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, 1999
                             Commission File Number
                                     0-28308

                        CollaGenex Pharmaceuticals, Inc.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


          Delaware                                          52-1758016
-------------------------------                   ------------------------------
(State or Other Jurisdiction of                         (I.R.S. Employer
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 September 30, 1999:

                Class                              Number of Shares
     ---------------------------                   ----------------
     Common Stock $.01 par value                       8,596,829


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.

                                TABLE OF CONTENTS



                                                                           Page
                                                                           ----

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

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

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

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

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

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

         Notes to Condensed Consolidated Financial Statements (unaudited).  6

  Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations............................  8

         Results of Operations............................................  9

         Liquidity and Capital Resources.................................. 11

         Year 2000 Issues................................................. 12

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk..... 14


PART II. OTHER INFORMATION................................................ 15

  Item 2.  Changes in Securities.......................................... 15

  Item 5.  Other Information.............................................. 15

  Item 6.  Exhibits and Reports on Form 8-K............................... 16


SIGNATURES................................................................ 17


                                      - i -


<PAGE>















                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS















                                      - 1 -


<PAGE>


<TABLE>
<CAPTION>
                               COLLAGENEX PHARMACEUTICALS, INC.
                                       AND SUBSIDIARIES
                             Condensed Consolidated Balance Sheets
                           December 31, 1998 and September 30, 1999

                                                                      December 31,   September 30,
                                                                          1998           1999
                                                                      -----------    -------------
                                                                                     (unaudited)
                                                                  (dollars in thousands, except share
                                                                           and per share data)
                      ASSETS
<S>                                                                   <C>            <C>
Current assets:
  Cash and cash equivalents ................................          $  3,286       $ 17,310
  Short term investments ...................................             6,964           --
  Accounts receivable, net of allowance of $293 and $393
    in 1998 and 1999, respectively .........................             3,045          1,359
  Inventories ..............................................               342            696
  Prepaid expenses and other current assets ................               823            665
                                                                      --------       --------
        Total current assets ...............................            14,460         20,030
Equipment, net .............................................               267            597
Other assets ...............................................                13             39
                                                                      --------       --------
        Total assets .......................................          $ 14,740       $ 20,666
                                                                      ========       ========

            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of note payable ..........................          $   --         $     65
  Accounts payable .........................................             2,914          2,623
  Accrued expenses .........................................             2,545          2,464
                                                                      --------       --------
        Total current liabilities ..........................             5,459          5,152
                                                                      --------       --------
Note payable, less current portion .........................              --              133
                                                                      --------       --------
Total stockholders' equity:
  Preferred stock, $0.01 par value,  5,000,000 shares
    authorized;  no shares and 200,000 shares of Series D
    Cumulative Convertible Preferred Stock, $0.01 par
    value,  issued and outstanding in 1998 and 1999,
    respectively  (liquidation value of $20,663 at
    September 30, 1999) ....................................              --                2
  Common stock, $0.01 par value, 25,000,000 shares
    authorized; 8,587,204 and 8,596,829 shares issued
    and outstanding in 1998 and 1999, respectively .........                86             86
  Additional paid in capital ...............................            47,317         66,077
  Deferred compensation ....................................              (194)          (106)
  Accumulated deficit ......................................           (37,928)       (50,678)
                                                                      --------       --------
        Stockholders' equity ...............................             9,281         15,381
                                                                      --------       --------
Commitments
        Total liabilities and stockholders' equity .........          $ 14,740       $ 20,666
                                                                      ========       ========

       See accompanying notes to unaudited condensed consolidated financial statements.


                                            - 2 -
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

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

                                                          Three Months Ended
                                                            September 30,
                                                      ------------------------
                                                          1998          1999
                                                      ---------      ---------
                                                  (dollars in thousands, except share
                                                            and per share data)

<S>                                                   <C>            <C>
Revenues:
  Product sales.................................      $      --      $   4,219
  Contract revenues.............................              1            126
  License revenues..............................            400             --
                                                      ---------      ---------
      Total revenues............................            401          4,345
                                                      ---------      ---------
Operating expenses:
  Cost of product sales.........................             --            860
  Research and development......................          1,749          1,102
  Selling, general and administrative...........          2,471          5,921
                                                      ---------      ---------
      Total operating expenses..................          4,220          7,883
                                                      ---------      ---------
      Operating loss............................         (3,819)        (3,538)
Other income (expense):
Interest income.................................            230            255
Interest expense................................             --             (3)
                                                      ---------      ---------
      Net loss..................................         (3,589)        (3,286)

Preferred stock dividend........................             --            429
                                                      ---------      ---------
Net loss allocable to common stockholders.......      $  (3,589)     $  (3,715)
                                                      =========      =========
Net loss per share allocable to common
  stockholders:
  Basic and Diluted.............................      $   (0.42)     $    (0.43)
                                                      =========      ==========

Shares used in computing net loss per share
  allocable to common stockholders:
  Basic and Diluted.............................      8,586,735      8,591,992
                                                      =========      =========

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


                                     - 3 -


<PAGE>


<TABLE>
<CAPTION>
                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
              For the Nine Months Ended September 30, 1998 and 1999
                                   (unaudited)
                                                          Nine Months Ended
                                                            September 30,
                                                      ------------------------
                                                          1998          1999
                                                      ---------      ---------
                                                  (dollars in thousands, except share
                                                            and per share data)

<S>                                                   <C>            <C>
Revenues:
  Product sales.................................      $      --      $   9,839
  Contract revenues.............................              8            262
  License revenues..............................            400            100
                                                      ---------      ---------
      Total revenues............................            408         10,201
                                                      ---------      ---------
Operating expenses:
  Cost of product sales.........................             --          2,113
  Research and development......................          4,021          3,331
  Selling, general and administrative...........          5,407         17,694
                                                      ---------      ---------
      Total operating expenses..................          9,428         23,138
                                                      ---------      ---------
      Operating loss............................         (9,020)       (12,937)
Other income (expense):
Interest income.................................            805            615
Interest expense................................             --           (192)
Other expense...................................             --             (2)
                                                      ---------      ----------
      Net loss..................................         (8,215)       (12,516)

Preferred stock dividend........................             --            663
                                                      ---------      ---------
Net loss allocable to common stockholders.......      $  (8,215)     $ (13,179)
                                                      =========      ==========
Net loss per share allocable to common
  stockholders:
  Basic and Diluted.............................      $   (0.96)     $    (1.53)
                                                      =========      ==========

Shares used in computing net loss per share
  allocable to common stockholders:
  Basic and Diluted.............................      8,576,337      8,590,224
                                                      =========      =========

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


                                     - 4 -


<PAGE>


<TABLE>
<CAPTION>
                                COLLAGENEX PHARMACEUTICALS, INC.
                                        AND SUBSIDIARIES
                         Condensed Consolidated Statements of Cash Flows
                      For the Nine Months Ended September 30, 1998 and 1999
                                           (unaudited)

                                                                         Nine Months Ended
                                                                           September 30,
                                                                  -----------------------------
                                                                       1998            1999
                                                                  ------------     ------------
                                                                      (dollars in thousands)

<S>                                                               <C>              <C>
Cash flows from operating activities:
  Net loss..................................................      $    (8,215)     $   (12,516)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Noncash compensation expense..........................               91              151
      Depreciation and amortization expense.................               27              137
      Change in assets and liabilities:
        Decrease in accounts receivable.....................               --            1,686
        Increase in inventories.............................               --             (354)
        (Increase) decrease in prepaid expenses and other
         assets.............................................             (302)             132
        Increase (decrease) in accounts payable.............              465             (291)
        Increase (decrease) in accrued expenses.............              457              (81)
                                                                  -----------      -----------
               Net cash used in operating activities........           (7,477)         (11,136)
                                                                  -----------      -----------
Cash flows from investing activities:
  Capital expenditures......................................              (33)            (467)
  Proceeds from the sale of short term investments..........            5,882            7,464
  Purchase of short term investments........................           (3,474)            (500)
                                                                  -----------      -----------
               Net cash provided by investing activities....            2,375            6,497
                                                                  -----------      -----------
Cash flows from financing activities:
  Proceeds from the issuance of convertible note payable....               --           10,000
  Repayment of convertible note payable.....................               --          (10,000)
  Proceeds from the issuance of preferred stock.............               --           18,456
  Proceeds from the issuance of common stock................               19                9
  Proceeds from the issuance of note payable................               --              219
  Payments on note payable..................................               --              (21)
                                                                  -----------      ------------
               Net cash provided by financing activities....               19           18,663
                                                                  -----------      -----------
Net increase (decrease) in cash and cash equivalents........           (5,083)          14,024
Cash and cash equivalents at beginning of period............           16,379            3,286
                                                                  -----------      -----------
Cash and cash equivalents at end of period..................      $    11,296      $    17,310
                                                                  ===========      ===========
Supplemental schedule of non-cash financing activities:
  Common stock dividend declared on Series D Cumulative
    Convertible Preferred Stock.............................               --              234

        See accompanying notes to unaudited condensed consolidated financial statements.


                                              - 5 -
</TABLE>


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           September 30, 1998 and 1999
                                   (Unaudited)


NOTE 1 -- BASIS OF PRESENTATION:

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

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

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


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

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

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


                                     - 6 -


<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           September 30, 1998 and 1999
                                   (Unaudited)
                                   (Continued)


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

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

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

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

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


NOTE 3 -- NOTE PAYABLE:

      In April 1999, the Company received $219,000 in proceeds from the issuance
of a note  payable.  The proceeds of such note were used to fund the purchase of
equipment,  fixtures and  furniture  for the  Company's  newly leased  corporate
offices in Newtown,  Pennsylvania.  The term of the note is three years at 9.54%
per annum, with monthly minimum payments of principal and interest.  The note is
secured by a third party irrevocable  standby letter of credit for an amount not
less than 90% of the financed property.


                                     - 7 -

<PAGE>


                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES


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


Overview
--------

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

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

      The  Company has  incurred  losses  each year since  inception  and had an
accumulated  deficit of $50.7 million at September 30, 1999. The Company expects
to continue  to incur  losses in the near  future  from  expenditures  on sales,
marketing, manufacturing, drug development and administrative activities.

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


                                     - 8 -


<PAGE>


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


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

      From its  founding  through the quarter  ended  September  30,  1998,  the
Company  had no  revenues  from  sales of its own  products.  During  the fourth
quarter  of 1998,  the  Company  achieved  net  product  sales  of $3.1  million
following the  commercial  launch of Periostat in November  1998.  Most of these
sales represented wholesale and retail stocking under introductory market launch
terms. During the three months ended March 31, 1999, June 30, 1999 and September
30, 1999, the Company achieved net product sales of $2.4 million,  $3.2 million,
and $4.2 million,  respectively,  from the  marketing of Periostat.  The Company
realized a net loss  during the first nine months of 1999,  resulting  primarily
from sales and marketing  expenses incurred during such period.  Total operating
expenses consist of the cost of product sales, research and development expenses
and selling, general and administrative expenses. Cost of product sales consists
primarily  of  direct  manufacturing   expenses  and  royalties.   Research  and
development  expenses consist primarily of payments to third parties,  including
contract research organizations,  universities and clinical  investigators,  for
services and materials  for  research,  drug  development  and clinical  trials.
Selling,  general and  administrative  expenses  consist  primarily of personnel
salaries and benefits, direct marketing costs, professional and consulting fees,
insurance and general office expenses.


     Three Months Ended September 30, 1999 Compared to Three Months Ended
     September 30, 1998

      Revenues. Total revenues increased to $4.3 million in the third quarter of
1999 from $401,000 in the third quarter of 1998.  Revenues for the third quarter
of 1999 included $4.2 million in net sales of Periostat and $126,000 in contract
revenues.  Revenues for the three months ended  September  30, 1998 were derived
from license and contract revenues. There were no product sales revenues for the
three months ended September 30, 1998.

      Cost of product  sales.  Cost of product sales were $860,000 for the three
months ended  September 30, 1999,  while there were no cost of product sales for
the three months ended  September  30, 1998.  Such  increase  resulted  from the
Company's sales of Periostat, which did not commence until November 1998.

      Research  and  development  expenses.  Research and  development  expenses
decreased  37% to $1.1 million in the third quarter of 1999 from $1.7 million in
the third quarter of 1998. This decrease resulted  primarily from a shift in the
Company's  research and development


                                     - 9 -


<PAGE>


expenditures   from  the  FDA   approval   process   relating  to  Periostat  to
manufacturing and formulation development for Periostat.

      Selling,  general  and  administrative  expenses.   Selling,  general  and
administrative  expenses  increased 140% to $5.9 million in the third quarter of
1999 from $2.5  million in the third  quarter  of 1998.  This  increase  was due
primarily to the Company's post-launch marketing activities related to Periostat
and the hiring of additional sales personnel.

      Other  income/expense.  Interest  income  increased to $255,000 during the
three  months ended  September  30, 1999 from  $230,000  during the three months
ended September 30, 1998. This increase was a function of the increased  average
cash and short-term investments on hand during the quarter. Interest expense was
$3,000 for the three  months  ended  September  30,  1999 due to interest on the
$219,000  note  payable  executed  by the  Company in April  1999.  There was no
interest  expense during the three months ended September 30, 1998, as there was
no debt then outstanding.

      Preferred stock dividend.  Preferred stock dividends increased to $429,000
during the three months ended  September  30, 1999 as a result of the  Company's
obligations  in  connection  with  the  issuance  of  its  Preferred  Stock  (as
hereinafter  defined) in May 1999. No dividends were accrued or declared  during
the three months ended  September 30, 1998 as no shares of Preferred  Stock were
outstanding during that period.


     Nine Months Ended September 30, 1999 Compared to Nine Months Ended
     September 30, 1998

      Revenues.  Total  revenues  increased to $10.2 million for the nine months
ended  September  30,  1999  from  $408,000  in the first  nine  months of 1998.
Revenues for the first nine months of 1999 included $9.8 million in net sales of
Periostat,  $262,000  in contract  revenues  and  $100,000 in license  revenues.
Revenues for the nine months ended  September 30, 1998 were derived from license
and  contract  revenues.  There were no product  sales for the nine months ended
September 30, 1998.

      Cost of product  sales.  Cost of product  sales were $2.1  million for the
nine months ended September 30, 1999,  while there were no cost of product sales
for the nine months ended  September 30, 1998.  Such increase  resulted from the
Company's sales of Periostat, which did not commence until November 1998.

      Research  and  development  expenses.  Research and  development  expenses
decreased 17% to $3.3 million for the nine months ended  September 30, 1999 from
$4.0 million in the first nine months of 1998. This decrease resulted  primarily
from a shift in the Company's research and development expenditures from the FDA
approval  process  relating  to  Periostat  to  manufacturing   and  formulation
development for Periostat.

      Selling,  general  and  administrative  expenses.   Selling,  general  and
administrative  expenses  increased  227% to $17.7  million  for the nine months
ended  September  30,  1999 from $5.4  million in the first nine months of 1998.
This  increase  was  due  primarily  to  the  Company's   post-launch  marketing
activities related to Periostat and the hiring of additional sales personnel.


                                     - 10 -


<PAGE>

      Other  income/expense.  Interest  income  decreased to $615,000 during the
nine months ended  September 30, 1999 from $805,000 during the nine months ended
September 30, 1998.  This decrease was a function of the decreased  average cash
and  short-term  investments  on hand during the quarter.  Interest  expense was
$192,000  for the nine months  ended  September  30, 1999  primarily  due to the
interest  on the $10.0  million  short term  convertible  note  executed  by the
Company in March  1999.  There was no  interest  expense  during the nine months
ended September 30, 1998, as there was no debt then outstanding.

      Preferred stock dividend.  Preferred Stock dividends increased to $663,000
during the nine months  ended  September  30, 1999 as a result of the  Company's
obligations  in  connection  with  the  issuance  of  its  Preferred  Stock  (as
hereinafter  defined) in May 1999. No dividends were accrued or declared  during
the nine months ended  September  30, 1998 as no shares of Preferred  Stock were
outstanding during that period.


Liquidity and Capital Resources
-------------------------------

     Since its origin in January 1992,  the Company has financed its  operations
through  private  placements  of preferred  stock and common  stock,  an initial
public  offering  of  2,000,000  shares of common  stock,  which  generated  net
proceeds to the Company of approximately  $18.0 million after  underwriting fees
and related  expenses,  and a follow-on  public offering of 1,000,000  shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million  after  underwriting  fees and related  expenses.  On May 12, 1999,  the
Company  consummated a $20.0 million  financing  (the  "Financing")  through the
issuance of its Series D Cumulative  Convertible Preferred Stock (the "Preferred
Stock"),  which  generated  net  proceeds to the Company of $18.5  million.  The
issuance of the  Preferred  Stock was  approved  by a majority of the  Company's
stockholders at the Company's  Annual Meeting of Stockholders on May 11, 1999. A
portion of the  proceeds of such  Financing  were used to repay a $10.0  million
Senior  Secured  Convertible  Note provided by one of the investors on March 19,
1999 in connection with the Financing.  The remaining  proceeds will be used for
general working capital purposes. The Preferred Stock is convertible at any time
into  shares of Common  Stock of the Company at an initial  conversion  price of
$11.00 per common share.  The conversion price is not subject to reset except in
the event that the Company  should fail to declare and pay dividends when due or
the Company should issue new equity  securities or  convertible  securities at a
price per  share or having a  conversion  price  per share  lower  than the then
applicable conversion price of the Preferred Stock. During the first three years
following  issuance,  holders of the Preferred Stock will be entitled to receive
dividends  payable in shares of fully registered  Common Stock at a rate of 8.4%
per annum.  Thereafter,  dividends will be payable in cash at a rate of 8.0% per
annum.  Without  written  approval of a majority of the holders of record of the
Preferred Stock, the Company,  among other things, shall not: (i) declare or pay
any dividend or distribution on any shares of capital stock of the Company other
than  dividends  on  the  Preferred  Stock;  (ii)  make  any  loans,  incur  any
indebtedness or guarantee any indebtedness, advance capital contributions to, or
investments  in any person,  issue or sell any  securities  or warrants or other
rights to acquire debt  securities  of the Company,  except that the Company may
incur  such  indebtedness  in any  amount  not to exceed  $10.0  million  in the
aggregate  outstanding  at any  time for  working  capital  requirements  in the
ordinary course of business; or (iii) make research and development


                                     - 11 -


<PAGE>


expenditures  in excess of $7.0 million in any  continuous  twelve month period,
unless the  Company  has  reported  positive  net  income  for four  consecutive
quarters  immediately  prior to such twelve month period. At September 30, 1999,
the  Company  had  cash,  cash   equivalents   and  short-term   investments  of
approximately  $17.3 million, an increase of $7.0 million from the $10.3 million
balance at December 31, 1998.

      In accordance with investment  guidelines  approved by the Company's Board
of Directors,  cash balances in excess of those required to fund  operations are
invested in short-term  United States Treasury  securities and commercial  paper
with a credit  rating no lower than  A1/P1.  The  Company's  working  capital at
September 30, 1999 was $14.9 million,  an increase of $5.9 million from December
31, 1998. This increase was primarily  attributable to the Financing,  offset in
part by cash loss from operations incurred during the first nine months of 1999.

      In April 1999, the Company received $219,000 in proceeds from the issuance
of a note  payable.  The proceeds of such note were used to fund the purchase of
equipment,  fixtures and  furniture  for the  Company's  newly leased  corporate
offices in Newtown,  Pennsylvania.  The term of the note is three years at 9.54%
per annum, with monthly minimum payments of principal and interest.  The note is
secured by a third party irrevocable  standby letter of credit for an amount not
less than 90% of the financed  property.

      The  Company  anticipates  that  its  existing  working  capital  will  be
sufficient  to fund the  Company's  operations  through  December 31, 2000.  The
Company's  future capital  requirements  and the adequacy of its available funds
will  depend on many  factors,  including,  the size and scope of the  Company's
marketing  effort and sales of Periostat,  the terms of agreements  entered into
with corporate partners, if any, and the results of research and development and
pre-clinical and clinical  studies for other  applications of the Company's core
technology.  Over the long-term,  the Company's liquidity is dependent on market
acceptance of its products and technology.


Year 2000 Issues
----------------

     Assessment

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

     Internal Operating Systems

      The Company  believes  that its principal  internal  systems are Year 2000
compliant.  The Company  recently  installed  upgraded  versions of its internal
accounting, management and financial reporting applications which the vendor has
represented  are  Year  2000  compliant.  Some  of  the  Company's  non-critical
applications, however, may not be Year 2000 compliant. The


                                     - 12 -


<PAGE>


Company is  conducting  a program to identify  and  resolve  any such  exposure.
Although the costs  related to these  efforts are not expected to be material to
the  Company's  business,  financial  condition  or  results of  operations,  no
assurance can be made that this will be the case.

      Third-Party Relationships

      The Company has  conducted  a program to  identify  and resolve  Year 2000
exposure  from third  parties.  The  Company has made  inquiries  of its outside
vendors, suppliers, manufacturers, distributors and marketing partners to assess
their Year 2000  readiness.  Such third parties have  represented to the Company
that their principal  internal systems are currently Year 2000 compliant or will
be Year 2000 compliant. Any failure of third parties with whom the Company has a
material  relationship  to resolve Year 2000  problems in a timely  manner could
materially  adversely  affect the  Company's  business,  financial  condition or
results of operations.

     Risks of the Company's Year 2000 Issues

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

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

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

     Costs

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

     The Company's Contingency Plans

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



                                     - 13 -


<PAGE>


absence of a  detailed  contingency  plan may  materially  adversely  affect its
business, financial condition and results of operations.


ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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


                                     - 14 -


<PAGE>


                           PART II. OTHER INFORMATION


ITEM 2.   CHANGES IN SECURITIES.

      The following  information relates to all securities of the Company within
the third quarter of 1999 which were not registered under the securities laws at
the time of grant, issuance and/or sale:

      1.    During the third quarter of 1999, the Company  granted stock options
            pursuant to its 1996  Non-Employee  Director Stock Option Plan which
            were not  registered  under the  Securities  Act of 1933, as amended
            (the  "Securities  Act").  All of such option grants were granted at
            the  then  current  fair  market  value  of the  Common  Stock.  The
            following table sets forth certain information regarding such grants
            during the quarter:

                            Number                Exercise
                           of Shares               Price
                           ---------              --------

                            50,000                 $12.25

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


ITEM 5.   OTHER INFORMATION.

Co-Promotion Agreement
----------------------

      The  Company  executed a  Co-Promotion  Agreement  with Merck & Co.,  Inc.
("Merck") in September  1999 pursuant to which the Company will promote  Merck's
Vioxx(R) product, an FDA approved prescription  pharmaceutical for the treatment
of arthritis  and acute pain in adults,  including  dental pain.  The  agreement
provides  for  certain  payments by Merck to the  Company  upon future  sales of
Vioxx.

Appointment of Directors
------------------------

      On  September  10,  1999,  Robert C.  Black and  Stephen  A.  Kaplan  were
appointed to the  Company's  Board of  Directors.  On May 12, 1999,  the Company
consummated  a $20.0  million  financing  through  the  issuance of its Series D
Cumulative  Convertible  Preferred  Stock which  generated  net  proceeds to the
Company of $18.5 million. OCM Principal Opportunities Fund, L.P. ("OCM") led the
investor group, which also included certain current stockholders of the Company.
Mr. Kaplan was appointed to the Board of Directors as the designee of OCM.


                                     - 15 -


<PAGE>


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

      (a)   Exhibits.

            27 -  Financial Data Schedule.

      (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.


                                     - 16 -


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



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


                                     - 17 -