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 March 31, 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 April 15, 2002:

                Class                               Number of Shares
     ---------------------------                    ----------------
     Common Stock $.01 par value                       11,119,594


<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, 2001
               and March 31, 2002 (unaudited)..............................    2

            Condensed Consolidated Statements of Operations for the Three
               Months Ended March 31, 2001 and 2002 (unaudited)............    3

            Condensed Consolidated Statements of Cash Flows for the Three
               Months Ended March 31, 2001 and 2002 (unaudited)............    4

            Notes to Condensed Consolidated Financial Statements
               (unaudited).................................................    5

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

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

            Liquidity and Capital Resources................................   15

    Item 3. Quantitative and Qualitative Disclosures About Market Risk.....   21

PART II. OTHER INFORMATION.................................................   22

    Item 2. Changes in Securities and Use of Proceeds......................   22

    Item 5. Other Information..............................................   22

    Item 6. Exhibits and Reports on Form 8-K...............................   23

SIGNATURES.................................................................   24



                                       -i-
<PAGE>

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS.


                                      -1-
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                      Condensed Consolidated Balance Sheets
                      December 31, 2001 and March 31, 2002
                  (dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,             MARCH 31,
                                  ASSETS                                         2001                    2002
                                                                             -------------          -------------
                                                                                                     (unaudited)
<S>                                                                          <C>                    <C>
Current assets:

   Cash and cash equivalents...........................................      $        6,171         $       4,195
   Accounts receivable, net of allowance of $950 and $1,067 at
      December 31, 2001 and March 31, 2002, respectively...............               4,478                 5,698
   Inventories.........................................................               1,402                 1,483
   Prepaid expenses and other current assets...........................               1,200                 1,533
                                                                             --------------         -------------
         Total current assets..........................................              13,251                12,909
   Equipment and leasehold improvements, net...........................                 537                   639
   Other assets........................................................                 910                   885
                                                                             --------------         -------------
         Total assets..................................................      $       14,698         $      14,433
                                                                             ==============         =============

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

   Current portion of note payable.....................................      $           35         $          15
   Accounts payable....................................................               3,769                 4,436
   Accrued expenses....................................................               3,153                 2,562
                                                                             --------------         -------------
         Total current liabilities.....................................               6,957                 7,013
                                                                             --------------         -------------
   Deferred revenue....................................................                 614                   552

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 December 31, 2001 and March 31, 2002
     (liquidation value of $20,000 at March 31, 2002)..................                   2                     2

   Common stock, $0.01 par value; 25,000,000 shares authorized,
     10,999,573 and 11,116,019 shares issued and outstanding at
      December 31, 2001 and March 31, 2002, respectively...............                 110                   111

   Common stock to be issued (103,196 shares at December 31, 2001
      and none at March 31, 2002) .....................................                 840                    --
   Additional paid in capital..........................................              80,129                81,266
   Accumulated deficit.................................................             (73,954)              (74,511)
                                                                             --------------         -------------
         Stockholders' equity..........................................               7,127                 6,868
                                                                             --------------         -------------
         Total liabilities and stockholders' equity....................      $       14,698         $      14,433
                                                                             ==============         =============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.


                                      -2-
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                 Condensed Consolidated Statements of Operations
               For the Three Months Ended March 31, 2001 and 2002
                  (dollars in thousands, except per share data)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED MARCH 31,
                                                                -----------------------------
                                                                     2001             2002
                                                                -----------       -----------
<S>                                                             <C>               <C>
Revenues:
  Product sales...........................................      $     6,113       $     9,881
  Contract revenues.......................................              875               792
  License revenues........................................               36                87
                                                                -----------       -----------
       Total revenues.....................................            7,024            10,760
                                                                -----------       -----------
Operating expenses:
  Cost of product sales...................................            1,366             1,580
  Research and development................................              944               829
  Selling, general and administrative.....................            7,477             8,928
                                                                -----------       -----------
        Total operating expenses..........................            9,787            11,337
                                                                -----------       -----------
        Operating loss....................................           (2,763)             (577)

Other income (expense):
  Interest income.........................................               63                22
  Interest expense........................................               (3)               (1)
  Other income (expense)..................................               12                (1)
                                                                -----------       -----------
        Net loss..........................................           (2,691)             (557)
                                                                -----------       -----------
Preferred stock dividend..................................              420               420
                                                                -----------       -----------
Net loss allocable to common stockholders.................      $    (3,111)      $      (977)
                                                                ===========       ===========
Basic and diluted net loss per share allocable to common
  stockholders............................................      $     (0.33)      $     (0.09)
                                                                ===========       ===========
Shares used in computing basic and diluted net loss per
  share allocable to common stockholders..................        9,336,639        11,078,258
                                                                ===========       ===========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.


                                      -3-
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                 Condensed Consolidated Statements of Cash Flows
               For the Three Months Ended March 31, 2001 and 2002
                             (dollars in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED MARCH 31,
                                                                 ----------------------------
                                                                    2001              2002
                                                                 ----------        ---------
<S>                                                              <C>               <C>
Cash flows from operating activities:
  Net loss................................................       $   (2,691)       $    (557)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Noncash compensation expense........................                7               --
      Depreciation and amortization expense...............               64               90
      Change in assets and liabilities:
        Accounts receivable...............................             (438)          (1,220)
        Inventories.......................................             (227)             (81)
        Prepaid expenses and other assets.................           (1,523)             (86)
        Accounts payable..................................              621              667
        Accrued expenses..................................             (349)            (591)
        Deferred revenue..................................              (15)             (62)
                                                                 ----------        ---------
               Net cash used in operating activities......           (4,551)          (1,840)
                                                                 ----------        ---------
Cash flows from investing activities:
  Capital expenditures....................................               (8)            (167)
  Proceeds from the sale of short term investments........            1,739               --
                                                                 ----------        ---------
               Net cash provided by (used in) investing
               activities.................................            1,731            (167)
                                                                 ----------        ---------
Cash flows from financing activities:
  Net proceeds from issuance of common stock..............            6,878               51
  Repayment of long-term debt.............................              (18)             (20)
                                                                 ----------        ---------
               Net cash provided by financing activities..            6,860               31
                                                                 ----------        ---------
Net increase (decrease) in cash and cash equivalents......            4,040          (1,976)

Cash and cash equivalents at beginning of period..........            3,709            6,171
                                                                 ----------        ---------
Cash and cash equivalents at end of period................       $    7,749        $   4,195
                                                                 ==========        =========
Supplemental schedule of noncash financing activities:
    Common stock dividends issued or to be issued
    on preferred stock....................................       $      420        $     420
                                                                 ==========        =========
    Issuance of common stock to be issued.................              872              840
                                                                 ==========        =========
    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..............       $        3        $       1
                                                                 ==========        =========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.


                                      -4-
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2001 AND 2002
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION:

     The unaudited condensed  consolidated  financial statements included herein
have been prepared by the Company,  pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with accounting  principles
generally  accepted in the United  States of America.  Certain  information  and
footnote  disclosures  normally  included  in the  annual  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 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 March 31,
2002,  their results of operations for the three months ended March 31, 2001 and
2002,  and their cash flows for the three  months ended March 31, 2001 and 2002.
Interim  results are not necessarily  indicative of results  anticipated for the
full fiscal year.

NOTE 2 -- INVENTORIES:

     Inventories  at  December  31,  2001 and March 31,  2002  consisted  of the
following:

                                               2001         2002
                                               ----         ----
                 Raw materials              $    174     $    347
                 Work-in-process                  66          891
                 Finished goods                1,162          245
                                            --------     --------
                                            $  1,402     $  1,483
                                            ========     ========


                                      -5-
<PAGE>

NOTE 3 -- CHANGE IN ACCOUNTING PRINCIPLE:

     In the fourth  quarter  of 2000,  the  Company  adopted  SAB 101,  "Revenue
Recognition  in  Financial   Statements",   implementing  a  change  in  revenue
recognition  policy for  certain  upfront  payments  received  in  international
licensing  arrangements for  Periostat(R).  Effective  January 1, 2000,  upfront
payments received from licensees,  where the Company has continuing involvement,
are now being  deferred and  recognized  as license  revenue over the  estimated
performance  period of the individual  license  agreements.  In previous  years,
prior to the Company's  adoption of SAB 101, the Company recognized revenue when
the  upfront  payments  were  received,  generally  upon the  execution  of each
agreement.  During the three months  ended March 31, 2001 and 2002,  the Company
recognized $15 and $16,  respectively,  in license  revenues which were deferred
upon  the  implementation  of SAB 101 as of  January  1,  2000  and  which  were
previously   recognized  as  license  revenues  under  the  historical   revenue
recognition  policy prior to the adoption of SAB 101.  During 2000,  the Company
recorded  a $764  charge as a result of the  cumulative  effect of the change in
accounting  principle for revenue  recognized  prior to January 1, 2000; $149 of
this deferred revenue has been recognized through March 31, 2002.

NOTE 4 -- COMMON STOCK AND DEBT FINANCINGS:

     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 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 March 31,
2002, there were no borrowings against the Facility, however, on March 26, 2002,
the  Company  issued an  irrevocable  letter of credit  under the  Facility  for
$1,343.  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

                                      -6-
<PAGE>

Kingsbridge Capital Limited  ("Kingsbridge").  Under the terms of the Agreement,
the Company may, at its sole  discretion  and from time to time over the next 12
months,  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  amounts
of individual draws is based on the Company's market  capitalization and may not
exceed $3,000 and availability is subject to certain representations, warranties
and covenants of the Company. The Company has committed to: (i) draw down on the
Equity Line an amount aggregating at least $1,500 in registered shares of Common
Stock, prior to August 14, 2002 (the "Minimum  Commitment  Amount");  or (ii) if
the Company has not satisfied such Minimum Commitment Amount, pay to Kingsbridge
an amount  equal to 10% of the  amount by which the  Minimum  Commitment  Amount
exceeds the aggregate of all amounts drawn down under the Equity Line in respect
of the shares of Common Stock issued and sold thereunder, except if the price of
the  Company's  Common Stock is below  certain  levels  during this period.  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  will not become
exercisable  until  August 14,  2002,  and will expire on August 13,  2007.  The
Company  recorded the fair value of the warrants  issued in connection  with the
Equity Line of  approximately  $248 as an increase to additional paid in capital
and other current  assets in the  accompanying  condensed  consolidated  balance
sheet as of March 31, 2002.

NOTE 5 -- 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,  unless the agreement is earlier
terminated pursuant to the terms of the agreement.

     Pursuant  to  the  terms  of an  exclusive  License  Agreement  with  Atrix
Laboratories,  the  Company  has  committed  to spend  no less  than  $2,000  in
advertising and selling expenses  related to the licensed  products during 2002,
and 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 markets
and the lesser of $2,000 or 30% of the Company's contribution margin, as defined
in the agreement,  relating to a separate Atrix product that the Company markets
commencing with fiscal year 2003. For the three months ended March 31, 2002, the
Company  has  fulfilled  $439 of the  $2,000  advertising  and  selling  expense
commitment for 2002. Accordingly,  the Company's obligation as of March 31, 2002
is $1,561. Additionally, the Company must maintain a minimum amount of full time
sales  professionals and make a specific amount of sales  presentations over the
first 24 months of the agreement.

     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  $4,170,  of which no more than  $533,  $950,  $1,650 and $1,037
shall be payable

                                      -7-
<PAGE>

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.


NOTE 6 -- SUBSEQUENT EVENTS:

     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.



                                      -8-
<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. We distribute Periostat through drug wholesalers and large retail chains
in the United  States and 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  co-promotes
Vioxx, a prescription non-steroidal  anti-inflammatory drug developed by Merck &
Co.,  Inc., in the United  States,  and  Pandel(R),  a topical  corticosteroidal
product developed by Altana Inc. and indicated for dermatologic use.

     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 contract 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 $74.5 million at March 31, 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 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



                                      -9-
<PAGE>

Control Agency for marketing in the United Kingdom and approved for marketing in
Austria,  Finland and Israel.  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,  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(TM)  are United
States   trademarks   of   CollaGenex   Pharmaceuticals,    Inc.   Periostat(R),
Nephrostat(R), Optistat(R), and Xerostat(R) are European Community trademarks of
CollaGenex  Pharmaceuticals,  Inc.  Periostat(R),   Nephrostat(R),  Optistat(R),
Xerostat(R),  IMPACS(R) and  Dentaplex(R)  are United Kingdom  trademarks of our
wholly-owned  subsidiary,  CollaGenex  International Limited.  CollaGenex(R) and
PS20(R) are both European  Community and United Kingdom trademarks 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 March 31, 2002, we achieved net product sales
of $9.9 million, including approximately $9.0 million from the sale of Periostat
and  approximately  $900,000  from the sale of Atridox,  Atrisorb  FreeFlow  and
Atrisorb-D.  We launched each of Atridox and Atrisorb  FreeFlow in October 2001,
and launched  Atrisorb-D in February 2002. In addition,  during the three months
ended March 31, 2002,  we generated  $792,000 in contract  revenues from our two
(2)  co-promotion  agreements  for Vioxx and Pandel,  and  $87,000 in  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.

     We  recognize  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

                                      -10-
<PAGE>

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 March 31, 2002  Compared to Three Months Ended March 31,
2001

REVENUES

--------------------------------------------------------------------------------
Revenues                            2002           CHANGE             2001
(dollars in thousands)              ----           ------             ----
--------------------------------------------------------------------------------
Product Sales                    $   9,881           62%           $   6,113
--------------------------------------------------------------------------------
Contract Revenues                      792           (9%)                875
--------------------------------------------------------------------------------
License Revenues                        87          142%                  36
                                 ---------                         ---------
--------------------------------------------------------------------------------
Total                            $  10,760           53%           $   7,024
--------------------------------------------------------------------------------

     Total  revenues  during the three  months  ended  March 31, 2002 were $10.8
million,  representing a 53% increase over total revenues of $7.0 million during
the three months ended March 31, 2001. Such 2002 revenues included approximately
$9.0 million in net sales of Periostat,  approximately  $900,000 in net sales of
Atridox, Atrisorb FreeFlow and Atrisorb-D,  $792,000 in contract revenues, which
were derived from our  co-promotion of Vioxx and Pandel,  and $87,000 in foreign
license and  milestone  revenues for  Periostat.  Product sales  increased  $3.8
million,  or 62%,  during the three  months ended March 31, 2002 to $9.9 million
compared  to $6.1 during the three  months  ended  March 31,  2001,  mainly as a
result of the Direct-To-Consumer,  or DTC, advertising campaign for Periostat in
addition to new incremental sales of the Atrix products we market.

     Total  revenues  during the three months ended March 31, 2001 included $6.1
million in net sales of  Periostat,  $875,000 in contract  revenues,  which were
derived from our  co-promotion  of Vioxx and Denavir,  a prescription  cold sore
medication owned by Novartis Pharmaceuticals Corporation, and $36,000 in license
revenues.  Revenues from Denavir  accounted for  approximately  $175,000 of such
contract  revenues.  Novartis,  which acquired  Denavir from SmithKline  Beecham
Consumer Healthcare in early 2001, terminated our Co-Promotion

                                      -11-
<PAGE>

Agreement  with  respect  to  Denavir  effective  April  13,  2001.  We have not
recognized any revenue with respect to sales of Denavir since April 2001.  There
were no sales of Atridox,

Atrisorb FreeFlow or Atrisorb-D in the first quarter of 2001.

     In accordance  with SAB 101, which we adopted in 2000,  $16,000 and $15,000
of our licensing  revenues  recorded during each of the three months ended March
31, 2002 and March 31, 2001, respectively,  were 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 are being  recognized  as
income over the expected performance period of these agreements.

COST OF PRODUCT SALES

--------------------------------------------------------------------------------
Cost of Product Sales               2002           CHANGE             2001
(dollars in thousands)              ----           ------             ----
--------------------------------------------------------------------------------
Cost of Product Sales             $  1,580           16%            $  1,366
--------------------------------------------------------------------------------
Percent of Product Sales             16.0%                             22.3%
--------------------------------------------------------------------------------

     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 and the Atrix products.

     Cost of product sales were $1.6  million,  or 16.0% of product sales during
the three  months ended March 31, 2002,  compared to $1.4  million,  or 22.3% of
product  sales during the three  months  ended March 31,  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 our
continued manufacturing cost savings for Periostat tablets, which we launched in
July 2001. For Periostat,  cost of product sales as a percent of sales, declined
to 13.7%  during the three  months  ended March 31,  2002 from 22.3%  during the
three  months  ended  March 31,  2001.  The cost of product  sales for  Atridox,
Atrisorb FreeFlow and Atrisorb-D were 39.0% for the first quarter of 2002.

RESEARCH AND DEVELOPMENT

--------------------------------------------------------------------------------
Research and Development            2002          CHANGE              2001
(dollars in thousands)              ----          ------              ----
--------------------------------------------------------------------------------
Research and Development          $   829          (12%)            $   944
--------------------------------------------------------------------------------
Percentage of Total Revenue          7.7%                             13.4%
--------------------------------------------------------------------------------

     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  decreased to $829,000 during the three
months  ended March 31, 2002 from  $944,000  during the three months ended March
31, 2001.  This  decrease of  $115,000,  or 12%, was mainly the result of higher
research and clinical  development  expenses  incurred  exclusively  in 2001 for
Metastat, our antiangiogenesis drug, and Dentaplex, a


                                      -12-
<PAGE>

nutritional  supplement,  as well as European regulatory expenses for Periostat.
This was partially  offset by the initial  spending in 2002 for clinical  trials
for Periostat in dermatologic and opthalmologic indications.

     Development  projects  contracted  during the three  months ended March 31,
2002  included  our   continuation  of  a  feasibility   study  and  formulation
development  work for a once-a-day  formulation of Periostat and our Restoraderm
technology, which totaled $155,000 and $70,000, 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 mid-2002. Additional
expenses  ranging  from  approximately  $1.0  million in 2002 to as much as $6.0
million through completion could be incurred if the project is successful.

     Clinical  projects totaling $273,000 were conducted during the three months
ended March 31, 2001 and  included  several  Phase IV studies for  Periostat  in
various dental indications and the continuation of clinical trials for Periostat
in  dermatological  indications.  We are currently in  discussions  with the FDA
regarding  protocols for additional  trials with Periostat for acne and rosacea.
Until these  discussions  are finalized,  it is premature to estimate the future
costs associated with the continued  development of Periostat for dermatological
indications.

     Other  expenses  incurred  during the three  months  ended  March 31,  2002
included  $44,000 in  regulatory  consulting  and  filing  fees under the Mutual
Recognition  Procedure  in Europe and  $61,000  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 March 31, 2002 were $145,000.  Additionally,  during such period we
incurred $81,000 in travel and other office expenses.

     Research and  development  expenses  incurred during the three months ended
March  31,  2001  included  $130,000  in  research  grants to  various  academic
institutions for conducting research related to our core technology, $105,000 in
Periostat  Phase IV clinical trial grants,  $180,000 in contracted  clinical and
development expenses related to a safety and pharmacokinetic  study for Metastat
and  other  IMPACS   compounds  in  the   development   stage  and  $180,000  in
manufacturing development and validation expenses for Dentaplex.

     Other  expenses  incurred  during the three  months  ended  March 31,  2001
included  $90,000 in  regulatory  consulting  and  filing  fees under the Mutual
Recognition  Procedure  in Europe and  $92,000  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 March 31, 2001 also
included  $122,000 in direct salaries and other personnel  related  expenses and
$45,000 in travel and other office expenses.

SELLING, GENERAL AND ADMINISTRATIVE

--------------------------------------------------------------------------------
Selling, General and Administrative         2002          CHANGE          2001
(dollars in thousands)                      ----          ------          ----
--------------------------------------------------------------------------------
Selling, General and Administrative       $  8,928          19%         $  7,477
--------------------------------------------------------------------------------
Percentage of Total Revenue                  83.0%                        106.4%
--------------------------------------------------------------------------------


                                      -13-
<PAGE>


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

     Selling,  general and administrative expenses increased 19% to $8.9 million
during the three months ended March 31, 2002 from $7.5 million  during the three
months  ended March 31, 2001.  Significant  components  of selling,  general and
administrative  expenses  incurred  during the three months ended March 31, 2002
included  $4.4  million in direct  selling  and sales  training  expenses,  $3.2
million in marketing expenses (including Periostat DTC advertising expenditures,
launch expenditures for 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 March 31, 2001 included $3.3 million in direct selling and training
expenses,   $3.1  million  in  marketing  expenses   (including   Periostat  DTC
advertising expenditures and co-promotion expenses related to Vioxx) and $1.1 in
general and administrative expenses.

     This  increase of $1.4  million,  or 19%, from the three months ended March
31, 2001 to the three months ended March 31, 2002,  was  primarily the result of
increases  in  incentive  compensation  and salaries for our dental sales force,
which are directly related to higher sales during this period. Additionally,  we
incurred an incremental  $200,000 in selling expenses associated with our Pandel
sales initiative, which we began in 2002.

     During the three  months  ended March 31, 2002 we incurred  $1.5 million in
DTC  advertising  expenses  compared to $1.4  million  during the same period in
2001.

OTHER INCOME/EXPENSE

--------------------------------------------------------------------------------
Other Income / Expense              2002             CHANGE             2001
                                    ----             ------             ----
--------------------------------------------------------------------------------
Interest Income                  $  22,000            (65%)          $  63,000
--------------------------------------------------------------------------------
Interest Expense                 $   1,000            (67%)          $   3,000
--------------------------------------------------------------------------------
Other (Expense) Income           $  (1,000)            N/A           $  12,000
--------------------------------------------------------------------------------


     Interest  income  decreased to $22,000 for the three months ended March 31,
2002  compared  to $63,000  for the three  months  ended  March 31,  2001.  This
decrease was due to lower average  balances in cash and  short-term  investments
and lower  investment  yields  during the three  months  ended  March 31,  2002.
Interest expense for the three months ended March 31, 2002 was $1,000,  compared
to $3,000 for the year ended  December 31, 2001.  Other expense during the three
months  ended March 31, 2002 was $1,000.  Other  income  during the three months
ended March 31, 2001 of $12,000 was  recognized as a result of foreign  currency
transactions.

PREFERRED STOCK DIVIDEND

     Preferred  stock  dividends  were $420,000  during each of the three months
ended March 31, 2002 and March 31, 2001. Such preferred stock dividends, paid in
shares of our Common


                                      -14-
<PAGE>

Stock, were the result of our obligations in connection with the issuance of our
Series D Preferred Stock in May 1999.  Beginning in mid-2002,  as more fully set
forth in the Amended  Certificate of Designation,  Preferences and Rights of the
Series D Cumulative Convertible Preferred Stock, we will no longer pay dividends
on the Series D Preferred  Stock in shares of our Common Stock,  and will become
obligated to pay such dividends in cash, at a rate equal to 8% per annum.

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  cumulative  convertible  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
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 have and are entitled to receive  dividends payable in shares of
fully  registered  Common  Stock at a rate of 8.4% per  annum.  Thereafter,  and
beginning  in  2002,  dividends  will be  payable  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 March 31,  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  distribution  on any shares of our capital stock
other than dividends on the Series D Preferred Stock; (ii) make any loans, incur
any indebtedness or


                                      -15-
<PAGE>

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.

     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 is three  years  at 9.54%  per  annum,  with  monthly  minimum
payments of principal and interest.

     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 (3) 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 (3) 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
twenty-four (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  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. As we 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


                                      -16-
<PAGE>

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 March  31,  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 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;
(iv) we have agreed to maintain,  for a period of 24 months,  a force of no less
than  ninety (90) 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  minimum  expenditures  for advertising and promotional
activities  after 2002,  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
over the next 12 months,  sell shares of our Common  Stock to  Kingsbridge  at a
discount  to  market  price,  as  determined  prior to each such  sale.  We have
committed to: (i) draw down on this equity line, an amount  aggregating at least
$1.5 million in registered shares of Common Stock,  prior to August 14, 2002; or
(ii) if, prior to August 14, 2002, we have not drawn down an amount  aggregating
at least $1.5 million in registered shares of Common Stock, we will be obligated
to pay Kingsbridge,  in cash, an amount equal to 10% of the amount by which $1.5
million  exceeds the  aggregate of all amounts drawn down by us under the equity
line up to that  date.  The  equity  line  provides  for the  sale of up to $8.5
million in registered shares of our Common Stock to Kingsbridge.

     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 will
not become  exercisable  until August 14, 2002,  and will  thereafter  expire on
August 13, 2007. We have  registered the shares of our Common Stock which may be
issued by us under the


                                      -17-
<PAGE>

equity  line and upon any  exercise  of the  warrant by  Kingsbridge,  under our
recent shelf  registration  statement on Form S-3, which registered an aggregate
of 964,880  shares of our Common Stock for use in connection the equity line. On
April 29, 2002,  the  Securities  and Exchange  Commission  declared  such shelf
registration statement on Form S-3 effective.

     At March 31, 2002, we had cash, cash equivalents and short-term investments
of approximately  $4.2 million, a decrease of $2.0 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 March 31, 2002 was $5.9  million,  a decrease  of $400,000  from $6.3
million at December 31, 2001.  This decrease was primarily  attributable  to our
continued  use of cash to fund  operations  during the  quarter  ended March 31,
2002.

     We anticipate that our existing  working capital will be sufficient to fund
our current  operations  through at least the end of 2002 and that existing cash
and  cash  equivalents,  internally  generated  funds  from  operations  and the
anticipated  cash inflows  from both our equity line of credit with  Kingsbridge
and our revolving credit facility with Silicon Valley Bank will be sufficient to
support our  operations  through  2003.  Our actual  future  cash  requirements,
however,  will  depend  on many  factors,  including  market  acceptance  of our
products and technology.

     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;

     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 Series D Preferred Stock outstanding,  operating leases for our office space
and other  contractual  commitments  with our  marketing  partners  for  certain
selling and promotional  expenses  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


                                      -18-
<PAGE>

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 10 years.  Rent is
expected  to be  approximately  $318,000  per  year  and is  subject  to  market
adjustments at the end of the 5th year.

     In August of 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.

     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
(90) 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 $4,000,000 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.  For the three
months  ended  March  31,  2002,  the  Company  has  fulfilled  $439,000  of the
$2,000,000 advertising and selling expense commitment for 2002. Accordingly, the
Company's obligation as of March 31, 2002 is $1,561,000.

     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 $4.2  million,  of which no more than  $533,000,
$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.


                                      -19-
<PAGE>

     Below is a table which presents our contractual  obligations and commercial
commitments as of March 31, 2002:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                 PAYMENTS DUE BY PERIOD
                              ------------------------------------------------------------------------------------
                                                  9 MONTHS
       CONTRACTUAL                                 ENDING
       OBLIGATIONS                               DECEMBER 31,        2003 AND           2005 AND         2007 AND
                                  TOTAL             2002               2004               2006            AFTER
------------------------------------------------------------------------------------------------------------------
<S>                           <C>               <C>                <C>               <C>              <C>
LONG-TERM DEBT(1)             $     15,000      $     15,000             $0                $0               $0
------------------------------------------------------------------------------------------------------------------

OPERATING LEASES(2)           $  2,448,000      $    251,000       $    667,000      $    668,000     $   862,000
------------------------------------------------------------------------------------------------------------------

UNCONDITIONAL                                   $    293,000(3)
PURCHASE                                        $    894,000(4)
OBLIGATIONS                   $  2,748,000      $  1,561,000(5)          (5)                --              --
------------------------------------------------------------------------------------------------------------------

CASH DIVIDEND ON SERIES D
PREFERRED STOCK               $  7,600,000(6)   $  1,200,000(6)    $  3,200,000(6)   $  3,200,000(6)       (6)
------------------------------------------------------------------------------------------------------------------

TOTAL CONTRACTUAL
OBLIGATIONS                   $ 12,811,000      $  4,214,000       $  3,867,000      $  3,868,000     $   862,000
------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  Balance payable on April 1999 $219,000 note.

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

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

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

(5)  Such  amounts  are  payable  under the terms of our  Agreement  with  Atrix
     Pharmaceuticals.  As of March  31,  2002,  we will be  required  to  expend
     $1,561,000  in  advertising  and  selling  expenses  related  to the  Atrix
     products in 2002, and to make certain minimum  expenditures for advertising
     and  promotional  activities  after  2002,  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.

(6)  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 our Common  Stock at a rate of 8.4% per annum for the
     first three years and dividends payable in cash at a rate of 8.0% per annum
     thereafter.


                                      -20-
<PAGE>



ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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




                                      -21-
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS.

Changes in Securities

     On February 14, 2002, in  connection  with the  consummation  of our equity
line arrangement with Kingsbridge Capital Limited 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
warrant will not become  exercisable  until August 14, 2002, and will thereafter
expire on August 13, 2007. Such warrant was not registered  under the Securities
Act of 1933, as amended, at the time of such issuance.

     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,  on
our  shelf  Registration  Statement  on Form S-3  (File  No.  333-72166),  which
registered  an aggregate of 964,880  shares of our Common Stock and was declared
effective by the Securities and Exchange Commission on February 14, 2002.

     We believe that the issuance of such warrant to Kingsbridge was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended,  as a
transaction not involving any public  offering.  Kingsbridge had adequate access
to information about us.

ITEM 5.     OTHER INFORMATION.

Receipt of Marketing Authorization

     On April 23,  2002,  we  announced  that we had  received  final  Marketing
Authorizations for our lead product, Periostat, from the Ministries of Health in
Austria and Finland. Periostat will be marketed and commercialized in Austria by
Willvonseder & Marchesani Ges.m.b.H & Co. KG, a Vienna based company, with which
we entered into a marketing and  distribution  agreement on June 9, 2000. We are
currently in discussions  with suitable  partner  companies for the Scandinavian
countries.

     Additionally,  on May 6, 2002,  we announced  that the Israeli  Ministry of
Health granted a Marketing Authorisation for Periostat to our Israeli commercial
partner,  Taro  Pharmaceutical  Industries Ltd.  ("Taro").  Taro will market and
distribute  Periostat  in  Israel  pursuant  to the  terms  of a  Marketing  and
Distribution  Agreement  which we  entered  into with Taro on August  24,  2000.
Periostat  tablets will be supplied to Taro by our  wholly-owned  United Kingdom
subsidiary, CollaGenex International Limited.

Publication of Metastat Phase I Results

     On March 7, 2002,  we announced  that the January 2002 issue of the Journal
of  Clinical  Oncology  featured a report  describing  the  results of a Phase I
clinical  trial carried out by the AIDS  Malignancy  Consortium and sponsored by
the   National   Cancer   Institute   designed  to  evaluate   the  use  of  our
anti-angiogenesis   compound,   COL-3   (Metastat(R)),   in  the   treatment  of
AIDS-related Kaposi's sarcoma.



                                      -22-
<PAGE>

Co-operation, Development and Licensing Agreement

     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 $4.2  million,  of which no more than  $533,000,
$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.

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

     (a)  Exhibits

          *10.1 - Wholesale Service Agreement  effective as of November 1, 2001,
          by and between the Company and National Specialty Services, Inc.

          *10.2 - First Amendment to Wholesale Service Agreement effective as of
          November 12, 2001,  by and between the Company and National  Specialty
          Services, Inc.

          *10.3 - Exclusive Distribution Agreement dated as of March 1, 2002, by
          and between the Company and CORD Logistics, Inc.

          10.4 - First Loan Modification Agreement dated as of March 22, 2002 by
          and between the Company and Silicon Valley Bank.

          10.5 - Second Loan  Modification  Agreement dated as of March 27, 2002
          by and between the Company and Silicon Valley Bank.

     (b)  Reports on Form 8-K.

          On February  15,  2002 we filed a current  report on Form 8-K with the
          Securities  and  Exchange  Commission  relating  to  our  equity  line
          arrangement with Kingsbridge Capital Limited.

          * Confidential Treatment has been sought for a portion of this Exhibit



                                      -23-
<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:   May 15, 2002                   By: /s/ Brian M. Gallagher, Ph.D.
                                           -------------------------------------
                                           Brian M. Gallagher, Ph.D.
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)


Date:   May 15, 2002                   By: /s/ Nancy C. Broadbent
                                           -------------------------------------
                                           Nancy C. Broadbent
                                           Chief Financial Officer (Principal
                                           Financial and Accounting Officer)



                                      -24-