C O L L A G E N E X
                          p h a r m a c e u t i c a l s



                                       November 14, 2002

Via EDGAR
---------

Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549

      Re:  CollaGenex Pharmaceuticals, Inc. (Commission File No. 0-28308)
           Form 10-Q for the Quarter Ended September 30, 2002

Dear Sirs:

     Pursuant to Rule 13a-13(a)  under the  Securities  Exchange Act of 1934, as
amended, on behalf of CollaGenex  Pharmaceuticals,  Inc., a Delaware corporation
(the  "Corporation"),   submitted  herewith  for  filing  is  the  Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

     If you have any  questions  or  comments  concerning  this  filing,  kindly
contact the undersigned at (215) 579-7388 ext. 3110.




                                 /s/ Frank Ruffo
                                     Frank Ruffo
                                     Controller

















  CollaGenex Pharmaceuticals, Inc., 41 University Drive, Newtown, PA 18940 USA
                       215-579-7388 voice 215-579-8577 fax


<PAGE>


                       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, 2002
                             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 or 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  the  number of  shares  outstanding  of each of the  Registrant's
classes of Common Stock as of October 31, 2002:

                Class                              Number of Shares
     ---------------------------                   ----------------
     Common Stock $.01 par value                      11,364,727


<PAGE>


                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

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

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

               Condensed Consolidated Balance Sheets as of September
                   30, 2002 (unaudited) and December 31, 2001............   2

               Condensed Consolidated Statements of Operations for
                   the Three Months Ended September 30, 2002 and 2001
                   (unaudited)...........................................   3

               Condensed Consolidated Statements of Operations for
                   the Nine Months Ended September 30, 2002 and 2001
                   (unaudited) ..........................................   4

               Condensed Consolidated Statements of Cash Flows for
                   the Nine Months Ended September 30, 2002 and 2001
                   (unaudited)...........................................   5

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

      Item 2.  Management's Discussion and Analysis of Financial
               Condition and Results of Operations.......................   11

               Results of Operations.....................................   12

               Liquidity and Capital Resources...........................   21

      Item 3.  Quantitative and Qualitative  Disclosures  About Market
               Risk......................................................   27

      Item 4   Controls and Procedures...................................   27

PART II. OTHER INFORMATION...............................................   28

      Item 5.  Other Information.........................................   28

      Item 6.  Exhibits and Reports on Form 8-K..........................   28

SIGNATURES...............................................................   30

CERTIFICATIONS...........................................................   31


                                     -i-

<PAGE>


                          PART I. FINANCIAL INFORMATION

                          Item 1. Financial Statements.



                                      -1-

<PAGE>


<TABLE>
<CAPTION>
                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                    September 30, 2002 and December 31, 2001
                  (dollars in thousands, except per share data)

                                                         September 30,  December 31,
                                                         -------------  ------------
                      Assets                                2002          2001
                                                         -------------  ------------
                                                                        (unaudited)

Current assets:

<S>                                                        <C>         <C>
  Cash and cash equivalents ...........................    $  5,137    $  6,171
  Accounts receivable, net of allowance of $1,416
   and $950 at September 30, 2002 and December 31,
   2001, respectively..................................       5,380       4,478
  Inventories .........................................       1,478       1,402
  Prepaid expenses and other current assets ...........       1,487       1,200
                                                           --------    --------
      Total current assets ............................      13,482      13,251
Equipment and leasehold improvements, net .............         638         537
Other assets ..........................................       2,110         910
                                                           --------    --------
      Total assets ....................................    $ 16,230    $ 14,698
                                                           ========    ========

       Liabilities and Stockholders' Equity

Current liabilities:

  Current portion of note payable .....................    $   --      $     35
  Accounts payable ....................................       3,406       3,769
  Accrued expenses ....................................       4,300       3,153
                                                           --------    --------
      Total current liabilities .......................       7,706       6,957
                                                           --------    --------
Deferred revenue ......................................         522         614

Commitments

Stockholders' equity:

  Preferred stock, $0.01 par value, 5,000,000 shares
    authorized; 200,000 shares of Series D cumulative
    convertible preferred stock issued
    and outstanding at September 30, 2002 and
    December 31, 2001 (liquidation value of $20,000
    at September 30, 2002).............................           2           2

  Common stock, $0.01 par value; 25,000,000 shares
    authorized, 11,364,727 and 10,999,573 shares
    issued and outstanding at September 30, 2002
    and December 31, 2001, respectively.................        114         110

  Common stock to be issued (no shares at
   September 30, 2002 and 103,196 shares at
   December 31, 2001) .................................        --           840
  Additional paid in capital ..........................      82,856      80,129
  Accumulated deficit .................................     (74,970)    (73,954)
                                                           --------    --------
      Total stockholders' equity ......................       8,002       7,127
                                                           --------    --------
      Total liabilities and stockholders' equity ......    $ 16,230    $ 14,698
                                                           ========    ========

See accompanying notes to unaudited condensed consolidated financial statements.

</TABLE>

                                       -2-

<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
             For the Three Months Ended September 30, 2002 and 2001
                  (dollars in thousands, except per share data)
                                   (unaudited)

                                                Three Months Ended September 30,
                                                --------------------------------
                                                         2002           2001
                                                --------------------------------


Revenues:
  Product sales....................................   $ 10,767       $  8,320
  Contract revenues................................        422            913
  License revenues.................................         40             16
                                                      ----------     ----------
      Total revenues...............................     11,229          9,249
                                                      ----------     ----------
Operating expenses:
  Cost of product sales............................      1,713          1,274
  Research and development.........................      1,355          1,024
  Selling, general and administrative..............      7,420          8,548
                                                      ----------     ----------
      Total operating expenses.....................     10,488         10,846
                                                      ----------     ----------
      Operating income (loss)......................        741         (1,597)

Other income (expense):
  Interest income..................................         18             53
  Interest expense.................................         (3)            (2)
                                                      ----------     ----------
      Net income (loss)............................        756         (1,546)
Preferred stock dividend...........................        400            420
                                                      ----------     ----------
Net income (loss) allocable to common stockholders.   $    356       $ (1,966)
                                                      ==========     ==========

Basic net income (loss) per share allocable to
  common stockholders..............................   $    0.03      $   (0.18)
                                                      ==========     ==========
Shares used in computing basic net income (loss)
  per share allocable to common stockholders.......   11,321,679     10,745,876
                                                      ==========     ==========
Diluted net income (loss) per share allocable to
  common stockholders..............................   $    0.03      $   (0.18)
                                                      ==========     ==========
Shares used in computing diluted net income (loss)
  per share allocable to common stockholders.......   11,589,483     10,745,876
                                                      ==========     ==========


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, 2002 and 2001
                  (dollars in thousands, except per share data)
                                   (unaudited)

                                                 Nine Months Ended September 30,
                                                 -------------------------------
                                                        2002           2001
                                                 -------------------------------

Revenues:
  Product sales ................................   $     31,026    $     21,701
  Contract revenues ............................          1,769           2,812
  License revenues .............................            162             472
                                                   -------------   ------------
      Total revenues ...........................         32,957          24,985
                                                   -------------   ------------
Operating expenses:
  Cost of product sales ........................          4,891           4,156
  Research and development .....................          3,054           2,842
  Selling, general and administrative ..........         25,248          25,095
                                                   -------------   ------------
      Total operating expenses .................         33,193          32,093
                                                   -------------   ------------
      Operating loss ...........................           (236)         (7,108)

Other income (expense):
  Interest income ..............................             55             189
  Interest expense .............................             (5)             (7)
  Other income .................................           --                 8
                                                   -------------   ------------
      Net loss .................................           (186)         (6,918)
Preferred stock dividend .......................          1,229           1,260
                                                   -------------   ------------
Net loss allocable to common stockholders ......   $     (1,415)   $     (8,178)
                                                   =============   ============
Basic and diluted net loss per share
  allocable to common stockholders .............   $      (0.13)   $      (0.80)
                                                   =============   ============
Shares used in computing basic and diluted
  net loss per share allocable to common
  stockholders .................................     11,189,318       10,216,213
                                                   =============   ============


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, 2002 and 2001
                             (dollars in thousands)
                                   (unaudited)

                                                           Nine Months Ended
                                                             September 30,
                                                           ------------------

                                                             2002        2001
                                                           ------------------
Cash flows from operating activities:
  Net loss ............................................     $  (186)    $(6,918)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
      Noncash compensation expense .....................         --         183
      Depreciation and amortization expense ............        194         192
      Accounts receivable provisions....................        466         221
     Change in assets and liabilities:
      Accounts receivable...............................     (1,368)     (1,503)
      Inventories ......................................        (76)       (893)
      Prepaid expenses and other assets ................     (1,487)       (992)
      Accounts payable .................................       (363)      1,814
      Accrued expenses .................................      1,147         548
      Deferred revenue .................................        (92)        (47)
                                                            --------    --------
            Net cash used in operating activities.......     (1,765)     (7,395)
                                                            --------    --------
Cash flows from investing activities:
  Capital expenditures .................................       (295)        (74)
  Proceeds from the sale of short term investments .....       --         1,936
  Purchase of short term investments ...................       --          (296)
                                                            --------    --------
             Net cash provided by (used in)
               investing activities ....................       (295)      1,566
                                                            --------    --------
Cash flows from financing activities:
  Net proceeds from issuance of common stock ...........      1,279       9,814
  Payment of preferred dividends .......................       (218)       --
  Repayment of long-term debt ..........................        (35)        (57)
                                                            --------    --------
            Net cash provided by financing activities...      1,026       9,757
Net increase (decrease) in cash and cash ...............     (1,034)      3,928
equivalents
Cash and cash equivalents at beginning of period .......      6,171       3,709
                                                            --------    --------
Cash and cash equivalents at end of period .............    $ 5,137     $ 7,637
                                                            ========    ========
Supplemental schedule of noncash financing
   activities:
   Common stock dividends issued or issuable
   on preferred stock ..................................    $   611     $   840
                                                            ========    ========
   Issuance of common stock to be issued ...............        840         872
                                                            ========    ========
   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     $     7
                                                            ========    ========


See accompanying notes to unaudited condensed consolidated financial statements.

                                      -5-

<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           September 30, 2002 and 2001
                             (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  2001  audited
consolidated financial statements and footnotes included in its Annual Report on
Form 10-K for the year ended December 31, 2001.

     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.

     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,
2002,  their results of operations for the three and nine months ended September
30, 2002 and 2001, and their cash flows for the nine months ended  September 30,
2002 and  2001.  Interim  results  are not  necessarily  indicative  of  results
anticipated for the full fiscal year.

Note 2 -- Inventories:

     Inventories  at  September  30, 2002 and  December  31, 2001 consist of the
following:

                                  2002             2001
                              -----------      -----------
     Raw materials.......     $        49      $       174
     Work-in-process.....             778               66
     Finished goods......             651            1,162
                              -----------      -----------
                              $     1,478      $     1,402
                              ===========      ===========

NOTE 3 -- COMMON STOCK AND DEBT FINANCING:

     On March 19, 2001,  the Company  consummated  a one-year  revolving  credit
facility (the  "Facility")  with Silicon Valley Bank (the "Bank").  The Facility
was  subsequently  amended on


                                      -6-

<PAGE>


March 22,  2002 to  increase  the  amount  available  to the  Company  under the
Facility  to the lesser of $4,000 or 80% of  eligible  accounts  receivable,  as
defined in the  amendment.  The amount  available is also reduced by outstanding
letters of credit which may be issued under this  agreement in amounts  totaling
up to $1,500.

     The Facility may be used only for working capital purposes.  The Company is
not  obligated to draw  amounts  under the Facility and any such draws under the
Facility will bear interest at the then  prevailing  prime rate plus 1.0 to 1.5%
per annum.  The Company  must also  maintain (i) a tangible net worth of $5,000,
subject to certain upward  adjustments as defined in the amendment,  as a result
of  profitable  operation or  additional  debt or equity  financings  and (ii) a
minimum of $2,000 in cash,  net of borrowings  under the facility,  at all times
during the term of the  Facility,  which  expires  March 15,  2004.  Without the
consent of the Bank,  the Company,  among other  things,  shall not (i) merge or
consolidate with another entity; (ii) acquire assets outside the ordinary course
of business;  or (iii) pay or declare any cash dividends on the Company's Common
Stock. In addition,  the Company has secured its obligations  under the Facility
through the granting of a security interest in favor of the Bank with respect to
all of the Company's assets,  including its intellectual  property. At September
30, 2002, there were no borrowings  against the Facility,  however,  the Company
has issued an  irrevocable  letter of credit under the  Facility for $549.  This
letter of credit will be used to secure future  purchases of inventory  that the
Company expects to make from a supplier.  As the Company pays down amounts under
the letter of credit,  the amount  available  to the Company  under the Facility
will increase.

     On February 14, 2002, the Company  entered into an equity line (the "Equity
Line")  arrangement  under the terms of a Common Stock  Purchase  Agreement (the
"Agreement") with Kingsbridge Capital Limited  ("Kingsbridge").  Under the terms
of the Agreement,  the Company may, at its sole discretion and from time to time
over the twelve  month period that began  February 14, 2002,  sell shares of its
Common  Stock to  Kingsbridge  at a discount  to market  price of up to 10%,  as
determined  prior to each such  sale.  The  maximum  amount of each draw down is
based on the Company's market capitalization and may not exceed $3,000. Pursuant
to the terms of the Agreement, as amended, the Company committed to draw down on
the Equity Line an amount  aggregating  at least $1,500 in registered  shares of
Common Stock, prior to October 29, 2002 (the "Minimum  Commitment  Amount"),  of
which the Company had drawn down an aggregate of $1,266 as of such date. Because
the Company did not satisfied  such Minimum  Commitment  Amount,  the Company is
obligated to pay to Kingsbridge  approximately $23. The Equity Line provides for
the sale of up to an aggregate  $8,500 in registered  shares of Common Stock. In
connection  with the  consummation  of the Equity  Line,  the Company  issued to
Kingsbridge  a warrant to purchase  40,000 shares of Common Stock at an exercise
price of $9.38 per share. Such warrant is exercisable as of August 14, 2002, and
will  expire  on August  13,  2007.  The fair  value of the  warrants  issued in
connection with the Equity Line of  approximately  $248 has no net impact as the
increase to additional  paid in capital  representing  the value of the warrants
issued is offset by the decrease in additional  paid in capital  representing  a
cost of the offering.  On May 30, 2002, the Company issued 119,335 shares of its
Common Stock under the Equity Line for gross  proceeds of  approximately  $1,000
and on June 28, 2002, the Company issued 32,187 shares of its Common Stock under
the Equity Line for gross proceeds of approximately $266.


                                      -7-

<PAGE>


NOTE 4 -- COMMITMENTS:

     During 1999, the Company entered into a three-year  co-promotion  agreement
with Merck & Co.,  Inc.  for Vioxx under which the Company is committed to spend
up to $1,000 annually for promotional  expenses.  In September 2002, the parties
amended this agreement and extended the term thereof to December 31, 2003.

     Pursuant  to the  Company's  License  and  Marketing  Agreement  with Atrix
Laboratories,  the  Company is  committed  to: (i) expend no less than $2,000 in
advertising and selling expenses related to the Atrix products during the fiscal
year beginning January 1, 2002; (ii) maintain,  through 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;  and (iii)
make the Atrix products the subject of a specific  number of detail calls in the
United  States  during  2002.  The Company will also be required to make certain
annual minimum  expenditures  for advertising and promotional  activities  after
2002, through the term of the agreement,  including: (i) the lesser of $4,000 or
30% of the Company's contribution margin, as defined in the agreement,  relating
to a specific Atrix product that the Company's  markets,  and (ii) 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.  For the nine
months ended September 30, 2002, the Company had fulfilled  $1,481 of the $2,000
advertising and selling expense commitment for 2002.

     On February 11, 2002, the Company executed a Co-operation,  Development and
Licensing  Agreement with Thomas Skold 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  consulting,  royalty  and  milestone  payments in the  aggregate
amount of up to  $3,955,  of which no more than  $318,  $950,  $1,650 and $1,037
shall be payable  prior to December 31, 2002,  January 1, 2003,  January 1, 2004
and January 1, 2005, respectively. 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 the Company  does not acquire any
patentable products, seven years.

     On May 24, 2002,  the Company  executed a Sublicense  Agreement with Altana
Inc.  ("Altana"),  the United States subsidiary of Altana Pharma AG, pursuant to
which the Company was granted the  exclusive  right to create  improvements  to,
market, advertise,  promote,  distribute, offer for sale and sell, in the United
States and Puerto Rico,  Pandel(R) Cream, a mid-potency  topical  corticosteroid
that is indicated for the relief of mild-to-moderate  inflammatory  disorders of
the skin, such as atopic  dermatitis and psoriasis.  Altana  currently  licenses
such  rights from Taisho  Pharmaceutical  Co.,  Ltd.,  a company  organized  and
existing  under the laws of Japan.  The Company  will  purchase  from Altana all
Pandel products to be sold. Pursuant to the terms of such agreement, the Company
agreed to pay Altana an aggregate  sublicense  fee of $1,700,  of which $800 was
paid in September  2002 and $900 of which is due on May 31, 2003. The sublicense
fee has been capitalized and will be amortized to cost of product sales over the
estimated  term of  agreement.  In  addition,  the  Company is required to pay a
royalty fee equal to a percentage  of the net sales of the product,  if any. The
agreement may be terminated by the


                                      -8-

<PAGE>


Company:  (i) at any time,  without  cause,  upon twelve  months  prior  written
notice;  (ii) if Altana shall commit any uncured,  willful or material breach of
the provisions of the  agreement;  or (iii) if Altana shall cease to manufacture
or supply the product to the Company. Altana may terminate the agreement: (i) at
any time, without cause, upon twelve months written notice;  (ii) if the Company
shall commit any uncured,  willful or material  breach of the  provisions of the
agreement;   (iii)  if  the  Company  shall  cease  to  offer  the  product  for
distribution  to its  customers;  or (iv) if the Company  fails to make  certain
payments or fulfill certain invoicing obligations. In certain circumstances, all
monies  paid to the other  party  under the  agreement  shall be refunded to the
paying party upon termination.

     On June  10,  2002,  the  Company  executed  a  Development  and  Licensing
Agreement with Shire Laboratories,  Inc. ("Shire") 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  using  Shire's
technology.  In  addition,  under the  agreement,  Shire shall  perform  certain
product  development  functions 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
to Shire a percentage  of certain net sales of products,  if any,  utilizing any
part of Shire's  technology.  The Company may terminate the agreement upon sixty
days notice.

NOTE 5 -- STOCK OPTION PLANS:

     At the Company's 2002 Annual Meeting of  Stockholders  held on May 9, 2002,
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  under the 1996
Stock  Option  Plan  from  2,000,000  to  2,500,000  shares  and to  reserve  an
additional  500,000  shares  of the  Company's  Common  Stock  for  issuance  in
connection with awards granted under the 1996 Stock Option Plan.

NOTE 6 --  ADOPTION  OF  AMENDED  AND  RESTATED  SHAREHOLDER  PROTECTION  RIGHTS
           AGREEMENT:

     On May 29, 2002, the Company's  Board of Directors  approved an Amended and
Restated Shareholder  Protection Rights Agreement (the "Rights Agreement").  The
Rights  Agreement  amended and  restated,  in its entirety,  the Company's  then
existing Shareholder  Protection Rights Agreement (the "Prior Rights Agreement")
dated  September 15, 1997,  as amended,  by and between the Company and American
Stock  Transfer & Trust  Company,  as rights agent  thereunder.  American  Stock
Transfer & Trust  Company  remains as rights  agent under the Rights  Agreement.
Each  right  previously  authorized  and  distributed  under  the  Prior  Rights
Agreement was deemed to constitute a Right under the Rights Agreement  effective
May 29, 2002.  The Board of  Directors  further  authorized  the issuance of one
Right for each share of the  Company's  Common Stock issued  between the date of
the Rights Agreement and the earlier of the Distribution  Date or the Expiration
Date, as defined in the Rights Agreement.


                                      -9-

<PAGE>


     Each Right,  once  exercisable,  entitles  the holder to purchase  from the
Company one  one-hundredth  of a share of the Company's  Series A  Participating
Preferred  Stock at an exercise price of $65. All Rights expire on September 26,
2007  unless  earlier  redeemed.  At June 30,  2002,  the  Rights  were  neither
exercisable nor traded  separately from the Company's  Common Stock,  and become
exercisable only if a person or a group of affiliated or associated  persons has
acquired, or obtained the right to acquire,  beneficial ownership of 20% or more
of the voting power of all outstanding  shares of the Company's Common Stock and
in certain other limited  circumstances.  Upon separation from the Common Stock,
each Right will  entitle the holder,  other than the  acquiring  person that has
triggered  such  separation,  to  effectively  purchase  certain  shares  of the
Company's  Common Stock equal in market  value to two times the then  applicable
exercise  price of the Right.  If the  Company is  acquired in a merger or other
business  combination  transaction,  or 50% or more of the  Company's  assets or
earning  power are sold in one or more  related  transactions,  the Rights  will
entitle holders,  upon exercise of the Rights, to receive shares of Common Stock
of the  acquiring  or  surviving  company with a market value equal to twice the
exercise price of each Right.

NOTE 7 -- Change of Control Agreements:

     In September 2002, the Company  entered into Change of Control  Agreements,
with certain officers of the Company,  which provide for acceleration of vesting
of stock options upon a change in control, as defined in the agreements.




                                      -10-

<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,
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 to
the dental community through our own professional  dental  pharmaceutical  sales
force of approximately 120 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),  Atrisorb FreeFlow(R) and Atrisorb-D(R), to the United States dental
market.  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  topical  corticosteroid  product  developed  by Altana  Inc.  and
indicated for dermatologic use. We distribute  Periostat and Pandel through drug
wholesalers and large retail chains in the United States. Periostat is also sold
through  wholesalers  in the  United  Kingdom.  The Atrix  dental  products  are
distributed through a specialty distributor who sells these products directly to
dental  practitioners  in the United  States.  Our sales  force  also  currently
co-promotes Vioxx, a prescription non-steroidal anti-inflammatory drug developed
by Merck & Co.,  Inc., in the United  States,  and,  effective  October 1, 2002,
began co-promoting  Denavir(R),  a topically applied prescription medication for
the treatment of recurrent cold sores in adults,  for Novartis  Consumer Health,
Inc.

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

     We have incurred  losses each year since  inception and have an accumulated
deficit of $75.0 million at September 30, 2002.

     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 our sales and marketing plans
for Periostat and other products that we market,  risks inherent in


                                      -11-

<PAGE>


research and development  activities,  risks associated with conducting business
in a highly regulated environment and uncertainty relating to clinical trials of
products  under  development.  Our  success  depends to a large  degree upon the
market acceptance of Periostat by  periodontists,  dental  practitioners,  other
health care  providers,  patients and  insurance  companies.  Periostat has been
approved  by the  FDA  for  marketing  in the  United  States,  approved  by the
Medicines  Control  Agency for marketing in the United  Kingdom and approved for
marketing  in  Austria,  Finland,   Ireland,  Israel,  Italy,  Luxembourg,   the
Netherlands  and  Portugal.  There  can be no  assurance  that any of our  other
product candidates will be approved by any regulatory authority for marketing in
any  jurisdiction  or, if approved,  that any such products will be successfully
commercialized  by us.  In  addition,  there  can be no  assurance  that we will
successfully  commercialize Vioxx, Denavir,  Pandel, Atridox,  Atrisorb FreeFlow
and Atrisorb-D.  As a result of these risks,  and others  expressed from time to
time in our filings  with the  Securities  and Exchange  Commission,  our actual
results may differ materially from the results discussed in the  forward-looking
statements contained herein.

     Periostat(R),  Metastat(R),  Dermostat(R),   Nephrostat(R),   Osteostat(R),
Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(TM),
The Whole  Mouth  Treatment(TM),  Restoraderm(TM)  and  Dentaplex(R)  are United
States   trademarks   of   CollaGenex   Pharmaceuticals,    Inc.   Periostat(R),
Nephrostat(R),   Optistat(R),  Xerostat(R),  IMPACS(TM)  and  Dentaplex(TM)  are
European Community trademarks of CollaGenex Pharmaceuticals Inc.

     Periostat(R),    Nephrostat(R),    Optistat(R),   Xerostat(R),   IMPACS(R),
Dentaplex(R), Restoraderm(R), Dermostat(R), Periocycline(R),  Periostatus(R) are
United  Kingdom  trade  marks  of  our   wholly-owned   subsidiary,   CollaGenex
International Limited. And, CollaGenex(R), PS20(R), "C" Logo(R), The Whole Mouth
Treatment(R)  are both European  Community  trade marks and United Kingdom trade
marks of CollaGenex  International Limited. All other trade names, trademarks or
service marks  appearing in this Quarterly  Report on Form 10-Q are the property
of their respective  owners and are not property of CollaGenex  Pharmaceuticals,
Inc. or any of our subsidiaries.

RESULTS OF OPERATIONS

     During the three months ended September 30, 2002, we achieved worldwide net
product  sales of $10.8  million.  Net product sales include sales of Periostat,
Atridox,  Atrisorb  FreeFlow,  Atrisorb-D  and, since July 1, 2002,  Pandel.  In
addition,  during the three  months  ended  September  30,  2002,  we  generated
$422,000 in contract  revenues mainly from our co-promotion  agreement for Vioxx
and $40,000 in international licensing revenue.

     CRITICAL ACCOUNTING JUDGMENTS 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.


                                      -12-

<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.

     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 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.

     THREE  MONTHS  ENDED  SEPTEMBER  30, 2002  COMPARED TO THREE  MONTHS  ENDED
SEPTEMBER 30, 2001

     Revenues

Revenues
(dollars in thousands)                     2002          Change          2001
----------------------                   -------         --------        -------
Product Sales ..................         $10,767            29.4%        $ 8,320
Contract Revenues ..............             422           (53.8)%           913
License Revenues ...............              40           150.0%             16
                                         -------         --------        -------
   Total .......................         $11,229            21.4%        $ 9,249

     Total revenues  during the three months ended September 30, 2002 were $11.2
million,  representing  a 21.4%  increase  over total  revenues of $9.2  million
during the three months ended  September 30, 2001.  Such 2002 revenues  included
approximately $10.8 million in net product sales of Periostat, Atridox, Atrisorb
FreeFlow,  Atrisorb-D  and Pandel,  $422,000 in  contract  revenues,  which were
derived from our  co-promotion  of Vioxx and Pandel,  and $40,000 in  previously
deferred  foreign license income and milestone  revenues for Periostat.  Product
sales increased $2.4 million, or 29.4%, to $10.8 million during the three months
ended  September 30, 2002 compared to $8.3 million during the three months ended
September 30, 2001 due to higher prescriptions for Periostat and the addition of
the Atrix dental products, which we began marketing in October 2001, and Pandel,
which we launched on July 1, 2002.


                                      -13-

<PAGE>


     Contract  revenues for the three months ended  September  30, 2002 declined
53.8% to $422,000 from $913,000  million during the three months ended September
30, 2001 as a result of a decline in contract  revenues  from Merck  relating to
our co-promotion of Vioxx.  The decline in contract  revenues from Merck was due
to lower levels of prescriptions for Vioxx resulting from increased  competitive
activity experienced during the quarter.

     In accordance  with SAB 101, which we adopted in 2000, we recorded  $15,000
and  $16,000  in  licensing  revenues  during  each of the  three  months  ended
September  30, 2002 and  September  30,  2001,  respectively.  This  revenue was
attributable to our recognition of previously  recognized  up-front license fees
received for various  agreements that were deferred upon the adoption of SAB 101
and is being recognized as income over the expected  performance period of these
agreements.  We also  recorded  milestone  revenues  from our foreign  licensing
partners of $25,000 during the three months ended September 30, 2002. There were
no additional milestone revenues recognized for the three months ended September
30, 2001.

     Cost of Product Sales

Cost of Product Sales
(dollars in thousands)                           2002          Change     2001
                                              --------         ------     ------
Cost of Product Sales .................       $  1,713          34.4%   $1,274
Percent of Product Sales ..............           15.9%                   15.3%

     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 $1.7  million,  or 15.9% of product sales during
the three months ended September 30, 2002, compared to $1.3 million, or 15.3% of
product sales during the three months ended  September 30, 2001. Cost of product
sales increased in absolute  dollars and as a percentage of product sales during
such period in 2002 compared to 2001,  primarily due to increased  cost of sales
associated with the Atrix products and Pandel launched in November 2001 and July
2002, respectively, which have lower gross margins than Periostat.

     Research and Development

Research and Development
(dollars in thousands)                           2002          Change     2001
                                              --------         ------     ------
Research and development ..............       $  1,355          32.3%   $1,024
Percentage of Total revenue ...........           12.1%                   11.1%

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


                                      -14-

<PAGE>


     Research and development  expenses  increased  $331,000,  or 32.3%, to $1.4
million  during the three  months  ended  September  30, 2002 from $1.0  million
during the three months ended September 30, 2001.

     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.  Future  development  of  the  once-a-day
technology  will be  contingent  on the  outcome  of the  initial  phase  of the
project,  which is  expected  to be  determined  by the end of 2002.  Additional
expenses ranging from approximately  $375,000 in 2002 to as much as $5.4 million
through completion could be incurred if the project is successful.

     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 160 patients to evaluate  Periostat for
the treatment of rosacea.  Until the outcome of these trials are determined,  it
is premature to estimate the future costs  associated  with the  development  of
Periostat for dermatological indications.

     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 $40,000 for various
regulatory  costs,  including  annual FDA filing  fees,  legal,  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.

     Research and  development  expenses  incurred during the three months ended
September  30,  2001  included  $7,000 in  research  grants to various  academic
institutions for conducting research related to our core technology,  $30,000 in
Periostat  Phase IV clinical trial grants,  $182,000 in contracted  clinical and
development expenses related to a safety and pharmacokinetic  study for Metastat
and other IMPACS compounds in the development stage. Other development  projects
included  $236,000 for the initial  expenses for the once-a-day  formulation for
Periostat and $12,000 for a Phase II trial using  Periostat for the treatment of
acne.

    Other research and  development  expenses  incurred during the three months
ended September 30, 2001 included  $130,000 in regulatory  consulting and filing
fees under the Mutual  Recognition  Procedure in Europe and $167,000 for various
regulatory  costs,  including  annual FDA filing  fees and legal and  regulatory
expenses in the United  States  related to obtaining  FDA approval for Periostat
tablets.  Research and  development  expenses  incurred  during the three months
ended  September  30, 2001 also included  $131,000 in direct  salaries and other
personnel related expenses and $129,000 relating to consulting, travel and other
office expenses.

                                      -15-

<PAGE>


     Selling, General and Administrative

Selling, General and Administrative
(dollars in thousands)                             2002        Change     2001
                                                 --------      ------     ------
Selling, general and administrative ........     $  7,420       (13.2)%   $8,548
Percentage of Total revenue ................         66.1%                 92.4%

     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  decreased  13.2%  to $7.4
million  during the three  months  ended  September  30, 2002 from $8.5  million
during the three months ended  September 30, 2001. This decrease of $1.1 million
was primarily the result of a $1.8 million  reduction in our  Direct-to-Consumer
advertising  and  other  Periostat  promotional  expenditures  offset in part by
approximately   $700,000  in  professional  promotion  expenses  for  Periostat,
additional  promotional  expenses for the Atrix dental products and Pandel,  and
the expansion of our dermatology sales operation.

     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.   Significant  components  of
selling,  general and  administrative  expenses  during the three  months  ended
September  30,  2001  included  $3.3  million  in direct  selling  and  training
expenses,   $3.9  million  in  marketing  expenses   (including   Periostat  DTC
advertising  expenditures,   launch  expenses  for  Dentaplex  and  co-promotion
expenses  related to Vioxx)  and $1.3  million  in  general  and  administrative
expenses.

     Other Income/Expense

Other Income/Expense                        2002           Change          2001
                                          --------         ------        -------
Interest income .................         $18,000          (66.0)%       $53,000
Interest expense ................         $ 3,000          (50.0)%       $ 2,000

     Interest  income  decreased to $18,000 for the three months ended September
30, 2002 compared to $53,000 for the three months ended September 30, 2001. This
decrease was due to lower average  balances in cash and  short-term  investments
and lower  investment  yields during the three months ended  September 30, 2002.
Interest  expense  for the three  months  ended  September  30, 2002 was $3,000,
compared to $2,000 for the three months ended September 30, 2001.

PREFERRED STOCK DIVIDEND

     Preferred  stock  dividends  were $400,000 and $420,000  during each of the
three months ended September 30, 2002 and September 30, 2001, respectively. Such
preferred stock

                                      -16-
<PAGE>

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,  and we
became obligated to pay such dividends in cash, at a rate equal to 8% per annum.
Cash  dividends  accrued for the period July 1, 2002 to September  30, 2002 were
$400,000.

     NINE  MONTHS  ENDED  SEPTEMBER  30,  2002  COMPARED  TO NINE  MONTHS  ENDED
SEPTEMBER 30, 2001

     Revenues

Revenues
(dollars in thousands)                      2002           Change          2001
                                          --------        -------        -------
Product Sales ...................         $31,026           43.0%        $21,701
Contract Revenues ...............           1,769          (37.1)%         2,812
License Revenues ................             162          (65.7)%           472
                                          --------        -------        -------
   Total ........................         $32,957           31.9%        $24,985

     Total revenues  during the nine months ended  September 30, 2002 were $33.0
million,  representing  a 31.9%  increase  over total  revenues of $25.0 million
during the nine months ended  September 30, 2001.  Such 2002  revenues  included
approximately $31.0 million in net product sales of Periostat, Atridox, Atrisorb
FreeFlow, Atrisorb-D, Pandel (since July 1, 2002) and Dentaplex, $1.8 million in
contract revenues,  which were derived from our co-promotion of Vioxx and Pandel
(prior to June 30, 2002), and $161,000 in deferred foreign license and milestone
revenues for Periostat.  Product sales increased $9.3 million,  or 43.0%, during
the nine months  ended  September  30, 2002 to $31.0  million  compared to $21.7
million during the nine months ended June 30, 2001,  mainly due to significantly
higher  prescriptions  for  Periostat  and  the  addition  of the  Atrix  dental
products,  which we began  marketing  in  October  2001,  and  Pandel,  which we
launched on July 1, 2002.

     Contract  revenues for the nine months ended  September  30, 2002  declined
37.1% to $1.8 million from $2.8 million  during the nine months ended  September
30,  2001 as a result of the  termination  in April 2001 of our prior  agreement
with Novartis  Pharmaceuticals  to co-promote  Denavir and a decline in contract
revenues from Merck relating to our co-promotion of Vioxx. Contract revenues for
the nine months  ended  September  30, 2001  included  $297,000 in  co-promotion
revenues  for Denavir.  There were no contract  revenues for Denavir in the nine
months ended September 30, 2002. The decline in contract revenues from Merck was
due to  lower  levels  of  prescriptions  for  Vioxx  resulting  from  increased
competitive activity experienced during 2002.

     In accordance  with SAB 101, which we adopted in 2000, we recorded  $45,000
in licensing  revenues  during each of the nine months ended  September 30, 2002
and September 30, 2001.  This revenue was  attributable  to our  recognition  of
previously recognized up-front license fees received for various agreements that
were  deferred  upon the adoption of SAB 101 and is being  recognized  as income
over the expected performance period of these agreements. We also


                                      -17-

<PAGE>

recorded  milestone revenues from our foreign licensing partners of $117,000 and
$427,000 during the nine months ended September 30, 2002 and 2001, respectively.

     Cost of Product Sales

Cost of Product Sales
(dollars in thousands)                    2002          Change          2001
                                        --------        -------       -------
Cost of Product Sales............       $ 4,891         17.7%          $ 4,156
Percent of Product Sales.........         15.8%                          19.2%

     Cost of product sales includes product  packaging,  third-party  royalties,
amortization of new 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 $4.9  million,  or 15.8% of product sales during
the nine months ended September 30, 2002,  compared to $4.2 million, or 19.2% of
product sales during the nine months ended  September 30, 2001.  Cost of product
sales  increased in absolute  dollars but  decreased as a percentage  of product
sales  during  such  period  in  2002   compared  to  2001,   primarily  due  to
manufacturing  cost  savings for  Periostat  tablets,  which we launched in July
2001, compared to Periostat capsules.  This decrease in percent of product sales
was slightly  offset by a higher percent of product sales for the Atrix products
and Pandel, launched in November 2001 and July 2002, respectively.

     Research and Development

Research and Development
(dollars in thousands)                    2002           Change          2002
                                        --------        -------        -------
Research and development.........       $ 3,054          7.5%          $ 2,842
Percentage of Total revenue......          9.3%                          11.4%

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

     Research  and  development  expenses  increased  $212,000,  or 7.5% to $3.1
million during the nine months ended September 30, 2002 from $2.8 million during
the nine months ended September 30, 2001.

     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.  Future  development  of the  once-a-day
technology  will be  contingent  on the  outcome  of the  initial  phase  of the
project,  which is  expected  to be  determined  by the end of 2002.  Additional
expenses ranging from approximately  $375,000 in 2002 to as much as $5.4 million
through completion could be incurred if the project is successful.


                                      -18-

<PAGE>


      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 160 patients to evaluate Periostat for
the treatment of rosacea. Until the outcome of these trials are determined, it
is premature to estimate the future costs associated with the development of
Periostat for dermatological indications.

     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 $222,000 for various
regulatory  costs,  including  annual FDA filing  fees,  legal,  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.

     Research and  development  expenses  incurred  during the nine months ended
September  30, 2001  included  $182,000 in research  grants to various  academic
institutions for conducting research related to our core technology, $125,000 in
Periostat  Phase IV clinical trial grants,  $517,000 in contracted  clinical and
development expenses related to a safety and pharmacokinetic  study for Metastat
and other IMPACS compounds in the development stage and $71,000 in manufacturing
development and validation  expenses for Dentaplex.  Other development  projects
included  $236,000 for the initial  expenses for the once-a-day  formulation for
Periostat and $12,000 for a Phase II trial using  Periostat for the treatment of
acne.

     Other research and  development  expenses  incurred  during the nine months
ended September 30, 2001 included  $420,000 in regulatory  consulting and filing
fees under the Mutual  Recognition  Procedure in Europe and $441,000 for various
regulatory  costs,  including  annual FDA filing  fees and legal and  regulatory
expenses in the United  States  related to obtaining  FDA approval for Periostat
tablets. Research and development expenses incurred during the nine months ended
September 30, 2001 also included $360,000 in direct salaries and other personnel
related expenses, $164,000 related to stock compensation expense and $314,000 in
consulting, travel and other office expenses.

     Selling, General and Administrative

Selling, General and Administrative
(dollars in thousands)                    2002         Change         2001
                                        -------        ------       --------
Selling, general and administrative      $25,248         0.6%        $ 25,095
Percentage of Total revenue......          76.6%                       100.4%

     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.


                                      -19-

<PAGE>


     Selling,  general  and  administrative  expenses  increased  0.6% to  $25.2
million  during the nine months  ended  September  30,  2002 from $25.1  million
during the nine months ended  September  30,  2001.  The increase of $153,000 in
selling,  general and  administrative  expenses,  or 0.6%,  from the nine months
ended  September  30, 2001 to the nine months  ended  September  30,  2002,  was
primarily  the  result  of  professional   promotion   expenses  for  Periostat,
additional  promotional  expenses for the Atrix dental products and Pandel,  and
the  expansion  of our  dermatology  sales  operation,  offset  in  part  by the
reduction in our DTC and other Periostat promotion expenditures.

     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  Periostat DTC advertising and promotion  expenditures  for
Periostat,  the Atrix products and co-promotion  expenses  relating to Vioxx and
Pandel) and $4.3 million in general and administrative  expenses,  which include
business development,  finance and corporate activities.  Significant components
of selling,  general and  administrative  expenses  during the nine months ended
September  30,  2001  included  $10.1  million in direct  selling  and  training
expenses,   $11.4  million  in  marketing  expenses  (including   Periostat  DTC
advertising  expenditures,   launch  expenses  for  Dentaplex  and  co-promotion
expenses  related to Vioxx)  and $3.6  million  in  general  and  administrative
expenses.

     Other Income/Expense

Other Income/Expense                     2002          Change         2001
                                        -------        ------       ---------
Interest income..................       $55,000        (70.9)%      $ 189,000
Interest expense.................       $ 5,000        (28.6)%      $   7,000
Other income.....................       $    --         N/A         $   8,000

     Interest  income  decreased to $55,000 for the nine months ended  September
30, 2002 compared to $189,000 for the nine months ended September 30, 2001. This
decrease was due to lower average  balances in cash and  short-term  investments
and lower  investment  yields  during the nine months ended  September 30, 2002.
Interest  expense  for the nine  months  ended  September  30,  2002 was $5,000,
compared to $7,000 for the nine months ended  September  30, 2001.  Other income
during the nine months ended  September  30, 2001 of $8,000 was  recognized as a
result of foreign currency transactions.

PREFERRED STOCK DIVIDEND

     Preferred  stock  dividends  were $1.2  million for the nine  months  ended
September  30, 2002 and $1.3  million for the nine months  ended  September  30,
2001. Such preferred stock dividends, paid in shares of our Common Stock through
May 11, 2002,  and  thereafter in cash,  were 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,  and we became  obligated to pay such  dividends in cash, at a
rate equal to 8% per annum. Cash dividends  incurred for the period May 12, 2002
to September 30, 2002 were approximately $618,000.


                                      -20-

<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

     Since our origin in January 1992, we have financed our  operations  through
private placements of our preferred and Common Stock, an initial public offering
of  2,000,000  shares of Common  Stock,  which  generated  net proceeds to us of
approximately $18.0 million after underwriting fees and related expenses,  and a
subsequent public offering of 1,000,000 shares of Common Stock,  which generated
net proceeds to us of approximately  $11.6 million after  underwriting  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 and will be used for general working capital purposes.

     The Series D Preferred  Stock is convertible at any time into shares of our
Common Stock at a current  conversion price of $9.91 per share, which conversion
price reflects a decrease from the initial  conversion price of $11.00 per share
as a  result  of both a Common  Stock  financing  in March  2001 and the sale of
shares of our Common  Stock to Atrix  Laboratories,  Inc. in August  2001.  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, 2002, such conversion price was $9.91 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  distribaggregate  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.ution 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.


                                      -21-

<PAGE>


     In April 1999, we received $219,000 in proceeds from our issuance of a note
payable.  We used the proceeds of such note to fund the  purchase of  equipment,
fixtures and furniture for our corporate offices in Newtown,  Pennsylvania.  The
term of the note was  three  years at 9.54%  per  annum,  with  monthly  minimum
payments of principal and interest. We repaid such note on May 1, 2002.

     On March 12, 2001, we  consummated a private  equity  offering of 1,500,000
shares of Common Stock for an aggregate  purchase  price of $7.5 million,  which
generated net proceeds to us of  approximately  $6.8 million.  We are using such
proceeds  primarily  for our DTC  advertising  campaign and for general  working
capital purposes. In addition,  the investors in such financing were also issued
an aggregate of 400,000  warrants  which are  exercisable  for up to three years
from the date of such  financing  into 400,000  shares of our Common Stock at an
exercise price per share of $6.00. The consideration  received for such warrants
is included in the aggregate proceeds received in such financing. We also issued
to our financial advisor in such financing  warrants to purchase an aggregate of
150,000  shares of our  Common  Stock  exercisable  for up to three  years at an
exercise  price of $5.70  per  share,  as  partial  consideration  for  services
rendered  in  connection  with  the  financing.  Such  warrants  may  be  deemed
automatically  exercised in certain circumstances based upon our stock price. In
connection  with the March 2001  financing,  we are  obligated  to maintain  the
effectiveness of a shelf registration  statement with respect to all such shares
of Common Stock issued and shares  underlying all such warrants for a continuous
24 month  period,  or we will be  required  to issue  to the  investors  and the
financial  advisor  an  additional  27,500  shares of our Common  Stock,  in the
aggregate, for no additional consideration.

     On March 19, 2001, we consummated a revolving  credit facility with Silicon
Valley Bank, which was subsequently  amended in March 2002. The credit facility,
as amended,  extends  through  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 March 26, 2002,  we initially  secured our expected  purchase
order  commitments  for Periostat  from  Pharmaceutical  Manufacturing  Research
Services,  Inc., a contract manufacturing company, with a letter of credit under
the credit  facility for  approximately  $1.3  million.  This amount was reduced
during the third quarter of 2002 to $549,000. 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
the  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 and a minimum of $2.0 million in
cash at Silicon Valley Bank, net of borrowings under the credit facility, at all
times  during the term  thereto.  In addition,  we have secured our  obligations
under the credit facility  through the granting of a security  interest in favor
of the bank  with  respect  to all of our  assets,  including  our  intellectual
property.  As of September  30, 2002, we had no current  borrowings  outstanding
against the credit facility.

     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


                                      -22-

<PAGE>


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 have 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 ($1.5 million of which we have
expended as of  September  30,  2002);  (iv) we have agreed to  maintain,  for a
period of 24 months, 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;  and (v) we have agreed that the Atrix  products
will be the subject of a specific  number of detail  calls in the United  States
during  2002.  We  will  also  be  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 $4,000,000 or
30% of our  contribution  margin  relating to a specific  Atrix  product that we
market,  and (ii) the lesser of  $2,000,000  or 30% of our  contribution  margin
relating to a separate Atrix product that we market.

     In addition,  pursuant to the terms of a Stock  Purchase  Agreement that we
executed with Atrix, dated August 24, 2001, Atrix purchased 330,556 unregistered
shares of our Common Stock for an aggregate purchase price of approximately $3.0
million.  As a result of the sale of such shares to Atrix,  the conversion price
of our Series D Preferred Stock was reduced from $9.94 to $9.91 per share.

     On February 14, 2002, we entered into an equity line arrangement  under the
terms of a Common Stock Purchase  Agreement with  Kingsbridge  Capital  Limited.
Pursuant to this agreement, we may, at our sole discretion and from time to time
through  February 13, 2003,  sell shares of our Common Stock to Kingsbridge at a
discount to market price, as determined prior to each such sale. Under the terms
of the agreement,  as amended, we committed to draw down on this equity line, an
amount  aggregating  at least $1.5 million in registered  shares of Common Stock
prior to  October  29,  2002,  of which we had drawn down an  aggregate  of $1.3
million as of such date.  Because we have not satisfied such minimum  commitment
amount, we are obligated to pay Kingsbridge  approximately  $23,000.  The equity
line  provides  for the sale of up to $8.5 million in  registered  shares of our
Common Stock to  Kingsbridge.  As of September  30, 2002,  we had drawn down and
issued an aggregate of approximately $1.3 million in registered shares of Common
Stock under such equity line arrangement.

     Additionally,  in connection  with the  consummation of the equity line and
pursuant  to  the  terms  of a  warrant  agreement  executed  by us,  we  issued
Kingsbridge  a warrant  to  purchase  40,000  shares of our  Common  Stock at an
exercise  price  of $9.38  per  share.  The  conversion  price  of our  Series D
Preferred  Stock was not reduced as a result of such  issuance.  Such warrant is
exercisable  as of August 14, 2002,  and will expire on August 13, 2007. We have
registered  the shares of our Common  Stock  which may be issued by us under the
equity line and upon any  exercise of the warrant by  Kingsbridge  under a shelf
registration  statement  on Form S-3 which  registered  an  aggregate of 964,880
shares of our Common  Stock.  On April 29,  2002,  the  Securities  and Exchange
Commission declared such shelf registration statement on Form S-3 effective.

                                      -23-

<PAGE>


     At September 30, 2002, we had cash and cash  equivalents  of  approximately
$5.1  million,  a decrease  of $1.1  million  from the $6.2  million  balance at
December 31, 2001.  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, 2002 was $5.8 million, a decrease of $500,000 from $6.3 million
at December 31, 2001. This decrease primarily reflects our current obligation to
Altana for the sublicensing rights for Pandel acquired in June 2002.

     Prior to the third quarter of 2002, we historically  have had negative cash
flows from  operations  and have used the net  proceeds  of public  and  private
placements of our equity to fund operations. We currently believe that projected
increases in sales of our United States  marketed  products in combination  with
contract  and license  revenues,  anticipated  cash inflows from both our equity
line of credit with  Kingsbridge and our revolving  credit facility with Silicon
Valley Bank will allow us to achieve  continued  profitability and positive cash
flows through  2003. 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 margins 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 and our
          ability to draw down on our equity line at desired price levels;

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

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

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 other  contractual  commitments  with our  marketing  partners  for  certain
selling and promotional  expenses


                                      -24-

<PAGE>

associated with the products 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.

     Our Series D Preferred  Stock paid  dividends  in Common Stock at a rate of
8.4% per  annum  from the date of  issuance  of such  Series D  Preferred  Stock
through May 11,  2002.  After May 11,  2002,  the Series D Preferred  Stock pays
dividends in cash at a rate of 8.0% per annum.  The Series D Preferred  Stock is
convertible  into our Common  Stock at a current  conversion  price of $9.91 per
share,  subject  to  adjustment,  at any time by the  holder  and under  certain
conditions  by us.  The  conversion  price of the  Series D  Preferred  Stock is
subject to adjustment in the event we fail to declare or pay dividends  when due
or should we issue new equity  securities or  convertible  securities at a price
per share or having a  conversion  price per  share  lower  than the  applicable
conversion price of the Series D Preferred Stock.

     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 at the end of the fifth year.

     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,  unless the agreement is earlier terminated.
In September  2002,  we amended this  agreement and extended the term thereof to
December 31, 2003.

     Pursuant to our License and Marketing Agreement with Atrix Laboratories, we
have  committed  to: (i) expend no less than $2.0  million  in  advertising  and
selling  expenses related to the Atrix products during the fiscal year beginning
January 1, 2002;  (ii)  maintain,  through  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;  and (iii) make the
Atrix  products  the subject of a specific  number of detail calls in the United
States  during  2002.  We  will  also  be  required  to  make  certain   minimum
expenditures for advertising and promotional  activities after 2002,  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.  For the nine
months ended  September  30,  2002,  we had  fulfilled  $1.5 million of the $2.0
million advertising and selling expense commitment for 2002.

     On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement  with Thomas  Skold  pursuant to which we were  granted an  exclusive,
sublicenseable, transferable license with respect to the Restoraderm(TM) 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 consulting, royalty and milestone payments in
the  aggregate  amount of up to $4.0  million,  of which no more than  $318,000,
$950,000, $1,650,000 and $1,037,000 shall be payable prior to December 31, 2002,
January 1, 2003, January 1, 2004 and January 1, 2005, respectively.  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 we do not acquire any
patentable products, seven years.


                                      -25-

<PAGE>

     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 using Shire's technology.  In addition,  under
the agreement, Shire shall perform certain product development functions for us.
Pursuant to the terms of such  agreement,  we will pay to Shire a percentage  of
certain net sales of products  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.

     Belowis a table which  presents  our maximum  contractual  obligations  and
commercial commitments as of September 30, 2002:


<TABLE>
<CAPTION>
                                         Payments Due by Period
                      ---------------------------------------------------------------------------
                                          Three
                                          Months
                                          ending
Contractual                               December       2003 and        2005 and      2007 and
Obligations              Total            31, 2002         2004            2006         after
-------------------   -----------      -------------    -----------   -----------  --------------


<S>                   <C>              <C>              <C>           <C>           <C>
Operating Leases(1)   $ 2,280,000      $    83,000      $   667,000   $   668,000   $   862,000

Unconditional .....                    $   366,000(2)
  Purchase ........                    $   644,000(3)   $1,000,000(3)
  Obligations .....   $ 2,529,000      $   519,000(4)   $       --(4) $       --(4) $        --(4)

Cash Dividends on
  Series D
  Preferred Stock .   $ 6,800,000(5)   $   400,000(5)   $3,200,000(5) $3,200,000(5) $        --(5)

Total Contractual
  Obligations .....   $11,609,000      $ 2,012,000      $4,867,000    $3,868,000    $   862,000

</TABLE>

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

     (2)  Such amount  represents  committed  inventory  purchases on a purchase
          order under the terms of our Agreement  with  Pharmaceutical  Research
          Manufacturing Services, Inc.

     (3)  Such amount  represents the maximum amounts payable under the terms of
          our Co-Promotion Agreement with Merck & Co., Inc. for Vioxx.

     (4)  Such amounts are payable under the terms of our  Agreement  with Atrix
          Pharmaceuticals.  As of  September  30,  2002,  we will be required to
          expend  $519,000 in advertising  and selling  expenses  related to the
          Atrix  products  in the fourth  quarter of 2002,  and to make  certain
          annual minimum expenditures for advertising and promotional activities
          after 2002, during the term of agreement, including: (i) the lesser of
          $4,000,000  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  $2,000,000 or 30% of our  contribution  margin (as
          defined in the agreement) relating to a separate Atrix product that we
          market.

                                      -26-

<PAGE>


     (5)  Pursuant to the terms of our Series D Cumulative Convertible Preferred
          Stock issued in May 1999, and unless earlier converted pursuant to its
          terms,  the  holders of the Series D Preferred  Stock are  entitled to
          dividends payable in cash at a rate of 8.0% per annum.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     We believe  that we are not subject to a material  impact to our  financial
position or results of operations relating to market risk.


ITEM 4.  CONTROLS AND PROCEDURES.

     (a)  Evaluation  of  disclosure  controls  and  procedures.  Based  on  our
evaluation  of our  disclosure  controls  and  procedures  (as  defined in Rules
13a-14(c) and 15d-14(c) under the Securities  Exchange Act of 1934) as of a date
within 90 days of the filing  date of this  Quarterly  Report on Form 10-Q,  our
chief  executive  officer and chief  financial  officer have  concluded that our
disclosure  controls  and  procedures  are  designed to ensure that  information
required to be  disclosed  by us in the 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 and are operating in an effective
manner.

     (b) Changes in internal controls.  There were no significant changes in our
internal  controls or in other  factors  that could  significantly  affect these
controls subsequent to the date of their most recent evaluation.


                                      -27-

<PAGE>


                           PART II. OTHER INFORMATION

ITEM 5.  OTHER INFORMATION.

     Amended and Restated Bylaws

     On September 12, 2002, our Board of Directors approved Amended and Restated
By-Laws of the Company.

     Research Collaboration

     On October 17,  2002,  we  announced  that we had  entered  into a research
collaboration with Discovery  Laboratories,  Inc. to evaluate the combination of
their respective platform  technologies for the development of novel respiratory
disease therapeutics.

     License Agreement

     On October 21, 2002, we announced an agreement pursuant to which Medtronic,
Inc.  obtained an  exclusive,  worldwide  license with respect to certain of the
Company's  IMPACS  compounds  (Inhibitors  of Multiple  Proteases and CytokineS)
relating to the use of such compounds to treat aortic  aneurysms and other forms
of vascular disease with medical devices.

     Co-Promotion Agreements

     On September 23, 2002, we executed an amendment,  extension and restatement
of our  Co-Promotion  Agreement  with Merck & Co.,  Inc.  with respect to Vioxx,
having a term through December 31, 2003.

     On October 1, 2002,  we entered  into a Product  Detailing  Agreement  with
Novartis Consumer Health,  Inc.  Pursuant to this Agreement,  we will co-promote
Novartis'  Denavir  product to our target  dentists in the United  States and we
will receive detailing fees and performance payments from Novartis.

     Change of Control Agreements

     On September  18, 2002, we entered into Change of Control  Agreements  with
each of the following executive officers:  Brian Gallagher,  Nancy C. Broadbent,
Robert Ashley, David Pfeiffer and Douglas Gehrig.


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

     (a)  Exhibits

          3.1  Amended and Restated By-Laws of CollaGenex Pharmaceuticals, Inc.

          10.1 Form of Change of Control  Agreement  executed with each of Brian
               Gallagher, Nancy C. Broadbent,  Robert Ashley, David Pfeiffer and
               Douglas Gehrig.


                                      -28-

<PAGE>


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

     (b)  Reports on Form 8-K.

          No  reports on Form 8-K were  filed  during the  quarter to which this
          report on Form 10-Q relates.


                                      -29-

<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, 2002             By:  /s/ Brian M. Gallagher, Ph.D.
                                         -------------------------------------
                                         Brian M. Gallagher, Ph.D.
                                         President and Chief Executive Officer
                                         (Principal Executive Officer)



Date: November 14, 2002             By:  /s/ Nancy C. Broadbent
                                         -------------------------------------
                                         Nancy C. Broadbent
                                         Chief Financial Officer (Principal
                                         Financial and Accounting Officer)

<PAGE>


                                  CERTIFICATION

I,  Brian  M.  Gallagher,   Ph.D.,   Chief   Executive   Officer  of  CollaGenex
Pharmaceuticals, Inc., certify that:

     1.   I have  reviewed  this  quarterly  report on Form  10-Q of  CollaGenex
          Pharmaceuticals, Inc.;

     2.   Based on my  knowledge,  this  quarterly  report  does not contain any
          untrue  statement of a material  fact or omit to state a material fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this quarterly report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this quarterly report,  fairly present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this quarterly report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               quarterly report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          c)   presented  in this  quarterly  report our  conclusions  about the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent function):

          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.


                               /s/ Brian M. Gallagher, Ph.D.
                               -----------------------------
Dated: November 14, 2002       Brian M. Gallagher, Ph.D.
                               Chief Executive Officer



<PAGE>


                                  CERTIFICATION

I, Nancy C. Broadbent,  Chief Financial  Officer of CollaGenex  Pharmaceuticals,
Inc., certify that:

     1.   I have  reviewed  this  quarterly  report on Form  10-Q of  CollaGenex
          Pharmaceuticals, Inc.;

     2.   Based on my  knowledge,  this  quarterly  report  does not contain any
          untrue  statement of a material  fact or omit to state a material fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this quarterly report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this quarterly report,  fairly present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this quarterly report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               quarterly report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          c)   presented  in this  quarterly  report our  conclusions  about the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent function):

          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.



                               /s/ Nancy C. Broadbent
                               ----------------------
Dated: November 14, 2002       Nancy C. Broadbent
                               Chief Financial Officer