,  it is  premature  to estimate the future costs
associated with the clinical development of Periostat for any indication.

     Other research and  development  expenses  incurred  during the nine months
ended September 30, 2003 included $90,000 in regulatory consulting and legal and
filing fees under the Mutual  Recognition  Procedure  in Europe and $329,000 for
various  regulatory  costs,  including  annual FDA filing fees,  patent fees and
regulatory  expenses  in  the  United  States,  and  $169,000  in  manufacturing
development  costs for Metastat and the Impacs  compounds.  Direct  salaries and
other  personnel  expenses  incurred  during the nine months ended September 30,
2003 were  $406,000.  Additionally,  during such period we incurred  $280,000 in
consulting, travel and other office expenses.

     Development  projects  conducted during the nine months ended September 30,
2002  included  our  continuing  formulation  development  work for a once-a-day
formulation  of Periostat  and  formulation  and  stability  testing for several
potential products utilizing our licensed Restoraderm technology,  which totaled
$953,000 and $293,000, respectively.

     Clinical  projects  totaling $704,000 were conducted during the nine months
ended September 30, 2002 and included  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  meibomiantis (an ocular condition),
clinical  development work relating to Periostat in  dermatological  indications
and  initiation  of a Phase III trial in 150 patients to evaluate  Periostat for
the treatment of rosacea.

                                      -21-
<PAGE>


     Other research and  development  expenses  incurred  during the nine months
ended September 30, 2002 included  $184,000 in regulatory  consulting and filing
fees under the Mutual  Recognition  Procedure  in Europe and $93,000 for various
regulatory costs,  including annual FDA filing fees, patent fees, and regulatory
expenses in the United  States.  Direct  salaries and other  personnel  expenses
incurred  during  the nine  months  ended  September  30,  2002  were  $391,000.
Additionally,  during such period we incurred $307,000 in consulting, travel and
other office expenses.

Selling, General and Administrative

--------------------------------------------------------------------------------
Selling, General and Administrative      2003          Change         2002
(dollars in thousands)
--------------------------------------------------------------------------------
Selling, General and Administrative -
        other......................... $24,578        (3.1)%        $25,377
--------------------------------------------------------------------------------
Selling, General and Administrative -
     stock compensation charge........     251         N/A               --
--------------------------------------------------------------------------------
Subtotal.............................. $24,829        (2.2)%        $25,377
--------------------------------------------------------------------------------
Percentage of Total Revenues..........    64.1%        N/A             77.0%
--------------------------------------------------------------------------------

     Selling,  general and  administrative - other expenses consist primarily of
personnel salaries and benefits, direct marketing costs, professional, legal and
consulting fees, insurance and general office expenses.

     Selling,  general and  administrative  - other  expenses  decreased 3.1% to
$24.6 million during the nine months ended September 30, 2003 from $25.4 million
during the nine months ended  September 30, 2002.  This decrease of $800,000 was
primarily  the  result of a $4.0  million  reduction  in selling  and  marketing
expenditures   for  Periostat  and  the  Atrix  Products,   offset  in  part  by
approximately $1.7 million in increased legal fees and settlement costs relating
to our ongoing litigation, net of reimbursable legal expenses, and approximately
$1.3 million in additional promotional expenses for AVAR and Pandel.

     Significant  components  of  selling,  general and  administrative  - other
expenses incurred during the nine months ended September 30, 2003 included $11.6
million in direct selling and sales training expenses, $6.3 million in marketing
expenses (including  advertising and promotion  expenditures for Periostat,  the
Atrix Products and Pandel and co-promotion  expenses relating to Vioxx and AVAR)
and $6.7 million in general and administrative  expenses, which include business
development, finance, legal and corporate activities.  Significant components of
selling,  general and  administrative  expenses  incurred during the nine months
ended  September  30, 2002 included  $12.0  million in direct  selling and sales
training expenses, $8.9 million in marketing expenses (including DTC advertising
and promotion  expenditures  for Periostat,  the Atrix Products and co-promotion
expenses  relating  to  Vioxx  and  Pandel)  and $4.5  million  in  general  and
administrative  expenses,  which  include  business  development,   finance  and
corporate activities.

     Selling, general and administrative - stock compensation charge of $251,000
during  the  nine  months  ended   September  30,  2003  resulted  from  certain
modifications made to stock option agreements held by Brian M. Gallagher, Ph.D.,
our chairman, chief executive officer and

                                      -22-

<PAGE>

president,  in  connection  with a  Transition  Agreement  we executed  with Dr.
Gallagher on March 18, 2003.

Other Income/Expense

--------------------------------------------------------------------------------
Other Income/Expense                     2003          Change         2002
--------------------------------------------------------------------------------
Interest income..................       $84,000         52.7%        $55,000
--------------------------------------------------------------------------------
Interest expense.................       $    --         (100)%       $(5,000)
--------------------------------------------------------------------------------
Other expense....................       $ 2,000          N/A         $    --
--------------------------------------------------------------------------------

     Interest  income  increased to $84,000 for the nine months ended  September
30, 2003 compared to $55,000 for the nine months ended  September 30, 2002. This
increase was due to higher  average  investment  balances in 2003.  There was no
interest  expense for the nine months  ended  September  30,  2003,  compared to
$5,000 for the nine months ended  September  30, 2002.  Other expense was $2,000
for the nine months ended  September  30, 2003 compared to other expense of zero
for the nine months ended September 30, 2002. Such increase was  attributable to
foreign currency transaction losses experienced in 2003.

Preferred Stock Dividend

     Preferred stock dividends included in net income (loss) allocable to common
stockholders  were $1.2 million  during each of the nine months ended  September
30, 2003 and September 30, 2002. Such preferred stock dividends,  paid in shares
of our Common Stock through May 11, 2002, and thereafter in cash, are the result
of our  obligations  in  connection  with the issuance of our Series D preferred
stock in May  1999.  As more  fully  set  forth in the  Amended  Certificate  of
Designation,  Preferences  and  Rights of the  Series D  Cumulative  Convertible
Preferred Stock,  after May 11, 2002, we no longer pay dividends on the Series D
preferred  stock in shares of our Common Stock at a rate of 8.4%,  and we became
obligated to pay such dividends in cash, at a rate equal to 8% per annum.

Liquidity and Capital Resources

     On October 3, 2003, we announced  that we had entered into  agreements  for
the sale of 2,000,000 shares of our Common Stock registered under a registration
statement  on  Form  S-3 to  certain  institutional  investors,  at a per  share
purchase price of $10.00 for aggregate  gross  proceeds of $20.0 million,  which
generated net proceeds to us of approximately  $18.8 million,  after the payment
of placement agent fees and related expenses.

     On May 12, 1999,  we  consummated  a $20.0  million  financing  through the
issuance of our Series D preferred stock,  which generated net proceeds to us of
$18.5  million.  The issuance of the Series D preferred  stock was approved by a
majority of our  stockholders  at our Annual Meeting of  Stockholders on May 11,
1999.  A portion of the  proceeds  of the  Series D  preferred  stock  financing
consummated  in May 1999  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  such  financing.  The  remaining  proceeds  have been used for
general working capital purposes.

                                      -23-
<PAGE>


     The Series D preferred  stock is convertible at any time into shares of our
Common Stock at a current  conversion price of $9.89 per share, which conversion
price reflects a decrease from the initial  conversion price of $11.00 per share
as a result of certain  subsequent equity issuances by us. Such conversion price
is not  subject to reset  except in the event that we should fail to declare and
pay dividends  when due or we should issue new equity  securities or convertible
securities  at a price per share or having a  conversion  price per share  lower
than the then  applicable  conversion  price of the  Series D  preferred  stock.
During  the first  three  years  following  issuance,  holders  of the  Series D
preferred stock received  dividends payable in shares of fully registered Common
Stock at a rate of 8.4% per annum. Thereafter, and beginning on May 12, 2002, we
began paying such dividends in cash at a rate of 8.0% per annum.

     All or a portion of the shares of Series D preferred  stock  shall,  at our
option (as  determined by our board of  directors),  automatically  be converted
into fully paid,  registered and  non-assessable  shares of Common Stock, if the
following two conditions  are met: (i) the last sale price,  or, in case no such
sale takes place on such day, the average of the closing bid and asked prices on
the  Nasdaq  National  Market is at least 200% of the  conversion  price then in
effect (as of September 30, 2003, such conversion price was $9.89 per share) for
forty consecutive  trading days; and (ii) a shelf  registration  statement is in
effect for the shares of Common Stock to be issued upon conversion of the Series
D  preferred  stock.  Without  written  approval of a majority of the holders of
record of the Series D preferred stock,  we, among other things,  shall not: (i)
declare or pay any dividend or  distribution  on any shares of our capital stock
other than dividends on the Series D 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  our debt  securities,  except  that we 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 we have  reported
positive  net income for four  consecutive  quarters  immediately  prior to such
twelve month period.

     We have a revolving  credit facility with Silicon Valley Bank which expires
on March 15,  2004.  We may  borrow up to the  lesser of $4.0  million or 80% of
eligible accounts receivable,  as defined under the credit facility.  The amount
available  to us is also reduced by  outstanding  letters of credit which may be
issued  under the credit  facility in amounts  totaling up to $1.5  million.  On
April 1, 2003, we secured our expected  purchase order  commitments for the next
twelve  months with a letter of credit for  approximately  $1.1  million.  As of
September  30, 2003,  the letter of credit had been  reduced to $592,000.  As we
continue to pay down amounts under the letter of credit, the amount available to
us under the Facility  will  increase.  We are not obligated to draw amounts and
any such borrowings bear interest,  payable monthly, currently at the prime rate
plus 1.0% to 1.5% per annum and may be used only for working  capital  purposes.
Without the consent of Silicon Valley Bank,  we, among other things,  shall not:
(i) merge or consolidate  with another  entity;  (ii) acquire assets outside the
ordinary  course of business;  or (iii) pay or declare any cash dividends on our
common  stock.  We must  also  maintain  a  certain  tangible  net worth of $5.0
million, subject to certain upward adjustments,  as defined in the amendment, as
a result of profitable  operations or additional debt or equity financings and a
minimum of $2.0 million in cash at Silicon Valley Bank, net of borrowings  under
the credit  facility.  In addition,  we have secured our  obligations  under the
credit facility through the granting of a security interest in favor of the

                                      -24-

<PAGE>

bank with respect to all of our assets,  including our intellectual property. As
of  September  30, 2003,  we had no  borrowings  outstanding  against the credit
facility.

     During 1999, we entered into a three-year co-promotion agreement with Merck
& Co.,  Inc. for Vioxx under which we are  committed to spend up to $1.0 million
annually for promotional  expenses,  or such lesser amount as will be determined
by mutual agreement of the parties. In September 2002, the agreement was amended
and the term was extended to December 31, 2003.

     On August 24, 2001, we signed a License and Marketing  Agreement with Atrix
Laboratories,  Inc. to market  Atrix's  proprietary  dental  products,  Atridox,
Atrisorb FreeFlow and Atrisorb-D,  to the United States dental market.  Pursuant
to the terms of this agreement,  among other things:  (i) Atrix will manufacture
the dental  products  for us at an agreed upon  transfer  price and will receive
royalties on future net sales of the products each calendar  year;  (ii) we paid
to  Atrix a $1.0  million  licensing  fee to  market  such  products;  (iii)  we
committed  to no less than $2.0  million in  advertising  and  selling  expenses
related to the Atrix Products  during the fiscal year beginning  January 1, 2002
(which  requirement  we met during  2002);  (iv) we agreed to maintain,  through
August  2003,  a force of no less than ninety full time dental  consultants  and
divisional and regional managers to make sales and product  recommendation calls
on dental professionals (which requirement we have fulfilled); and (v) we agreed
that the Atrix  Products  would be the  subject of a  specific  number of detail
calls in the United States during 2002, which we achieved.  We are also required
to make certain annual minimum  expenditures  for  advertising  and  promotional
activities over the term of the agreement beginning January 1, 2003,  including:
(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.

     On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement  pursuant  to  which we were  granted  an  exclusive,  sublicenseable,
transferable  license with  respect to the  Restoraderm  topical  drug  delivery
system which we intend to develop for dermatological  applications.  Pursuant to
the terms of such agreement,  upon the occurrence of certain events,  we will be
required to pay certain future consulting, royalty and milestone payments in the
aggregate amount of up to approximately $3.2 million, of which no more than $2.2
million  shall be payable  prior to January 1, 2004 and of which no more than an
additional  $1.0  million  shall be payable  prior to  January 1, 2005.  We paid
$565,000 under this  Agreement in the nine months ended  September 30, 2003. The
term of such  agreement  is for the life of any patent  that may be issued to us
for the first product we develop utilizing such technology, or, if such a patent
fails to issue, seven years.

     At September 30, 2003, we had cash and cash  equivalents  of  approximately
$14.5  million,  an increase of $4.4 million from the $10.1  million  balance at
December 31, 2002.  In accordance  with  investment  guidelines  approved by our
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.  Our working capital
at September 30, 2003 was $12.0  million,  an increase of $5.4 million from $6.6
million at December 31, 2002.  This increase was primarily  attributable  to the
operating profitability


                                      -25-
<PAGE>


experienced  during 2003 and the addition of $1.8 million in cash  proceeds from
the  exercise  of stock  options  and  warrants.  During the nine  months  ended
September  30,  2003,  we  generated  $5.4  million  in cash from our  operating
activities  principally  from net income of $4.1 million less changes in certain
assets and  liabilities.  During the nine months ended  September  30, 2003,  we
invested $270,000 in capital  expenditures,  made $900,000 in licensing payments
to Altana Inc.  and paid $1.6  million in cash  dividends  to the holders of our
Series D preferred stock.

     We currently believe that projected increases in sales of our United States
marketed  products in combination  with contract and license  revenues,  working
capital at September 30, 2003,  available cash inflows from our revolving credit
facility  with  Silicon  Valley  Bank  and the  proceeds  from our  offering  of
2,000,000  shares  of Common  Stock in  October  2003 will  allow us to fund our
operations,  capital expenditures and preferred stock dividend  requirements for
at least the next twelve months.  At this time,  however,  we cannot  accurately
predict the effect of certain  developments  on future product sales such as the
degree of market  acceptance of our products and  technology,  competition,  the
effectiveness of our sales and marketing efforts and the outcome of our research
and  development to demonstrate  the utility of Periostat in indications  beyond
those already included in the FDA approved label.  Contract and license revenues
include receipts from co-promotion  agreements and performance  milestones.  The
continuation of any of these agreements is subject to the achievement of certain
milestones and to periodic review by the parties involved.

     We  believe  that other key  factors  that could  affect our  internal  and
external sources of cash are:

     o    Revenues and profits from sales of  Periostat  and other  products and
          contracted services;

     o    The success of our dermatology franchise;

     o    The success of our pre-clinical, clinical and development programs;

     o    The receptivity of the capital markets to future financings;

     o    Our ability to enter into additional  strategic  collaborations and to
          maintain  existing  and new  collaborations  and the  success  of such
          collaborations;

     o    Our  ability to meet the  covenant  requirements  under our  revolving
          credit facility; and

     o    The  outcome  and  consequences  of  our  patent  litigation  and  our
          litigation with the FDA.

Contractual Obligations

     Our major outstanding  contractual  obligations relate to cash dividends on
our outstanding Series D preferred stock,  operating leases for our office space
and contractual  commitments with our marketing partners for certain selling and
promotional expenses associated with the products

                                      -26-
<PAGE>


we are  currently  detailing.  Additionally,  we also  expect  to  make  certain
inventory purchases from our contract  manufacturer of Periostat,  guaranteed by
our irrevocable Letter of Credit with Silicon Valley Bank.

     Below is a table which presents our contractual  obligations and commercial
commitments as of September 30, 2003:

                                      Payments Due by Period
-------------------------------------------------------------------------------
                                  Three
                                 Months
                                 ending
Contractual                      December      2004 and    2006 and    2008 and
Obligations         Total        31, 2003        2005         2007       after
-------------------------------------------------------------------------------
Operating
  Leases(1)......  $1,974,000    $  82,000    $ 678,000     $  684,000  $530,000
-------------------------------------------------------------------------------
Unconditional
  Purchase
  Obligations....  $  592,000(2) $ 592,000(2)     --           --         --
-------------------------------------------------------------------------------
Co-Promotional
  Commitments....    (3)(4)        (3)(4)         (4)          (4)        (4)
-------------------------------------------------------------------------------
Cash Dividends
  on Series D
  Preferred Stock  $6,400,000(5)   --(5)      $3,200,000(5) $3,200,000(5) (5)
-------------------------------------------------------------------------------
Consulting
  Payments.......  $  649,000(6)   --(6)      $ 649,000(6)     --         --
-------------------------------------------------------------------------------
Total
  Contractual
  Obligations....  $9,615,000    $ 674,000    $4,527,000    $3,884,000  $530,000
-------------------------------------------------------------------------------

     (1)  Such amounts  primarily include minimum rental payments for our office
          lease in Newtown, Pennsylvania.

     (2)  Such  amount  represents  purchase  order  commitments  for  inventory
          purchases with various suppliers.

     (3)  Under the terms of our  Co-Promotion  Agreement with Merck & Co., Inc.
          for Vioxx,  which expires December 31, 2003, we are obligated to spend
          up to $1.0 million annually for promotional  expenses,  or such lesser
          amount as will be determined by mutual agreement of the parties.

     (4)  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.  See  further  information  regarding  the Atrix  License  and
          Marketing   Agreement   under  the  heading   "Liquidity  and  Capital
          Resources."

     (5)  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


                                      -27-
<PAGE>


          entitled  to  dividends  payable  in cash at a rate of 8.0% per annum,
          which are declared and paid every six months. See further  information
          regarding  our Series D preferred  stock under the heading  "Liquidity
          and Capital Resources."

     (6)  Such  amount  represents  consulting  payments  to be made to Brian M.
          Gallagher,  our  chief  executive  officer  and  president,  upon  his
          separation  from the Company and pursuant to the terms of a consulting
          agreement executed March 18, 2003.

     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  $318,000  per  year  and is  subject  to  market
adjustments in 2004.

     On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement  pursuant  to  which we were  granted  an  exclusive,  sublicenseable,
transferable  license with  respect to the  Restoraderm  topical  drug  delivery
system which we intend to develop for dermatological  applications.  Pursuant to
the terms of such agreement,  upon the occurrence of certain events,  we will be
required to pay certain future consulting, royalty and milestone payments in the
aggregate amount of up to $3.2 million, of which no more than $2.2 million shall
be payable prior to January 1, 2004 and of which no more than an additional $1.0
million shall be payable prior to January 1, 2005. The term of such agreement is
for the life of any  patent  that may be issued to us for the first  product  we
develop  utilizing such technology,  or, if such a patent fails to issue,  seven
years.

     On June 10, 2002, we executed a Development  and Licensing  Agreement  with
Shire  Laboratories,  Inc.  pursuant  to  which  we were  granted  an  exclusive
worldwide  license  (including the right to sublicense) to develop,  make,  have
made, use, supply, export, import,  register and sell products for the treatment
of various inflammatory  disorders.  In addition,  under the agreement,  certain
product  development  functions shall be performed for us. Pursuant to the terms
of such  agreement,  we will pay to Shire a  percentage  of certain net sales of
products,  if any,  utilizing  any part of  Shire's  technology.  Also under the
agreement,  we have  committed  to  payments  in  cash,  or,  at our  option,  a
combination  of cash and our  Common  Stock,  upon the  achievement  of  certain
clinical and regulatory  milestones in the event we pursue certain  applications
of the technology which could total up to $7.9 million in the aggregate.

Additional Risks That May Affect Results

     Important  factors could cause our actual results to differ materially from
those  indicated  or  implied  by   forward-looking   statements   contained  or
incorporated  by reference in this Quarterly  Report on Form 10-Q.  Factors that
could cause or contribute to such  differences  include those factors  discussed
below.  If any of the following risks actually  occur,  our business,  financial
condition or results of operations would likely suffer.

     We Rely on Periostat for Most of Our Revenue.

     During the nine months ended  September  30, 2003 and the years ended 2002,
2001 and 2000,  Periostat  accounted for approximately  82%, 82%, 87% and 84% of
our total net revenues,  respectively.  Although we currently derive  additional
revenue from marketing and/or selling other products (Vioxx,  Atridox,  Atrisorb
FreeFlow, Atrisorb-D, Pandel and Denavir (through

                                      -28-
<PAGE>

September 30, 2003)) and from  licensing fees from foreign  marketing  partners,
our revenue and  profitability  in the near future will depend on our ability to
successfully market and sell Periostat.

     Although we recently  settled our litigation with West-ward  Pharmaceutical
Corporation  ("West-ward"),   Mutual  Pharmaceutical  Company,  Inc.  ("Mutual")
submitted  an  application  to the FDA for  approval  of a  generic  version  of
Periostat.  Other companies may also have submitted applications for approval of
generic versions of Periostat.  We have filed suits to enforce our patent rights
and to compel the FDA to award  patent and  exclusivity  protections  that would
prevent a generic drug application from being approved now. On July 23, 2003, we
announced that the United States District Court for the District of Columbia had
granted a preliminary injunction temporarily  restraining the FDA from approving
any  Abbreviated  New Drug  Applications  ("ANDAs")  submitted  for any  generic
version of Periostat.  Until the Court has made a final ruling on our complaint,
the FDA  cannot  approve  the ANDAs on file for  West-ward's  20 mg  doxycycline
hyclate capsule, Mutual's 20 mg doxycycline hyclate tablet or any other ANDA for
a generic version of Periostat.  The Court could make a final ruling at any time
after the briefs are due in mid-December  2003. If the Court decides in favor of
the FDA, the FDA could begin to approve generic drugs immediately therafter.

     As a  result  of the  ruling  in the  District  Court  of the  District  of
Columbia,  we have  withdrawn our motion for a temporary  restraining  order and
preliminary injunction in our patent infringement suit against Mutual, which was
filed in the  District  Court of the  Eastern  District  of New  York.  Our suit
against Mutual, however,  remains on file and a motion for injunctive relief can
be filed immediately if required.  We cannot be sure, however,  that one or more
generic versions of Periostat will not be approved and marketed.  If one or more
generic  versions of  Periostat  are approved and  marketed,  our revenues  from
Periostat would significantly  decrease, and as result, our business,  financial
condition,  cash flows and results of operations  would be materially  adversely
affected.

     We May Not Be Able to Maintain Profitability.

     From our  founding in 1992  through the  commercial  launch of Periostat in
November,  1998,  we had no revenue from sales of our own  products.  During the
year ended  December 31, 2000, we experienced a net loss of  approximately  $8.8
million.  During the year ended  December 31, 2001, we experienced a net loss of
approximately  $8.1 million.  As of September  30, 2003, we have an  accumulated
deficit of $71.4 million. Our historical losses have resulted primarily from the
expenses  associated  with  our  pharmaceutical  development  program,  clinical
trials, the regulatory  approval process associated with Periostat and sales and
marketing  activities relating to Periostat.  Although we achieved net income of
$902,000,  $1.2  million,  $1.6  million  and $1.2  million  for the year  ended
December 30, 2002,  and each of the three months ended March 31, 2003,  June 30,
2003 and September 30, 2003, respectively, we expect to incur significant future
expenses, particularly with respect to the sales and marketing of Periostat, new
products  and  continuing  clinical  and  manufacturing  development  for  other
indications and formulations of Periostat,  and therefore,  we cannot be certain
that we will be able to maintain our profitability in the future, if at all.

                                      -29-
<PAGE>


     Our  Competitive  Position  in the  Marketplace  Depends on  Enforcing  and
Successfully Defending Our Intellectual Property Rights.

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

     Our core  technology is licensed from The Research  Foundation of the State
University of New York ("SUNY"),  and other  academic and research  institutions
collaborating  with  SUNY.  Under the  license  agreement  with SUNY (the  "SUNY
License") we have an  exclusive  worldwide  license to SUNY's  rights in certain
patents  and  patent   applications   to  make  and  sell   products   employing
tetracyclines  to treat certain  disease  conditions.  The SUNY License  imposes
various payment and reporting  obligations on us, and our failure to comply with
these  requirements  permits SUNY to  terminate  the SUNY  License.  If the SUNY
License  is  terminated,  we would lose our right to  exclude  competitors  from
commercializing  similar  products,  and we could be excluded from marketing the
same products if SUNY licensed the underlying  technology to a competitor  after
terminating the SUNY License.

     SUNY owns 31 United States patents and 6 United States patent  applications
that are licensed to us. The patents  licensed from SUNY expire between 2004 and
2019.  Two of the patents are related to Periostat  and expire in 2004 and 2007.
Technology  covered by these patents  becomes  available to  competitors  as the
patents expire.

     Since many of our patent rights cover new treatments  using  tetracyclines,
we may be  required  to bring  expensive  infringement  actions to  enforce  our
patents and protect our technology.  Although  federal law prohibits  making and
selling pharmaceuticals for infringing use, competitors and/or practitioners may
provide  generic  forms of  tetracycline  for  treatment(s)  which  infringe our
patents, rather than prescribe our Periostat product. Enforcement of patents can
be expensive and time consuming.

     We are currently enforcing our patent rights against Mutual, a generic drug
company. Mutual has submitted a request for listing a generic tablet replacement
for  Periostat  on  the  New  Jersey  Formulary.  In  keeping  with  our  patent
enforcement  policy,  we have  initiated  a patent  infringement  action  in the
Eastern  District  of New York to  prevent  Mutual  from  introducing  a generic
version of Periostat.  A motion for preliminary  injunction was filed and served
to  prevent  Mutual  from  introducing  a generic  version of  Periostat  to the
marketplace.  As a result of our  litigation  against the FDA, we have withdrawn
our motion for a temporary  restraining order and preliminary  injunction in our
patent  infringement suit against Mutual,  although our complaint against Mutual
remains  outstanding.  Mutual has filed  various  claims  against us relating to
these matters.  We cannot be certain that Mutual or other third parties will not
receive FDA approval and introduce a competitive  generic  version of Periostat.
Any  infringement  or related  action  involving  Mutual or any third party will
likely  result in  significant  expenditures,  even if such actions are settled,
require substantial management time and may not be resolved in our favor.

     Our success also  depends upon  know-how,  trade  secrets,  and the skills,
knowledge and experience of our scientific and technical personnel. To that end,
we require all of our employees and, to the extent  possible,  all  consultants,
advisors and research collaborators, to

                                      -30-
<PAGE>

enter into confidentiality agreements prohibiting unauthorized disclosure.  With
respect  to  information  and  chemical  compounds  we  provide  for  testing to
collaborators   in  academic   institutions,   we  cannot   guarantee  that  the
institutions  will not assert  property  rights in the results of such tests nor
that a license can be reasonably  obtained from such  institutions  which assert
such  rights.  Failure to obtain the  benefit of such  testing  could  adversely
affect our commercial position and, consequently, our financial condition.

     If We  Lose  Our  Sole  Supplier  of  Doxycycline  Hyclate  or Our  Current
Manufacturer  of  Periostat,   Our   Commercialization   of  Periostat  Will  be
Interrupted, Halted or Less Profitable.

     We rely on a single supplier,  Hovione  International  Limited ("Hovione"),
for doxycycline,  the active  ingredient in Periostat.  There are relatively few
alternative  suppliers of doxycycline  and Hovione  produces the majority of the
doxycycline used in the United States. Our current supply agreement with Hovione
expires on May 14,  2006 and  thereafter  automatically  renews  for  successive
two-year  periods  unless,  90 days prior to the expiration of any such periods,
either party gives the other party written notice of  termination.  In addition,
in the event of a default,  uncured for 90 days,  the  non-defaulting  party can
terminate  the  supply  agreement  effective  immediately  at the  end  of  such
ninety-day  period.  We rely on Hovione as our sole supplier of doxycycline  and
have no back-up  supplier at this time. If we are unable to procure a commercial
quantity of doxycycline from Hovione on an ongoing basis at a competitive price,
or if we cannot find a replacement supplier in a timely manner or with favorable
pricing terms, our costs may increase significantly and we may experience delays
in the supply of Periostat.

     We  have  entered  into  an   agreement   with  a  contract   manufacturer,
Pharmaceutical  Manufacturing  Research Services,  Inc. ("PMRS"), for our tablet
formulation for Periostat.  Our current  arrangement with PMRS has been extended
until the earlier of March 30, 2007 or until a generic 20 mg doxycycline hyclate
tablet is  available  on the  market.  Currently,  PMRS is the sole  third-party
contract  manufacturer  to supply a tablet  formulation  of Periostat to us. Any
inability  of PMRS to produce  and supply  product  on agreed  upon terms  could
result in delays in the supply of Periostat. The introduction of a generic 20 mg
doxycycline  hyclate tablet could leave us without a manufacturer or force us to
negotiate a new  arrangement,  possibly on less  favorable  terms.  We intend to
contract  with  additional  manufacturers  for  the  commercial  manufacture  of
Periostat  tablets.  We believe,  however,  that it could take up to one year to
successfully transition from PMRS to a new manufacturer.

     Our Products are Subject to Extensive Regulation by the FDA.

     Drugs and medical devices  generally require approval or clearance from the
FDA before they can be marketed in the United States.  Periostat,  Vioxx, Pandel
and Atridox have been approved by the FDA as drugs. Sirius  Laboratories,  Inc.,
the  manufacturer  of the AVAR  products,  has not sought FDA  approval of those
products  because the  manufacturer  believes  that no approval is required.  We
cannot be sure that the FDA will not  object to the lack of  approval  for these
products.  If the FDA were to assert that the AVAR  products need  approval,  we
might be required to stop marketing such products temporarily or permanently and
might be subject to FDA regulatory action. Atrisorb FreeFlow and Atrisorb-D have
been cleared by the FDA as medical devices. Our drug products under development,
however, will have to be approved by

                                      -31-
<PAGE>

the FDA before they can be marketed in the United States. Also, we cannot market
our  approved  products for new  indications  until FDA approves the product for
that indication.  If the FDA does not approve our products under  development or
additional  indications for marketed  products in a timely fashion,  or does not
approve them at all, our financial condition may be adversely affected.

     In  addition,   drug  and  medical  device   products   remain  subject  to
comprehensive  regulation by the FDA while they are being marketed. The drug and
medical device  regulatory  schemes differ in detail,  but they are  essentially
similar. The FDA regulates,  for example, the safety,  manufacturing,  labeling,
and promotion of both drug and medical  device  products.  If we or our partners
who  manufacture  our  products  fail to comply  with  regulatory  requirements,
various adverse  consequences can result,  including  recalls,  civil penalties,
withdrawal  of the product  from the market  and/or the  imposition  of civil or
criminal sanctions.

     We  are,  and  will  increasingly  be,  subject  to a  variety  of  foreign
regulatory  regimes governing  clinical trials and sales of our products.  Other
than  Periostat,  which has been  approved by the Medicines  Control  Agency for
marketing in the United Kingdom and approved for marketing in Austria,  Finland,
Switzerland,  Ireland, Israel, Italy, Luxemburg,  the Netherlands,  Portugal and
Canada,  our  products  in  development  have not been  approved  in any foreign
country.  Whether  or not FDA  approval  has  been  obtained,  approval  of drug
products by the comparable  regulatory  authorities of foreign countries must be
obtained  prior to the  commencement  of  marketing  of those  products in those
countries.  The  approval  process  varies from  country to  country,  and other
countries may also impose post-approval requirements.

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

     We  sell  most  of  our  products  to a  small  number  of  wholesale  drug
distributors.  For the year ended December 31, 2002,  sales to Cardinal  Health,
Inc.,  McKesson  Corporation  and  Amerisource-Bergen  Corporation,  represented
approximately  32%,  24% and 19%,  respectively,  of our  aggregate  net product
sales.  For the nine months ended September 31, 2003,  sales to Cardinal Health,
Inc.,  McKesson  Corporation  and  Amerisource-Bergen  Corporation,  represented
approximately  43%,  30% and 19%,  respectively,  of our  aggregate  net product
sales.  The small number of wholesale drug  distributors,  consolidation in this
industry or financial  difficulties  of these  distributors  could result in the
combination  or  elimination of  warehouses,  which could  temporarily  increase
returns  of our  products  or, as a result of  distributors  reducing  inventory
levels,  delay the  purchase  of our  products.  In  addition,  wholesalers  may
increase  purchase  levels in  anticipation  of future  price  increases  or may
capitalize  on  volume  discounts  to  acquire  inventory.  This  may  cause  an
unexpected  increase in the level of trade  inventories  normally  maintained by
wholesalers.  Although  we have  developed  a plan  to  manage  Periostat  trade
inventory levels,  this plan may not be effective.  If Periostat trade inventory
levels  become too high,  or if  prescription  growth of Periostat is lower than
expected by the trade,  wholesalers  and large retail  chains could reduce their
orders for  Periostat,  which could  result in reduced  sales of  Periostat  and
adversely affect our operating results.

                                      -32-
<PAGE>


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

     In January  2002,  we  announced  our plans to expand into the  dermatology
market.  During 2002,  we initiated a  150-patient  Phase III clinical  trial to
evaluate  the use of  Periostat  to  treat  rosacea,  we  announced  that we had
licensed  a  new  dermal  and  transdermal  drug  delivery   technology   called
Restoraderm, we executed a sublicense Agreement with Altana Inc. with respect to
the  marketing  and  distribution  of Pandel,  and in March 2003,  we executed a
co-promotion agreement with Sirius Laboratories,  Inc. pursuant to which we will
jointly market  Sirius' AVAR product line. In addition,  we continue to actively
seek product licensing  opportunities to enhance our near-term  offerings to the
dermatology  market.  Our future success will depend on, among other things, our
ability  to:  (i)  achieve  market   acceptance  for  any  of  these  or  future
dermatological  offerings; (ii) hire and retain personnel with experience in the
dermatology market;  (iii) execute our business plan with respect to this market
segment;  and (iv) adapt to technical or  regulatory  changes once  operational.
Furthermore,  while we have  experience  in the  sales and  marketing  of dental
products,  we have virtually no experience in  dermatology.  This market is very
competitive and some of our competitors  have  substantially  greater  resources
than we have.  New  product  development  is a lengthy,  complex  and  uncertain
process that will require significant attention and resources from management. A
product candidate can fail at any stage of the development process due to, among
other things,  efficacy or safety  concerns,  the inability to obtain  necessary
regulatory approvals, the difficulty or excessive cost to manufacture and/or the
infringement of patents or intellectual property rights of others.  Furthermore,
the  sales  of new  products  may  prove to be  disappointing  and fail to reach
anticipated levels. We therefore cannot assure you that we will be successful in
our pursuit of business in the  dermatology  market,  or that we can sustain any
business in which we achieve initial success.

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

     Our business may be adversely affected by potential product liability risks
inherent in the testing,  manufacturing  and  marketing  of Periostat  and other
products  developed by or for us or for which we have licensing or  co-promotion
rights. We have an aggregate of $10.0 million in product liability insurance for
Periostat,  our product  candidates  and products for which we have licensing or
co-promotion  rights.  This level of  insurance  may not  adequately  protect us
against product liability claims. Insufficient insurance coverage or the failure
to obtain  indemnification  from third parties for their respective  liabilities
may expose us to product  liability  claims  and/or  recalls and could cause our
business, financial condition and results of operations to decline.

     Because Our  Executive  Officers,  Directors  and  Affiliated  Entities Own
Approximately  23.3% of Our Capital Stock, They Could Influence Our Actions in a
Manner  That  Conflicts  With  Our  Interests  and the  Interests  of Our  Other
Stockholders.

     Currently,  our  executive  officers,  directors  and  affiliated  entities
together  beneficially own approximately  23.3% of the outstanding shares of our
Common Stock or equity  securities  convertible  into Common Stock. As a result,
these  stockholders,   acting  together,   or  in  the  case  of  our  preferred
stockholders,  in  certain  instances,  as a  class,  will be able to  influence
corporate  actions  requiring  stockholder  approval,  including the election of
directors. This concentration of

                                      -33-
<PAGE>

ownership  may have the effect of  delaying or  preventing  a change in control,
including  transactions  in which our  stockholders  might  otherwise  receive a
premium for their shares over then current market prices.

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

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

     The  following  table sets forth the high and low closing  market price per
share for our Common  Stock for each of the  quarters  in the  period  beginning
January 1, 2000 through  September 30, 2003, as reported on the Nasdaq  National
Market:


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

         March 31, 2000..........         $27.13         $12.63
         June 30, 2000...........         $15.50          $8.25
         September 30, 2000......          $9.88          $8.06
         December 31, 2000.......          $7.88          $3.13
         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


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     We had cash  equivalents  at  September  30,  2003 which are exposed to the
impact of  interest  rate  changes and our  interest  income  fluctuates  as our
interest rates change.  Due to the short-term nature of our investments in money
market funds, the carrying values of our cash equivalents approximate their fair
value at September 30, 2003.

                                      -34-
<PAGE>


Item 4. Controls and Procedures.

     Our management,  with the  participation of our chief executive officer and
chief financial officer,  evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the Exchange
Act) as of  September  30, 2003.  In designing  and  evaluating  our  disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated,  can provide only reasonable assurance
of achieving their objectives and management necessarily applied its judgment in
evaluating the  cost-benefit  relationship of possible  controls and procedures.
Based on this  evaluation,  our chief  executive  officer  and  chief  financial
officer  concluded  that, as of September 30, 2003, our disclosure  controls and
procedures were (1) designed to ensure that material information relating to us,
including our  consolidated  subsidiaries,  is made known to our chief executive
officer  and  chief   financial   officer  by  others  within  those   entities,
particularly  during the period in which this report was being  prepared and (2)
effective,  in that they provide reasonable  assurance that information required
to be  disclosed  by us in our reports that we file or submit under the Exchange
Act is recorded,  processed,  summarized  and  reported  within the time periods
specified in the SEC's rules and forms.

     No change in our internal  control over financial  reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended September 30, 2003 that has materially affected,  or is reasonably
likely to materially affect, our internal control over financial reporting.


                                      -35-
<PAGE>


                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

West-ward Pharmaceutical Corporation Litigation

     On November 18,  2002,  we filed a complaint  and on February 13, 2003,  we
filed a preliminary injunction in the District Court for the Eastern District of
New York seeking to prevent West-ward Pharmaceutical  Corporation  ("West-ward")
from introducing a 20 mg. capsule of doxycycline  hyclate into the market in the
United  States.  We alleged that  West-ward had infringed our Periostat  patents
under  the  Hatch-Waxman  Act by  filing  an  Abbreviated  New Drug  Application
("ANDA") for a capsule  formulation of Periostat.  More  specifically,  our suit
alleged  that  West-ward  infringed  two  patents to which we are the  exclusive
licensee:  U.S. Patent No. 4,666,897 and Re-Issue Patent RE 34,656. The remedies
sought  by us  included  an  award  of  treble  damages,  costs  and  reasonable
attorneys' fees.

     In a separate  action in the United States  District Court for the District
of  Columbia,  we sought  and,  on July 23,  2003,  were  granted a  preliminary
injunction  preventing  the FDA from  approving  generic  versions of Periostat,
including West-ward's version. West-ward intervened in that case.

     On November 7, 2003, we settled all pending  litigation  between  West-ward
and us. In the settlement,  West-ward  agreed and confessed to judgment that our
Periostat  patents are valid and  infringed by the filing of  West-ward's  ANDA.
West-ward also agreed and confessed to judgment that our Periostat patents would
be  infringed by the  manufacture  and sale of a generic  version of  Periostat.
West-ward  consented to a judgment  enjoining  West-ward and any party acting in
concert with  West-ward  from making and selling a generic  version of Periostat
until our patents expire or are declared  invalid or unenforceable by a court of
competent jurisdiction.  Finally, West-ward agreed to withdraw from the FDA case
in the District of Columbia. In connection with the settlement, we agreed to pay
a portion of West-ward's actual legal expenses in the amount of $700,000.



                                      -36-
<PAGE>


Item 2. Changes in Securities and Use of Proceeds.

Changes in Securities

     The following  information relates to all securities of the Company sold by
the  Company  within  the past  quarter  which  were not  registered  under  the
securities laws at the time of grant, issuance and/or sale:

     Option Grants

     During the third quarter of 2003, we granted stock options  pursuant to our
1996 Stock Plan which were not  registered  under the Securities Act of 1933, as
amended (the  "Securities  Act").  All of such option grants were granted at the
then  current fair value of the Common  Stock.  The  following  table sets forth
certain information regarding such grants during the quarter:

                                         Weighted Average
                 Number of Shares         Exercise Price
                 ----------------         --------------

                      64,150                  $10.63

     We did not employ an  underwriter  in  connection  with the issuance of the
securities  described  above.  We believe  that the  issuance  of the  foregoing
securities  was exempt from  registration  under  either (i) Section 4(2) of the
Securities  Act as  transactions  not  involving  any public  offering  and such
securities  having  been  acquired  for  investment  and  not  with  a  view  to
distribution,  or (ii) Rule 701 under the  Securities Act as  transactions  made
pursuant  to a  written  compensatory  benefit  plan or  pursuant  to a  written
contract  relating  to  compensation.  All  recipients  had  adequate  access to
information about the Company.

Item 5. Other Information.

Incentive Bonus Agreements

     We entered into Incentive  Bonus  Agreements with effective dates of August
27, 2003, with each of David F. Pfeiffer,  the Company's  Senior Vice President,
Sales and Marketing,  and Robert A. Ashley, the Company's Senior Vice President,
Commercial Development.

Deloitte & Touche Technology Fast 50 Program

     On September  29, 2003,  we announced  that we had been named to Deloitte &
Touche's Technology Fast 50 Program for the Delaware Valley, a ranking of the 50
fastest  growing  technology  companies in the area.  Rankings were based on the
percentage  of growth in the  fiscal  year  revenues  over five  years from 1998
through 2002.

                                      -37-
<PAGE>


Sale of Common Stock

      On October 3, 2003, we announced  that we had entered into  agreements for
the sale of 2,000,000 shares of our Common Stock registered under a registration
statement  on  Form  S-3 to  certain  institutional  investors,  at a per  share
purchase price of $10.00 for aggregate  gross  proceeds of $20.0 million,  which
generated net proceeds to us of approximately  $18.8 million,  after the payment
of placement agent fees and related expenses.

Appointment of Paul Lubetkin as Senior Vice President and General Counsel

      On October 6, 2003, we announced the  appointment  of Paul Lubetkin to the
newly created  position of senior vice president and general  counsel to oversee
all of our legal affairs. In connection with such appointment,  on September 29,
2003, we entered into a Severance  Agreement  and a Change of Control  Agreement
with Mr. Lubetkin.

Sale  of  Common  Stock  by  Marquette  Venture  Partners  and  OCM  Principal
Opportunities Fund

      On October 7, 2003, we announced that Marquette Venture Partners II, L.P.,
and  OCM  Principal  Opportunities  Fund,  L.P.,  had  separately  entered  into
agreements  with certain  institutional  investors  to sell  341,302  shares and
320,000 shares, respectively, of our Common Stock held by them.

Settlement of Litigation with West-ward Pharmaceutical Corporation

      On  November  10,  2003,  we  announced  that we had  settled  all pending
litigation  between  West-ward and us. We sued West-ward and other defendants in
the United States District Court for the Eastern District of New York,  alleging
that  West-ward  infringed  our patents for Periostat for the treatment of adult
periodontitis.  Our  complaint  also alleged that  West-ward  infringed  the our
patent rights under the Hatch-Waxman Act by submitting an ANDA with the Food and
Drug Administration, seeking FDA approval to market a generic capsule version of
Periostat.

      In a separate  action in the United States District Court for the District
of  Columbia,  we sought  and,  on July 23,  2003,  were  granted a  preliminary
injunction  preventing  the FDA from  approving  generic  versions of Periostat,
including West-ward's version. West-ward intervened in that case.

      In the  settlement,  West-ward  agreed and  confessed to judgment that our
Periostat  patents are valid and  infringed by the filing of  West-ward's  ANDA.
West-ward also agreed and confessed to judgment that our Periostat patents would
be  infringed by the  manufacture  and sale of a generic  version of  Periostat.
West-ward  consented to a judgment  enjoining  West-ward and any party acting in
concert with  West-ward  from making and selling a generic  version of Periostat
until our patents expire or are declared  invalid or unenforceable by a court of
competent jurisdiction.  Finally, West-ward agreed to withdraw from the FDA case
in the District of Columbia. In connection with the settlement, we agreed to pay
a portion of West-ward's actual legal expenses in the amount of $700,000.

                                      -38-
<PAGE>


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

     (a) Exhibits

          10.1 Form of Incentive Bonus Agreement  executed with each of David F.
               Pfeiffer and Robert A. Ashley.

          10.2 Severance Agreement executed with Paul Lubetkin.

          31.1 Certification  pursuant to Section 302 of the  Sarbanes-Oxley Act
               of 2002.

          31.2 Certification  pursuant to Section 302 of the  Sarbanes-Oxley Act
               of 2002.

          32   Certification Pursuant to 18 U.S.C. Section 1350.

     (b) Reports on Form 8-K.

          On July 14, 2003, we filed a Current  Report on Form 8-K under Item 5,
          relating to our filing and service of a complaint  on United  Research
          Laboratories/Mutual Pharmaceutical Company.

          On July 16, 2003, we filed a Current  Report on Form 8-K under Item 5,
          relating  to our filing and  service of a  preliminary  injunction  in
          connection     with    our    litigation    with    United    Research
          Laboratories/Mutual Pharmaceutical Company.

          On July 22, 2003, we furnished a Current Report on Form 8-K under Item
          9, containing a copy of our earnings release for the period ended June
          30,  2003  (including  financial  information)  pursuant  to  Item  12
          (Results of Operations and Financial Condition).

          On July 23, 2003, we filed a Current  Report on Form 8-K under Item 5,
          relating to our award of a preliminary injunction by the United States
          District Court of the District of Columbia.

                                      -39-

<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: November 14, 2003             By:  /s/ Brian M. Gallagher, Ph.D.
                                         ---------------------------------
                                         Brian M. Gallagher, Ph.D.
                                         President and Chief Executive Officer
                                         (Principal Executive Officer)



Date: November 14, 2003             By:  /s/ Nancy C. Broadbent
                                         ---------------------------------
                                         Nancy C. Broadbent
                                         Chief Financial Officer (Principal
                                         Financial and Accounting Officer)


                                      -40-