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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549





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FORM 10-Q





| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934 
| | -------------------------------------------------------------------------------------------
| |                                                                                            
| | For    the quarterly period ended June 30, 2005                                            
| |                                                                                            
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934




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    Incorporation or Organization) |  | (I.R.S.    Employer     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: |  |  | No: | 
| | ---- |  |  | --- | 




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





| | Yes: |  |  | No: | 
| | ---- |  |  | --- | 




Indicate  the number of shares outstanding of each of the issuers classes of common  stock as of July 31, 2005:





|Class                       |  | Number of    Shares
|--------------------------- |  | -------------------
|                            |  |                    
|Common Stock $.01 par value |  | 14,436,142         




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COLLAGENEX PHARMACEUTICALS, INC.


TABLE OF CONTENTS





|                                     |         |                                                                                                                     | Page
|------------------------------------ | ------- | ------------------------------------------------------------------------------------------------------------------- | ----
|                                     |         |                                                                                                                     |     
|PART I.     FINANCIAL    INFORMATION | 1      
|                                     |        
|                                     | Item 1. | Financial Statements (unaudited)                                                                                    | 1   
|                                     |         |                                                                                                                     |     
|                                     |         | Condensed Consolidated Balance    Sheets as of June 30, 2005 and December 31, 2004 (unaudited)                      | 2   
|                                     |         |                                                                                                                     |     
|                                     |         | Condensed Consolidated Statements    of Operations for the Three Months Ended June 30, 2005 and 2004    (unaudited) | 3   
|                                     |         |                                                                                                                     |     
|                                     |         | Condensed Consolidated Statements    of Operations for the Six Months Ended June 30, 2005 and 2004 (unaudited)      | 4   
|                                     |         |                                                                                                                     |     
|                                     |         | Condensed Consolidated Statements    of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (unaudited)      | 5   
|                                     |         |                                                                                                                     |     
|                                     |         | Notes to Condensed Consolidated    Financial Statements (unaudited)                                                 | 6   
|                                     |         |                                                                                                                     |     
|                                     | Item 2. | Managements Discussion and    Analysis of Financial Condition and Results of Operations                            | 14  
|                                     |         |                                                                                                                     |     
|                                     |         | Results of Operations                                                                                               | 16  
|                                     |         |                                                                                                                     |     
|                                     |         | Liquidity and Capital Resources                                                                                     | 23  
|                                     |         |                                                                                                                     |     
|                                     |         | Additional Risks That May Affect    Results                                                                         | 27  
|                                     |         |                                                                                                                     |     
|                                     | Item 3. | Quantitative and Qualitative    Disclosures About Market Risk                                                       | 36  
|                                     |         |                                                                                                                     |     
|                                     | Item 4. | Controls and Procedures                                                                                             | 36  
|                                     |         |                                                                                                                     |     
|PART    II.     OTHER INFORMATION    | 38     
|                                     |        
|                                     | Item 1. | Legal Proceedings                                                                                                   | 38  
|                                     |         |                                                                                                                     |     
|                                     | Item 4. | Submission of Matters to a Vote of    Security Holders                                                              | 38  
|                                     |         |                                                                                                                     |     
|                                     | Item 6. | Exhibits                                                                                                            | 39  
|                                     |         |                                                                                                                     |     
|SIGNATURES                           |         | 40                                                                                                                 




CollaGenex  Pharmaceuticals, Inc. - United States trademarks:


Periostat®, Metastat®, Dermostat®, Nephrostat®, Osteostat®, Arthrostat®,  Rheumastat®, Corneostat®, Gingistat®, IMPACS, PS20®, The Whole Mouth  Treatment®, Restoraderm®, Dentaplex®, Lytra, Periostat-MR and Oracea.


CollaGenex  Pharmaceuticals, Inc. - European Community trademarks:


Periostat®, Nephrostat®, Optistat®, Xerostat® and Oracea.


CollaGenex  International, Ltd. (our wholly-owned subsidiary) - United Kingdom trademarks:


Periostat®, Nephrostat®, Optistat®, Xerostat®, IMPACS®, Dentaplex®,  Restoraderm®, Periocycline®, Periostatus® and Periostat-MR®.


CollaGenex  International, Ltd. - European Community and United Kingdom trademarks:


CollaGenex®, PS20®, Dermastat®, Periostan®, Periostat-SR®, C Logo®  and The Whole Mouth Treatment Logo®.


CollaGenex  International, Ltd. - European Community Trademarks:


Periocycline, Restoraderm, and Periostat-MR.





Marks listed herein may additionally be  registered in jurisdictions not specified in the above list.  All other trade names, trademarks or service  marks appearing in this Quarterly Report are the property of their respective owners  and are not property of CollaGenex Pharmaceuticals, Inc. or any of our  subsidiaries.





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PART I.   FINANCIAL  INFORMATION





Item 1.   Financial  Statements (unaudited).





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COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES





Condensed Consolidated Balance Sheets


June 30, 2005 and December 31, 2004


(dollars in thousands, except share data)





|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | June 30,    2005 |             | December 31,     2004 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | --------------------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  | (unaudited) |                       |  
|Assets                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                  |             |                       |  
|Current assets:                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                  |             |                       |  
|Cash and cash    equivalents                                                                                                                                                                                                                                                                                                                                                                                                                         |  | $                | 15,971      |                       | $
|Short-term investments                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                  | 19,761      |                       |  
|Accounts receivable,    net of allowances of $585 and $483 at     June 30, 2005 and December 31, 2004, respectively                                                                                                                                                                                                                                                                                                                                  |  |                  | 5,791       |                       |  
|Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                  | 875         |                       |  
|Prepaid expenses and    other current assets                                                                                                                                                                                                                                                                                                                                                                                                         |  |                  | 1,898       |                       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  
|Total current assets                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  | 44,296      |                       |  
|Equipment and leasehold improvements, net                                                                                                                                                                                                                                                                                                                                                                                                            |  |                  | 427         |                       |  
|Acquired product rights, net                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                  | 871         |                       |  
|Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                  | 43          |                       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  
|Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | $                | 45,637      |                       | $
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  
|Liabilities and Stockholders    Equity                                                                                                                                                                                                                                                                                                                                                                                                              |  |                  |             |                       |  
|Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |             |                       |  
|Accounts payable                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | $                | 3,656       |                       | $
|Accrued expenses                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  | 8,105       |                       |  
|Preferred stock    dividend                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                  |            |                       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  
|Total current    liabilities                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                  | 11,761      |                       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  
|Other long-term liabilities                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                  | 106         |                       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  
|Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                  |             |                       |  
|Stockholders equity:                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                  |             |                       |  
|Preferred stock, $0.01    par value, 5,000,000 shares authorized;     200,000 shares of Series D cumulative convertible preferred  stock issued and outstanding at June 30,    2005 and December  31, 2004    (liquidation value of $20,827 and $20,800 respectively); 150,000 shares    of  Series A participating preferred    stock, $0.01 par value,  designated    and no shares issued and outstanding at June 30,  2005 and December 31, 2004 |  |                  | 2           |                       |  
|Common stock, $0.01 par    value; 25,000,000 shares authorized, 14,416,642 and 14,385,877 shares issued    and outstanding at  June 30, 2005 and December    31, 2004, respectively                                                                                                                                                                                                                                                                  |  |                  | 144         |                       |  
|Additional paid-in    capital                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                  | 106,052     |                       |  
|Accumulated other    comprehensive loss                                                                                                                                                                                                                                                                                                                                                                                                              |  |                  | (29         | )                     |  
|Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                  | (72,399     | )                     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  
|Total stockholders    equity                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                  | 33,770      |                       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  
|Total liabilities and    stockholders equity                                                                                                                                                                                                                                                                                                                                                                                                        |  | $                | 45,637      |                       | $
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                  |             |                       |  




See accompanying notes to  unaudited condensed consolidated financial statements.





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COLLAGENEX  PHARMACEUTICALS, INC.


AND SUBSIDIARIES





Condensed Consolidated Statements of Operations


For the Three Months Ended June 30, 2005 and 2004


(amounts in thousands, except share and per share data)  (unaudited)





|                                                                                                                     |  | Three    Months Ended June 30, |           
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ----------
|                                                                                                                     |  |                                |           
|                                                                                                                     |  | 2005                           |           
|                                                                                                                     |  |                                |           
|Revenues:                                                                                                            |  |                                |           
|Net product sales                                                                                                    |  | $                              | 6,872     
|Contract and license revenues                                                                                        |  |                                | 45        
|                                                                                                                     |  |                                |           
|Total revenues                                                                                                       |  |                                | 6,917     
|                                                                                                                     |  |                                |           
|Operating    expenses:                                                                                               |  |                                |           
|Cost of product sales (note 3)                                                                                       |  |                                | 1,701     
|Research and development                                                                                             |  |                                | 3,200     
|Selling, general and administrative  other                                                                          |  |                                | 6,510     
|Selling, general and administrative  restructuring (note 8)                                                         |  |                                | 1,184     
|                                                                                                                     |  |                                |           
|Total operating expenses                                                                                             |  |                                | 12,595    
|                                                                                                                     |  |                                |           
|Operating (loss) income                                                                                              |  |                                | (5,678    
|Other income    (expense):                                                                                           |  |                                |           
|Interest income                                                                                                      |  |                                | 264       
|Other (expense)
      income                                                                                         |  |                                | (1        
|                                                                                                                     |  |                                |           
|Net (loss) income                                                                                                    |  |                                | (5,415    
|Preferred    stock dividend                                                                                          |  |                                | 427       
|                                                                                                                     |  |                                |           
|Net (loss) income    allocable to common stockholders                                                                |  | $                              | (5,842    
|                                                                                                                     |  |                                |           
|Net (loss)    income per basic share allocable to common stockholders                                                |  | $                              | (0.41     
|                                                                                                                     |  |                                |           
|Weighted    average shares used in computing net (loss) income per basic share allocable    to common stockholders   |  |                                | 14,414,767
|                                                                                                                     |  |                                |           
|Net (loss)    income per diluted share allocable to common stockholders                                              |  | $                              | (0.41     
|                                                                                                                     |  |                                |           
|Weighted    average shares used in computing net (loss) income per diluted share allocable    to common stockholders |  |                                | 14,414,767
|                                                                                                                     |  |                                |           




See accompanying notes to unaudited condensed consolidated financial  statements.





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COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES





Condensed Consolidated  Statements of Operations


For the Six Months Ended  June 30, 2005 and 2004


(amounts in thousands,  except share and per share data)  (unaudited)





|                                                                                                                  |  | Six Months    Ended June 30, |           
|----------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----------
|                                                                                                                  |  |                              |           
|                                                                                                                  |  | 2005                         |           
|                                                                                                                  |  |                              |           
|Revenues:                                                                                                         |  |                              |           
|Net product sales                                                                                                 |  | $                            | 18,708    
|Contract and license    revenues                                                                                  |  |                              | 244       
|                                                                                                                  |  |                              |           
|Total revenues                                                                                                    |  |                              | 18,952    
|                                                                                                                  |  |                              |           
|Operating expenses:                                                                                               |  |                              |           
|Cost of product sales    (note 3)                                                                                 |  |                              | 4,166     
|Research and    development                                                                                       |  |                              | 7,294     
|Selling, general and    administrative  other                                                                    |  |                              | 14,256    
|Selling, general and    administrative  legal settlement (note 6)                                                |  |                              |          
|Selling, general and    administrative  restructuring (note 8)                                                   |  |                              | 1,184     
|                                                                                                                  |  |                              |           
|Total operating    expenses                                                                                       |  |                              | 26,900    
|                                                                                                                  |  |                              |           
|Operating (loss) income                                                                                           |  |                              | (7,948    
|Other income (expense):                                                                                           |  |                              |           
|Interest income                                                                                                   |  |                              | 476       
|Other expense                                                                                                     |  |                              | (1        
|                                                                                                                  |  |                              |           
|Net (loss) income                                                                                                 |  |                              | (7,473    
|Preferred stock dividend                                                                                          |  |                              | 827       
|                                                                                                                  |  |                              |           
|Net (loss) income allocable to common stockholders                                                                |  | $                            | (8,300    
|                                                                                                                  |  |                              |           
|Net (loss) income per basic share allocable to    common stockholders                                             |  | $                            | (0.58     
|                                                                                                                  |  |                              |           
|Weighted average shares used in computing net (loss)    income per basic share allocable to common stockholders   |  |                              | 14,409,719
|                                                                                                                  |  |                              |           
|Net (loss) income per diluted share allocable to    common stockholders                                           |  | $                            | (0.58     
|                                                                                                                  |  |                              |           
|Weighted average shares used in computing net (loss)    income per diluted share allocable to common stockholders |  |                              | 14,409,719
|                                                                                                                  |  |                              |           




See accompanying notes to  unaudited condensed consolidated financial statements.





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COLLAGENEX PHARMACEUTICALS, INC.


AND SUBSIDIARIES





Condensed Consolidated  Statements of Cash Flows


For the Six Months Ended  June 30, 2005 and 2004


(dollars in thousands)


(unaudited)





|                                                                                               |  | Six Months    Ended June 30, |        
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                                               |  |                              |        
|                                                                                               |  | 2005                         |        
|                                                                                               |  |                              |        
|Cash flows from operating activities:                                                          |  |                              |        
|Net (loss) income                                                                              |  | $                            | (7,473 
|Adjustments to    reconcile net income to net cash (used in) provided by operating activities: |  |                              |        
|Write-down of inventory    (note 3)                                                            |  |                              | 979    
|Write-down of fixed    assets (note 8)                                                         |  |                              | 96     
|Depreciation and    amortization expense                                                       |  |                              | 464    
|Accounts receivable    provisions                                                              |  |                              | 102    
|Changes in operating    assets and liabilities:                                                |  |                              |        
|Accounts receivable                                                                            |  |                              | 1,090  
|Inventories                                                                                    |  |                              | 838    
|Prepaid expenses and    other assets                                                           |  |                              | 198    
|Accounts payable                                                                               |  |                              | (661   
|Accrued expenses                                                                               |  |                              | 2,670  
|Other non-current    liabilities                                                               |  |                              | (98    
|                                                                                               |  |                              |        
|Net used in operating    activities                                                            |  |                              | (1,795 
|                                                                                               |  |                              |        
|Cash flows from investing activities:                                                          |  |                              |        
|Capital expenditures                                                                           |  |                              | (196   
|Purchase of in-process    research and development                                             |  |                              | (150   
|Purchase of short-term    investments                                                          |  |                              | (16,011
|Sale of short-term    investments                                                              |  |                              | 22,998 
|                                                                                               |  |                              |        
|Net cash provided by    (used in) investing activities                                         |  |                              | 6,641  
|                                                                                               |  |                              |        
|Cash flows from financing activities:                                                          |  |                              |        
|Net proceeds from    issuance of common stock                                                  |  |                              | 36     
|Payment of preferred    dividends                                                              |  |                              | (800   
|                                                                                               |  |                              |        
|Net cash (used in)    provided by financing activities                                         |  |                              | (764   
|                                                                                               |  |                              |        
|Net increase (decrease)    in cash and cash equivalents                                        |  |                              | 4,082  
|Cash and cash equivalents at beginning of period                                               |  |                              | 11,889 
|                                                                                               |  |                              |        
|Cash and cash equivalents at end of period                                                     |  | $                            | 15,971 
|                                                                                               |  |                              |        




See accompanying notes to  unaudited condensed consolidated financial statements.





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COLLAGENEX PHARMACEUTICALS, INC.  AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  June 30, 2005 and 2004  (dollars in thousands, except per share data)  (Unaudited)





Note 1 -- Basis of Presentation





The
    unaudited condensed consolidated financial statements included herein have
    been prepared by CollaGenex Pharmaceuticals, Inc. and subsidiaries (the Company),
    pursuant to the rules and regulations of the Securities and Exchange Commission
    and in accordance with accounting principles generally accepted in the United
    States of America.  Certain information and  footnote disclosures normally
    included in the annual consolidated financial statements prepared in accordance
    with accounting principles generally accepted in the United States of America
    have been condensed or omitted pursuant to such rules and the regulations
    of the Securities and Exchange Commission.  These
    unaudited condensed consolidated financial statements should be read in conjunction
    with the Companys 2004 audited consolidated financial statements and
    footnotes included in its Annual Report on Form 10-K for the year ended
    December 31,
2004.





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





Certain  amounts in the 2004 consolidated financial statements have been reclassified to  conform to the 2005 presentation.





In the  opinion of the Companys management, the accompanying unaudited condensed  consolidated financial statements have been prepared on a basis substantially  consistent with the audited consolidated financial statements for the year  ended December 31, 2004 and contain adjustments, all of which are of a  normal recurring nature, necessary to present fairly the Companys consolidated  financial position at June 30, 2005, the results of operations for the three  and six months ended June 30, 2005 and 2004, and the cash flows for the six  months ended June 30, 2005 and 2004.   Interim results are not necessarily indicative of results anticipated  for the full fiscal year.





The  preparation of consolidated financial statements in conformity with accounting  principles generally accepted in the United States requires management to make  estimates and assumptions that affect the amounts reported in the consolidated  financial statements and accompanying notes.   Actual results could differ from those estimates.





Historically,
    the Company has recognized all product sales revenue upon shipment to wholesale
    customers, net of estimated future returns, estimates for chargebacks, wholesale
    distribution fees, if applicable, rebates, generic introductions and current
    inventory levels in the distribution channel provided that collection was
    probable and no significant obligations remained.  Following
    the launch of a third party generic competitor to Periostat® in
    May 2005, and commencing with the second quarter of 2005, the Company now
    recognizes
    Periostat sales revenue primarily based on sales to end-users, which are
    estimated using prescription demand data generated by a leading independent
    prescription tracking service.





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Accordingly, since it is possible
    that the launch of generic competition to Periostat in May 2005 may increase
    the rate of product returns from the distribution channel, the Company has
    accrued $2,707 for potential Periostat returns on sales recognized prior
    to the launch of generic competition in Accrued Expenses on the Condensed
    Consolidated Balance Sheet at June 30, 2005.   (See note 9)





Upon
    the launch of a third party generic equivalent to Periostat, the Companys
    agreement with United Research Laboratories/Mutual Pharmaceutical Company,
    Inc. (Mutual) provides for rebates to be paid to Mutual to compensate
    Mutual and its customers for price erosion on the value of certain of its
    inventories of Mutuals branded version of Periostat.   Accordingly,
    the Company has deferred revenues associated with such shipments of these
    products until such future time as the selling price becomes fixed and determinable.  At
    June 30, 2005, the Companys Condensed Consolidated Balance Sheet included
    $108 in deferred revenue associated with sales of Mutuals branded version
    of Periostat.  (See note 9)





The Company  recognizes all other product sales revenue (excluding Periostat and Mutuals  branded version of Periostat) upon shipment, net of estimated returns, rebates,  chargebacks and wholesale distribution fees, if applicable, provided that  collection is determined to be probable and no significant obligations remain.





Pursuant to  the Companys Promotion and Cooperation Agreement (the Promotion Agreement)  with Primus Pharmaceuticals, Inc. (Primus), contract revenues for Novacort,  a prescription topical steroid and anesthetic, and Alcortin, a  prescription topical antifungal steroid combination, are fee-based arrangements  where contract revenue is earned as prescriptions are filled and recognized as  a percentage of the gross profit earned by Primus.  The Company does not take title to the inventory sold by Primus  under the Promotion Agreement.





Recently Issued Accounting Standards





In December  2004, the Financial Accounting Standards Board (the FASB) issued SFAS No. 123  (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No.  123, (SFAS No. 123) Accounting for Stock  Based Compensationand supercedes APB Opinion No. 25 (Opinion No.  25) Accounting for Stock Issued to  Employees.  SFAS 123R  requires all share-based payments to employees to be recognized in the  financial statements based on their fair values.  Share-based payments include grants of employee stock options and  liabilities that are based on the fair value of the Companys equity  instruments or that may be settled by the issuance of such equity  instruments.  The pro forma disclosures  previously permitted under SFAS 123 may no longer be provided in lieu of  recording these
payments in the Companys financial statements.





The
    Company is required to adopt SFAS 123R no later than January 1, 2006, and
    the Company expects this adoption to have a material effect on its results
    of operations and earnings per share.  The Company has not  yet determined
    its method of adopting SFAS 123R and whether it will result in amounts that
    are similar to the current pro forma disclosures under SFAS No. 123 in Note
    1 to these Condensed Consolidated Financial Statements.





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In
    November 2004, the FASB issued SFAS No. 151, *Inventory Costs -
    An amendment of ARB No. 43, Chapter 4* (SFAS No. 151).  SFAS  No.
    151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
    clarify the accounting for abnormal amounts of idle facility expense, freight,
    handling costs and wasted material (spoilage).   Among other provisions,
    the new rule requires that items such as idle facility expense, extensive
    spoilage, double freight and rehandling costs be recognized as current period
    charges regardless of whether they meet the criterion of so abnormal as
    stated in ARB No. 43.  Additionally, SFAS No. 151 requires the allocation
    of fixed production overheads to the costs of conversion be based on the
    normal capacity of the production facilities.  SFAS No.  151 is effective
    for fiscal years beginning after June  15, 2005 and is required to be adopted
    by the Company in the first quarter of 2006.  The Company is currently
    evaluating the impact, if any, that SFAS No. 151 will have on the results
    of operations and financial position of the Company.





Cash, Cash Equivalents and Short-term Investments





The Company  considers all highly liquid investments with a maturity of three months or less  at the date of acquisition to be cash equivalents.  Cash equivalent investments are held at amortized cost, which  approximates fair value.  The Companys  short-term investments are primarily composed of commercial paper and  government notes.  At June 30, 2005, all  of the Companys short-term investments, carried at fair value, were classified  as available-for-sale with unrealized gains and losses included as a separate  component of equity.  The gross  unrealized loss on short-term investments was $29 at June 30, 2005.





StockBased
        Compensation





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





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





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|                                                                                   |  | Three Months Ended June 30, |        | Six Months Ended June 30, |  
|---------------------------------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- | -
|                                                                                   |  |                             |        |                           |  
|                                                                                   |  | 2005                        |        | 2004                      |  
|                                                                                   |  |                             |        |                           |  
|Net (loss) income allocable to common stockholders:                                |  |                             |        |                           |  
|As reported                                                                        |  | $                           | (5,842 | )                         | $
|Less: Stock-based    employee compensation under fair value based method           |  |                             | (737   | )                         |  
|                                                                                   |  |                             |        |                           |  
|Pro forma net (loss)    income                                                     |  | $                           | (6,579 | )                         | $
|                                                                                   |  |                             |        |                           |  
|Basic and diluted net (loss) income per share    allocable to common stockholders: |  |                             |        |                           |  
|As reported                                                                        |  | $                           | (0.41  | )                         | $
|                                                                                   |  |                             |        |                           |  
|Pro forma net (loss)    income                                                     |  | $                           | (0.46  | )                         | $
|                                                                                   |  |                             |        |                           |  
|                                                                                   |  |                             |        |                           |  




Note 2 -- Customer and Product  Concentrations





A majority  of the Companys revenue has historically been derived from a small number of  wholesale drug distributors and Mutual.   For the six months ended June 30, 2005, sales to Cardinal Health, Inc.,  McKesson Corporation, Amerisource Bergen Corporation and Mutual, represented  approximately 32%, 19%, 11% and 29%,  respectively, of the Companys aggregate net product sales.  For the six months ended June 30, 2004,  sales to Cardinal Health, Inc., McKesson Corporation, Amerisource Bergen  Corporation and Mutual represented approximately 34%, 25%, 16% and 17% of the  Companys aggregate net product sales.





During the  six months ended June 30, 2005, Periostat and Mutuals branded version of  Periostat accounted for approximately 83% of the Companys total net  revenues.  During the six months ended  June 30, 2004, Periostat and Mutuals branded version of Periostat accounted  for approximately 90% of the Companys total net revenues.





Note 3 -- Inventories





Inventories  at June 30, 2005 and December 31, 2004 consist of the following:





|                |  | 2005 |     | 2004 |  
|--------------- |  | ---- | --- | ---- | -
|                |  |      |     |      |  
|Raw materials   |  | $    | 138 |      | $
|Work-in-process |  |      | 185 |      |  
|Finished goods  |  |      | 552 |      |  
|                |  |      |     |      |  
|                |  | $    | 875 |      | $
|                |  |      |     |      |  




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During
    the six month period ended June 30, 2005, the Company recorded a charge to
    cost of product sales of $979 for excess inventory
    of Periostat and Mutuals
    branded version of Periostat.  The charge was  the result of decreased
    demand for Periostat and the termination of the Companys License and
    Supply Agreement with Mutual both of which resulted from the introduction
    of a third party generic version of Periostat in May 2005.





Note 4 -- Line of Credit





On June 7,  2004, the Company entered into a Loan Modification Agreement with Silicon  Valley Bank to renew and amend its revolving credit facility.  The amended credit facility expires on  May 31, 2006.  Under the amended  credit facility, the Company may borrow up to the lesser of $5,000 or 80% of  eligible accounts receivable, as defined under the amended credit facility.  The amount available to the Company is reduced  by any outstanding letters of credit which may be issued under the amended  credit facility in amounts totaling up to $2,000.  As the Company pays down amounts under any letter of credit, the  amount available to it under the credit facility increases.  The Company is not obligated to draw down  any amounts under the amended credit facility and any borrowings shall bear  interest, payable monthly, at the current prime rate.  As of June 30, 2005,
the  Company had no borrowings or letters of credit outstanding.





Note 5 -- Contract and License  Revenues





The Company  recorded $244 and $151 in  contract and licensing revenues for the six months ended June 30, 2005 and June  30, 2004, respectively.  During the six  months ended June 30, 2005, $160 of license revenue was recorded to  reflect the unamortized portion of upfront license revenue from the License and  Supply Agreement with  Showa Yakuhin Kako Co., Ltd., which was terminated in March 2005.





Note 6 -- Legal Settlements and  Proceedings





On April 8,  2004, the Company announced that it had settled all pending litigation between  the Company and Mutual.  In the  settlement, the Company paid to Mutual $2,000, which was recorded during the  three month period ended March 31, 2004.





In connection  with the settlement, the Company and Mutual entered into a License and Supply  Agreement pursuant to which Mutual would purchase a branded version of  Periostat from the Company at prices below the Companys average manufacturers  price, and received a license to sell a branded version of Periostat.  Pursuant to the Agreement the Company agreed  to provide price adjustments to Mutual after a generic version of Periostat  became available on the market at a price lower than the selling price of  Mutuals branded version of Periostat.   These adjustments take the form of rebates or credits to Mutual to  reduce the acquisition cost of the branded version of Periostat in Mutuals  inventory or to offset rebates and similar retroactive price adjustments  requested by, and actually provided by, Mutual to its customers.





On
    May 13, 2005, the FDA approved a third party generic version of Periostat
    and a third party generic product was launched in late May 2005.  Upon
    this generic launch, Mutual was no longer obligated to purchase their branded
    version of Periostat from the Company.





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As a result, the Company will pay Mutual approximately  $1,066 as an adjustment related to price protection on Mutuals branded version  of Periostat.  Net product sales for the  three months ended June 30, 2005 reflect a $1,000 reduction in revenue for such  price protection.  As of June 30, 2005,  the Company has recorded deferred revenue of $108 related to sales to Mutual  for which the final selling price is not fixed and determinable as the final  sale and ultimately the price protection rebates have not yet been made by  Mutual.  (See note 9)





In June  2003, the Company commenced an action and filed a motion for a preliminary  injunction in the United States District Court for the District of Columbia  challenging the FDAs decision to treat Periostat as an antibiotic drug, thus  denying Periostat certain protections afforded non-antibiotic drugs under the  Food, Drug, and Cosmetic Act and against FDA approval of generic copies of  Periostat (the FDA  Litigation).  On July 23, 2003,  the United States District Court for the District of Columbia issued an  injunction in favor of the Company.  On  January 20, 2005, the United States District Court for the District of Columbia  reached its decision on the merits of the FDA Litigation, and dissolved the  injunction that had prohibited the FDA from approving any Abbreviated New Drug  Applications, or ANDAs, submitted for any generic version of Periostat.  The
Company lodged, but has now withdrawn,  an appeal against this decision in the Court of Appeals for the District of  Columbia Circuit.





On October  1, 2004, the Company filed a complaint for patent infringement against IVAX  Pharmaceuticals Inc. (IVAX) and CorePharma LLC (CorePharma) in the United  States District Court for the Eastern District of New York.  In its complaint, the Company alleged that  the submission of ANDAs by each of IVAX and CorePharma for 20 mg tablets of doxycycline  hyclate infringed United States Patent RE 34,656, for which the Company is the  exclusive licensee.  The Company also  alleged that any manufacture, importation, marketing and sale of generic 20 mg  tablets of doxycycline hyclate by IVAX and CorePharma would infringe the RE  34,656 patent. The Company sought an injunction preventing  IVAX and CorePharma from introducing 20 mg tablets of doxycycline hyclate in  the United States.  The injunction was denied by the Court on  June 16, 2005.  The
litigation on the  merits of the Companys patent infringement claims is ongoing.





Note 7 -- Legal Expenses to Defend  Periostat Patents





Under
    the Companys license agreement with the Research Foundation of the
    State University of New York (SUNY) covering Periostat, the Company
    is entitled to deduct costs incurred to defend its patents, including the
    $2,000 settlement payment to Mutual in April 2004, from current and future
    royalties due to SUNY on net sales of Periostat and sales to Mutual of its
    branded
    version
    of Periostat.  The Company anticipates that its future legal costs in
    these matters relating to patent infringement and defense will be reimbursed
    by SUNY pursuant to its Technology License Agreement with SUNY to the extent
    that these legal expenses do not exceed royalties earned by SUNY during that
    period.  During the six months ended  June 30, 2005 and June 30, 2004,
    the Company incurred $1,062 and $2,867 respectively, in legal defense, litigation
    and settlement costs, of which $735 and $914,  respectively, were deducted
    from royalties payable to SUNY.  In the event such cumulative legal
    costs exceed the amount of the royalties payable to SUNY, the Company will
    not be able to recover such legal costs from SUNY.   The cumulative
    legal patent defense, litigation and settlement costs incurred as of June
    30, 2005 exceed the amount of the royalties earned and payable to SUNY by
    $4,266.  These amounts, which
    have been expensed, will be available to offset future royalties earned by
    SUNY, if any, on net sales of products based on the SUNY technology.





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Note 8  -- Sales Force Restructuring





On May 16,  2005, the Company announced the restructuring of the Companys sales force  following the FDAs approval of a third party generic version of  Periostat.  As a result of the  restructuring, the Company ceased all sales activities related to  Periostat.  The Company incurred a  $1,184 restructuring charge during the three months ended June 30, 2005.  Of this charge, $813 related to employee  severance costs while the remaining portion was primarily related to the  write-off of assets associated with the Companys dental sales and marketing activities  that could no longer be utilized by the Company.  As of June 30, 2005, $273 of the restructuring charge had not yet  been paid and is a component of accrued expenses on the Companys Condensed  Consolidated Balance Sheet.  (See note  9)





On April  22, 2004, the Company announced the restructuring of the Companys  pharmaceutical sales organization into dedicated dental and dermatology sales  forces. The
    Company incurred a $348 restructuring charge during the year ended December
31, 2004.  As of June 30, 2005, all of these costs have been paid by the Company.





Note 9 -- Accrued Expenses





Accrued expenses at June 30, 2005 and  December 31, 2004 consist of the following:





|                                                  |  | 2005 |       | 2004 |  
|------------------------------------------------- |  | ---- | ----- | ---- | -
|                                                  |  |      |       |      |  
|Contracted development and    manufacturing costs |  | $    | 2,410 |      | $
|Sales and marketing costs                         |  |      | 140   |      |  
|Payroll and related costs                         |  |      | 1,061 |      |  
|Professional and    consulting fees               |  |      | 212   |      |  
|Deferred
      revenue (notes 1 and 6)            |  |      | 153   |      |  
|Foreign taxes                                     |  |      | 945   |      |  
|Product
      returns (note 1)                    |  |      | 2,740 |      |  
|Miscellaneous taxes                               |  |      | 50    |      |  
|Restructuring expenses                            |  |      | 273   |      |  
|Other                                             |  |      | 121   |      |  
|                                                  |  |      |       |      |  
|                                                  |  | $    | 8,105 |      | $
|                                                  |  |      |       |      |  




Note 10 -- Promotion and Cooperation  Agreement





In
    June 2005, the Company entered into a Promotion and Cooperation Agreement
    with Primus, under which the Company will promote Alcortin, a prescription
    topical antifungal steroid combination, and Novacort, a prescription topical
    steroid and anesthetic.





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Under the  Promotion Agreement, the Company will receive a percentage of the gross profit  arising from prescriptions written by dermatologists that result in sales of  the products in the United States.  The  majority of marketing expenses, excluding sales force compensation and sample  product costs, related to the promotion of the Primus products will be funded  by Primus.  The majority of product sample  product costs and all sales force compensation will be funded by the  Company.





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





Our  managements discussion and analysis of our financial condition and results of  operations include the identification of certain trends and other statements  that may predict or anticipate future business or financial results that are  subject to important factors that could cause our actual results to differ  materially from those indicated.  See  Additional Risks That May Affect Results.





Overview





CollaGenex  Pharmaceuticals, Inc. and subsidiaries is a specialty pharmaceutical company  currently focused on developing and marketing innovative proprietary medical  therapies to the dermatology market.  We  currently market three prescription pharmaceutical products to the dermatology  market through our professional dermatology sales force.  Our marketed dermatology products are Pandel®,  a prescription corticosteroid we licensed from Altana, Inc. in May 2002,  Novacort, a prescription topical steroid and anesthetic, and Alcortin, a  prescription topical antifungal steroid combination.  We are promoting Novacort and Alcortin to dermatologists pursuant  to a Promotion and Cooperation Agreement executed in June 2005 with Primus  Pharmaceuticals, Inc. (Primus).





Prior to  the May 2005 introduction of a third party generic version of Periostat®,  our dental sales force detailed four prescription pharmaceutical products to  the dental market.  On May 20,  2005, we ceased all sales activities for these products.  We currently still generate sales from these  dental products, which all treat periodontal disease and include our own  product Periostat, as well as Atridox®, Atrisorb FreeFlow®  and Atrisorb-D® which are licensed from Atrix Laboratories, Inc.  (now known as QLT USA, Inc.) (the Atrix Products).  We had also sold a separately branded version of Periostat to  United Research Laboratories, Inc./Mutual Pharmaceutical Company, Inc.  (Mutual) pursuant to a License and Supply Agreement executed in April 2004 as  part of a settlement of our outstanding
patent litigation with Mutual.  As a result of the launch of a third party  generic version of Periostat in May 2005, Mutual is no longer obligated to  purchase product from us, and we do not anticipate future purchases from  Mutual.  Based on data provided by a  leading independent prescription tracking service, we estimate that Periostats  share of the 20 mg doxycycline market was approximately 34% during the month of  June 2005.  We anticipate Periostats  share of the market will continue to decrease as a result of the third party  introduction of a generic version of Periostat.





In
    addition to our marketed products, we have a pipeline of products in clinical
    and pre-clinical development.  These  products are based on our two
    proprietary platform technologies, IMPACS and  Restoraderm®.  IMPACS
    (Inhibitors of Multiple Proteases And CytokineS) are a group of compounds
    that demonstrate a range of anti-inflammatory activities as well as the ability
    to inhibit the breakdown of connective tissue.   Periostat is our first
    FDA-approved IMPACS product.  Periostat-MR is a once-a-day,  modified-release
    formulation of Periostat currently in a Phase III clinical trial for the
    treatment of adult periodontitis.  Oracea, which has the same
    active ingredient and modified delivery as Periostat-MR, recently completed
    two Phase III clinical trials for the treatment of rosacea, a dermatological
    condition.  Our New Drug
Application for Oracea was submitted to the FDA on  August 1, 2005.





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Col-3, a second generation IMPACS compound, has completed a Phase II proof-of-concept  clinical trial for the treatment of rosacea, and we anticipate beginning a  Phase II clinical study with Col-3 in acne patients during 2005.





Our  Restoraderm technology is a proprietary, foam-based, topical drug delivery  technology that originated from a Swedish collaborator.  We have acquired all rights, title and  interest to the Restoraderm technology and have committed to initiate the  development of five products based on this technology before the end of  2005.  We are currently developing  Restoraderm products for the treatment of acne and psoriasis.





Our  strategy is to become a leading developer and marketer of innovative  prescription pharmaceutical products to the dermatology and other specialty  pharmaceutical markets.  We intend to  continue to market our current products and develop and launch new products  based on our two proprietary platform technologies.  Our current focus is on the dermatology market, although we  intend to seek additional partnerships with third parties to develop potential  uses of our technology outside of our core focus.





We were  founded in 1992 and completed an initial public offering of our common stock in  1996.  We recorded our first profit in  the third quarter of 2002.  Although we  earned net income of $6.5 million and $6.4 million for the years ended  December 31, 2004 and 2003, respectively, we incurred a net loss allocable  to common stockholders of $8.3 million during the six months ended June 30,  2005 and we have an accumulated deficit of $72.4 million.  We do  not expect to generate profits for the year ended December 31, 2005.





Significant  Recent Developments





On October  1, 2004, we filed a complaint for patent infringement against IVAX Pharmaceuticals  Inc. (IVAX) and CorePharma LLC (CorePharma) in the United States District  Court for the Eastern District of New York.   In our complaint, we alleged that the submission of Abbreviated New Drug  Applications, or ANDAs, by each of IVAX and CorePharma for 20 mg tablets of  doxycycline hyclate infringed United States Patent RE 34,656, for which we are  the exclusive licensee.  We also alleged  that any manufacture, importation, marketing and sale of generic 20 mg tablets  of doxycycline hyclate by IVAX and CorePharma would infringe the RE 34,656  patent.  We sought an injunction  preventing IVAX and CorePharma from introducing 20 mg tablets of doxycycline  hyclate in the United States.  The injunction was denied by  the Court on June 16, 2005.  We intend  to
continue the litigation on the merits of the patent infringement and to seek  damages against IVAX and CorePharma.





On May 13, 2005, the FDA approved a third  party generic version of Periostat which was launched in late May 2005.  On May 16, 2005, we announced the restructuring of our sales force  following such approval.  As a result of  the restructuring, we ceased all sales activities related to Periostat and  incurred a $1.2 million restructuring charge during the three months ended June  30, 2005.





In June  2005, we entered into a Promotion and Cooperation Agreement with Primus, under  which we will promote Alcortin, a prescription topical antifungal steroid  combination and Novacort, a prescription topical steroid and anesthetic.  Under the Promotion Agreement, we will





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receive a percentage of the gross profit arising from prescriptions  written by dermatologists that result in sales of these products in the United  States.  The majority of marketing  expenses, excluding sales force compensation and sample product costs, related  to the promotion of the Primus products will be funded by Primus.  The majority of product sample product costs  will be funded by us.  We are also  responsible for the applicable sales force compensation of our employees for  such promotion.





In April  2005, we announced the favorable results of a double-blinded,  placebo-controlled Phase II clinical study designed to evaluate the safety and  efficacy of Col-3 for the treatment of rosacea.  Col-3 is a second-generation IMPACS compound that has  demonstrated a range of potent anti-inflammatory properties.





In June  2005, we announced the statistically significant positive outcomes of two Phase  III, double-blinded, placebo-controlled clinical trials designed to evaluate  the safety and efficacy of Oracea for the treatment of rosacea.





In August  2005, we announced the filing of a New Drug Application with the FDA for  Oracea, the first orally administered, systemically delivered drug to treat  rosacea.





In August  2005, we announced that the United States Patent and Trademark Office had  published on its website that U.S. Patent Application, serial no. 10/117,709,  had been allowed.  This patent covers  the use of sub-antimicrobial tetracyclines, including Oracea, for the treatment  of acne and acne rosacea.  This patent  application has a priority date of April 5, 2002 and an expiration date 20  years from that date.





Results of Operations





Three Months Ended June 30, 2005 Compared to  Three Months Ended June 30, 2004





Revenues





|Revenues    (dollars in thousands) |  | 2005 |       | Change |         | 2004 |  
|---------------------------------- |  | ---- | ----- | ------ | ------- | ---- | -
|                                   |  |      |       |        |         |      |  
|Net Product Sales                  |  | $    | 6,872 |        | (52.2)% |      | $
|Contract and License Revenues      |  |      | 45    |        | (38.4)% |      |  
|                                   |  |      |       |        |         |      |  
|Total                              |  | $    | 6,917 |        | (52.1)% |      | $




The
    decrease in net product sales during the three months ended June 30, 2005
    was primarily due to the launch of a third party generic competitor to Periostat
    and Mutuals
    branded version of Periostat in May 2005.  This generic launch had two
    primary effects in the second quarter of 2005.   First, we deferred
    approximately $2.3 million of Periostat revenues for product shipped during
    the second quarter of 2005
    due
    to our reduced ability to estimate future returns of product in the distribution
    channel following the launch of a third party generic competitor.  Second,
    we recorded a lower average selling price on sales to Mutual of its branded
    version of Periostat in accordance with our agreement, which requires us
    to compensate Mutual for price erosion experienced by Mutual and its customers
    on certain of their inventories.  This  lower average selling price
    reduced net product sales in the second quarter of 2005 by  approximately
    $1.0 million.   During the second quarter of 2005, Periostat and Mutuals
    branded version of Periostat accounted for 95% of the total dispensed prescriptions
    for the 20 mg doxycycline market compared to 100% in the second quarter of
    2004.





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Cost of Product Sales





|Cost of Product Sales    (dollars in thousands) |  | 2005 |       | Change |         | 2004 |  
|----------------------------------------------- |  | ---- | ----- | ------ | ------- | ---- | -
|                                                |  |      |       |        |         |      |  
|Cost of Product Sales                           |  | $    | 1,701 |        | (17.1)% |      | $
|Percent of Net Product Sales                    |  |      | 24.8  | %      | N/A     |      |  




Cost of product sales includes product packaging, third party  royalties, amortization of product licensing fees, and the costs associated  with the manufacturing, storage and stability of Periostat, Mutuals branded  version of Periostat, Pandel and the Atrix Products, as well as charges taken  to reflect a decrease in inventory carrying value, if any.





The  decrease in cost of products sales was primarily the result of lower net  product sales.  Cost of product sales  also included a charge of approximately $117,000 associated with excess  inventories of certain raw materials used to manufacture both Periostat and  Mutuals branded version of Periostat following the launch by a third party  generic competitor.  Cost of product  sales also increased as a percentage of net product sales as a result of lower  average selling prices to Mutual during the second quarter of 2005 as compared  to the second quarter of 2004.





Research and Development





|Research and Development     (dollars in thousands) |  | 2005 |       | Change |       | 2004 |  
|--------------------------------------------------- |  | ---- | ----- | ------ | ----- | ---- | -
|                                                    |  |      |       |        |       |      |  
|Research and development                            |  | $    | 3,200 |        | 30.2% |      | $




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





Significant  development projects conducted during the three months ended June 30, 2005  included:





| |  | our continuing clinical and manufacturing    development work for Oracea, our once daily, modified release formulation of    doxycycline, 40 mg, for the treatment of rosacea, which accounted for total    costs of approximately $937,000;                                  
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                               
| |  | our continuing clinical and manufacturing    development and formulation work for Periostat-MR, our once daily, modified    release formulation of doxycycline, 40 mg, for the treatment of adult    periodontitis, which accounted for total costs of approximately $502,000;
| |   |                                                                                                                                                                                                                                                                               
| |  | our clinical and manufacturing development work for    Col-3, a second generation IMPACS compound, totaling $698,000; and                                                                                                                                                     




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| |  | stability testing and formulation costs for two    potential products utilizing our Restoraderm technology, which accounted for    total costs of approximately $255,000.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------




We estimate  that if Oracea, Periostat-MR, Col-3 and our Restoraderm acne and psoriasis  products are developed to the point of market launch, the additional  formulation and clinical development expenses and milestones fees would be in  the range of $25.0 million to $30.0 million.





Significant  development projects conducted during the three months ended June 30, 2004  included:





| |  | our continuing clinical and manufacturing    development work for Oracea, our once daily, modified release formulation of    doxycycline, 40 mg, for the treatment of rosacea, which accounted for total    costs of approximately $1.0 million; and                          
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                               
| |  | our continuing clinical and manufacturing    development and formulation work for Periostat-MR, our once daily, modified    release formulation of doxycycline, 40 mg, for the treatment of adult    periodontitis, which accounted for total costs of approximately $335,000.




Selling, General and Administrative





|Selling, General and Administrative    (dollars in thousands) |  | 2005 |       | Change |         | 2004 |  
|------------------------------------------------------------- |  | ---- | ----- | ------ | ------- | ---- | -
|                                                              |  |      |       |        |         |      |  
|Selling, General and Administrative  other                   |  | $    | 6,510 |        | (13.5)% |      | $
|Selling, General and Administrative  restructuring           |  |      | 1,184 |        | 146.7%  |      |  
|                                                              |  |      |       |        |         |      |  
|Total                                                         |  | $    | 7,694 |        | (3.9)%  |      | $




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





Significant  components of selling, general and administrative  other expenses incurred  during the three months ended June 30, 2005 included approximately  $2.8 million in direct selling and sales training expenses, approximately  $1.9 million in marketing expenses (including advertising and promotion  expenditures for Periostat, the Atrix Products, the Primus products and Pandel)  and approximately $1.8 million in general and administrative expenses, which  include business development, finance, legal and corporate activities.  Significant components of selling, general  and administrative  other expenses incurred during the three months ended  June 30, 2004 included approximately $3.8 million in direct selling  and sales training expenses, approximately $2.1 million in marketing  expenses (including advertising and promotion expenditures for Periostat, the
 Atrix Products, and Pandel) and approximately $1.6 million in general and  administrative expenses, which include business development, finance, legal and  corporate activities.  The decrease in  selling, general and administrative  other expenses during





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the three months ended June 30, 2005
    compared to the three months ended June 30, 2004 is primarily attributable
    to decreased personnel costs of $853,000 as a result of the April 2004 sales
    force restructuring and the May 2005 termination of our dental sales and
    marketing activities and the corresponding
    reduction
    of 63 employees, including our dental sales force, which was partially offset
    by an increase of $170,000 in patent litigation costs.





Selling,  general and administrative  restructuring
    during the three months ended June 30, 2005 consisted of a $1.2 million charge
    related to a reorganization following the approval of a third party generic
version of Periostat.  As a result of the restructuring, we ceased  all sales activities related to Periostat and our dental franchise.  Selling, general and  administrative  restructuring during the three months ended  June 30, 2004 consisted of a charge of $480,000 that resulted from a  the strategic realignment of our sales organization into dedicated dental and  dermatology sales forces.





Other Income/Expense





|Other Income/Expense    (dollars in thousands) |  | 2005 |     | Change |          | 2004 |  
|---------------------------------------------- |  | ---- | --- | ------ | -------- | ---- | -
|                                               |  |      |     |        |          |      |  
|Interest income                                |  | $    | 264 |        | 282.6%   |      | $
|Other income (expense)                         |  | $    | (1  | )      | (133.3)% |      | $




The  increase in other income was due to higher average investment balances as well  as higher average investment yields.





Preferred Stock Dividend





Preferred  stock dividends included in net income allocable to common stockholders were  $427,000 during the three months ended June 30, 2005 and $400,000 during  the three months ended June 30, 2004.   Such preferred stock dividends were paid in cash and are the result of  our obligations in connection with the issuance of our Series D preferred  stock in May 1999.





Six Months Ended June 30, 2005 Compared to Six  Months Ended June 30, 2004





Revenues





|Revenues    (dollars in thousands) |  | 2005 |        | Change |         | 2004 |  
|---------------------------------- |  | ---- | ------ | ------ | ------- | ---- | -
|                                   |  |      |        |        |         |      |  
|Net Product Sales                  |  | $    | 18,708 |        | (32.5)% |      | $
|Contract and License Revenues      |  |      | 244    |        | (61.6)% |      |  
|                                   |  |      |        |        |         |      |  
|Total                              |  | $    | 18,952 |        | (32.0)% |      | $




Revenues
    during the six month period ending June 30, 2005 included approximately $18.7 million
    in net product sales of Periostat, Mutuals branded version  of Periostat,
    Pandel and the Atrix Products and $244,000 in contract and license revenues,
    which were derived from residual contract revenues from our expired agreement
    with Merck & Co., Inc. for Vioxx®, contract revenues from our promotion and
    cooperation agreement with Primus and international licensing revenues for
    Periostat.  During
    the six months ended June 30, 2005, $160,000 of contract and license revenue
    was recorded to reflect the elimination of any continuing involvement related
    to the





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upfront license revenue, received
    in 2000, from the License and Supply Agreement with Showa Yakuhin Kako Co.,
    Ltd. which was terminated in March 2005.  The decrease in net product
    sales was primarily due to the launch of a third party generic competitor
    to Periostat and Mutuals branded version of Periostat in May 2005.  This
    generic launch had two primary effects during the six month period ended
    June 30, 2005.  First,
    we deferred approximately $2.3 million of Periostat revenues for product
    shipped during the second quarter of 2005 due to our reduced ability to estimate
    future
    returns
    of product in the distribution channel following the launch of a third party
    generic competitor.  Second,  we recorded a lower average selling price
    on sales to Mutual of its branded version of Periostat in accordance with
    our agreement, which requires us to compensate Mutual for price erosion experienced
    by Mutual and its customers on certain of their
inventories.  This  lower average selling price reduced net product sales
in the second quarter of 2005 by approximately $1.0 million.  During  the
six month period ended June 30, 2005, Periostat and Mutuals branded  version
of Periostat accounted for approximately 98% of the total dispensed prescriptions
for the 20 mg doxycycline market compared to 100% for the six month period ended
June 30, 2004.





Cost of Product Sales





|Cost of Product Sales    (dollars in thousands) |  | 2005 |       | Change |      | 2004 |  
|----------------------------------------------- |  | ---- | ----- | ------ | ---- | ---- | -
|                                                |  |      |       |        |      |      |  
|Cost of Product Sales                           |  | $    | 4,166 |        | 2.8% |      | $
|Percent of Net Product Sales                    |  |      | 22.3  | %      | N/A  |      |  

Cost of product sales includes product packaging, third party  royalties, amortization of product licensing fees, and the costs associated  with the manufacturing, storage and stability of Periostat, Mutuals branded  version of Periostat, Pandel and the Atrix Products, as well as charges taken  to reflect a decrease in inventory carrying value, if any.





Cost
    of product sales  for the six months ended June 30, 2005 includes a charge
    of approximately $979,000 associated
with the estimated excess inventories of Periostat and Mutuals branded
version of Periostat as a result of the launch by a third party generic competitor.  Cost
of product sales also increased as a percentage of net product sales as a result
of lower average selling prices to Mutual during the six month period ended June
30, 2005 as compared to the six month period ended June 30, 2004.





Research and Development





|Research and Development    (dollars in thousands) |  | 2005 |       | Change |       | 2004 |  
|-------------------------------------------------- |  | ---- | ----- | ------ | ----- | ---- | -
|                                                   |  |      |       |        |       |      |  
|Research and development                           |  | $    | 7,294 |        | 89.7% |      | $




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





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Significant  development projects conducted during the six months ended June 30, 2005  included:





| |  | our continuing clinical and manufacturing    development work for Oracea, our once daily, modified release formulation of    doxycycline, 40 mg, for the treatment of rosacea, which accounted for total    costs of approximately $3.2 million;                                  
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                   
| |  | our continuing clinical and manufacturing    development and formulation work for Periostat-MR, our once daily, modified    release formulation of doxycycline, 40 mg, for the treatment of adult    periodontitis, which accounted for total costs of approximately $1.0 million;
| |   |                                                                                                                                                                                                                                                                                   
| |  | our clinical and manufacturing development work for    Col-3, a second generation IMPACS compound, totaling $1.2 million; and                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                   
| |  | stability testing and formulation costs for two    potential products utilizing our Restoraderm technology, which accounted for    total costs of approximately $503,000.                                                                                                         




We estimate  that if Oracea, Periostat-MR, Col-3 and our Restoraderm acne and psoriasis  products are developed to the point of market launch, the additional  formulation and clinical development expenses and milestones fees would be in  the range of $25.0 million to $30.0 million.





Significant  development projects conducted during the six months ended June 30, 2004  included:





| |  | our continuing clinical and manufacturing    development work for Oracea, our once daily, modified release formulation of    doxycycline, 40 mg, for the treatment of rosacea, which accounted for total    costs of approximately $1.1 million;                                  
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                   
| |  | our continuing clinical and manufacturing    development and formulation work for Periostat-MR, our once daily, modified    release formulation of doxycycline, 40 mg, for the treatment of adult    periodontitis, which accounted for total costs of approximately $583,000; and
| |   |                                                                                                                                                                                                                                                                                   
| |  | a Phase III clinical trial to evaluate Periostat for    the treatment of rosacea, which accounted for total costs of approximately $418,000.                                                                                                                                      




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Selling, General and Administrative





|Selling, General and Administrative    (dollars in thousands) |  | 2005 |        | Change |         | 2004 |  
|------------------------------------------------------------- |  | ---- | ------ | ------ | ------- | ---- | -
|                                                              |  |      |        |        |         |      |  
|Selling, General and Administrative  other                   |  | $    | 14,256 |        | (8.9)%  |      | $
|Selling, General and Administrative  legal    settlement     |  |      |       |        | N/A     |      |  
|Selling, General and Administrative  restructuring           |  | $    | 1,184  |        | 146.7%  |      |  
|                                                              |  |      |        |        |         |      |  
|Total                                                         |  | $    | 15,440 |        | (14.8)% |      | $




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





Significant
    components of selling, general and administrative  other expenses incurred
    during the six months ended June 30, 2005 included approximately  $6.6 million
    in direct selling and sales training expenses, approximately $3.8 million
    in marketing expenses (including advertising and promotion expenditures for
    Periostat, the Atrix Products, the Primus products and Pandel) and approximately
    $3.9 million in general and administrative expenses,  which include
    business development, finance, legal and corporate activities.  Significant
    components of selling, general and administrative  other expenses incurred
    during the six months ended June 30, 2004 included approximately $8.2
    million in direct selling and sales training expenses, approximately $4.1 million
    in marketing expenses (including advertising and promotion expenditures for
    Periostat, the  Atrix Products and Pandel and co-promotion expenses relating
    to Vioxx and AVARTM), and approximately
    $3.3 million in general and
     administrative expenses, which include business development, finance, legal
    and corporate activities.  The decrease in  selling, general and administrative
    -- other expenses during the six months ended June 30, 2005 compared to the
    six months ended June 30, 2004 was primarily attributable to decreased personnel
    costs of $1.4 million as a result of the April 2004 sales force restructuring
    and the May 2005 termination of our dental sales and marketing activities
    and the corresponding
    reduction of 63 employees, including our dental sales force, which was partially
    offset by an increase of $575,000 in patent litigation costs.





Selling,  general and administrative  legal settlement consisted of  $2.0 million during the three months ended June 30, 2004 that resulted  from the accrual for a one-time payment to Mutual in connection with the  settlement of all outstanding litigation between us and Mutual.





Selling,
    general and administrative  restructuring
    during the six months ended June 30, 2005 consisted of a $1.2 million charge
    related to a reorganization following the approval of a third party generic
version of Periostat.  As a result of the restructuring, we ceased all sales
activities related to Periostat and our dental franchise.  Selling, general
and administrative   restructuring during the six months ended June 30,
2004 consisted of $480,000 that resulted from a charge related to the reorganization
of our sales organization into dedicated dental and dermatology sales forces.





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Other Income/Expense





|Other Income/Expense    (dollars in thousands) |  | 2005 |     | Change |        | 2004 |  
|---------------------------------------------- |  | ---- | --- | ------ | ------ | ---- | -
|                                               |  |      |     |        |        |      |  
|Interest income                                |  | $    | 476 |        | 240.0% |      | $
|Other expense                                  |  | $    | (1  | )      | 100%   |      | $




The  increase in interest income was due to higher average investment balances in  2005, as well as higher average investment yields.





Preferred Stock Dividend





Preferred  stock dividends included in net income allocable to common stockholders were  $827,000 during the six months ended June 30, 2005 and $800,000 during the  six months ended June 30, 2004.   Such preferred stock dividends are the result of our obligations in  connection with the issuance of our Series D preferred stock in May 1999.





Liquidity and Capital Resources





Cash Requirements/Sources and Uses  of Cash





We require cash to fund our operating  expenses, capital expenditures and dividend payments on our outstanding  Series D preferred stock.  We have historically funded our cash  requirements primarily through the following:





| |  | Public offerings and private placements of our    preferred and common stock;
| | - | -----------------------------------------------------------------------------
| |   |                                                                              
| |  | Cash from operations; and                                                    
| |   |                                                                              
| |  | Exercise of stock options and warrants.                                      




We believe  that other key factors that could affect our ability to maintain and draw on  internal and external sources of cash are:





| |  | The success of our dermatology franchise;                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                  
| |  | The success of our pre-clinical, clinical and    development programs;                                                           
| |   |                                                                                                                                  
| |  | Market penetration by third party generic    manufacturers of a generic version of Periostat;                                    
| |   |                                                                                                                                  
| |  | Revenues and profits from sales of Periostat and our    other product candidates, as well as the products we co-promote;         
| |   |                                                                                                                                  
| |  | Our ability to continue to meet the covenant    requirements under our revolving credit facility with Silicon Valley Bank;    and




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| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | The state of the capital markets generally and, in    particular, the receptivity of the capital markets to our future financings.




On  June 7, 2004, we entered into a Loan Modification Agreement with Silicon  Valley Bank to renew and amend our revolving credit facility, which had expired  on March 15, 2004.  The amended  credit facility expires on May 31, 2006.   Under the amended credit facility, we may borrow up to the lesser of  $5.0 million or 80% of eligible accounts receivable, as defined under the  amended credit facility.  The amount  available to us is reduced by any outstanding letters of credit which may be  issued under the amended credit facility in amounts totaling up to $2.0  million.  As we pay down amounts under  any letter of credit, the amount available to us under the credit facility  increases.  We are not obligated to draw  amounts under the amended credit facility and any borrowings shall bear  interest, payable monthly, at the current prime rate.  As of June
30, 2005, we  had no outstanding borrowings or letters of credit.





At June 30,  2005, we had cash, cash equivalents and short-term investments of approximately  $35.7 million, a decrease of  $2.9 million compared to the approximately $38.6 million balance at  December 31, 2004.  This decrease is  primarily attributable to our operating loss during the six months ended June  30, 2005 offset in part by cash receipts from revenues which were deferred,  collection of our trade receivables and a reduction in our inventory  levels.  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 government notes, commercial  paper and money market funds.  Our  working capital at June 30, 2005 was $32.5  million compared to $39.7 million at December 31, 2004.  During the six months ended June 30, 2005,  we invested approximately $196,000  in
capital expenditures, paid $800,000  in cash dividends to the holders of our Series D preferred stock and  liquidated approximately $7.0 million (net of purchases) of short-term  investments.





As
    of June 30, 2005 we had approximately $3.9 million in outstanding accounts
    receivable due from Mutual all of which is due in the third quarter of
2005.





Cash Flows/Cash Management





The  principal use of cash in operating activities in the three months ended June  30, 2005 was the payment of operating expenses and related working capital  liabilities.  Cash flows from operations  can vary significantly due to various factors including the timing of payments  made to our vendors, vendor payment terms, customer mix and customer payment  terms.





Investing
    activities during the six months ended June 30, 2005 consisted primarily
    of purchases and sales of short-term investments. Financing activities during
    the six months ended June 30, 2005 consisted primarily of the payment of
preferred dividends to our Series D preferred stockholders.





Contractual Obligations





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





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we are currently detailing.  The  disclosures relating to our contractual obligations in our Annual Report on  Form 10-K for the year ended December 31, 2004 have not materially changed  since we filed that report.





Critical  Accounting Policies and Estimates





Managements
    discussion and analysis of its financial position and results of operations
    are based upon our consolidated financial statements, which have been prepared
    in accordance with accounting principles generally accepted in the United
    States of America.  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, stock compensation and the valuation of deferred
    taxes, acquired product rights and inventory.





Revenue  Recognition





Historically,
    we have recognized all product sales revenue upon shipment to wholesale customers,
    net of estimated future returns, estimates for chargebacks, wholesale distribution
    fees, if applicable, rebates, generic introductions and current inventory
    levels in the distribution channel provided that collection was probable
    and no significant obligations remained.  Following
    the launch of generic competition to Periostat in May 2005, and commencing
    with
    the
    second quarter
    of 2005, we now recognize Periostat sales revenue primarily based on sales
    to end-users, which we estimate using prescription demand data generated
    by a leading independent prescription tracking service. Accordingly,
    since it is possible that the launch of generic competition to Periostat
    in May 2005 may increase the rate of product returns from the distribution
    channel we
    have accrued $2.7 million for potential Periostat returns on sales recognized
    prior to the launch of generic competition in Accrued Expenses on the Condensed
    Consolidated Balance Sheet at June 30, 2005.





Upon the  launch of a third party generic equivalent to Periostat, our agreement with Mutual  provides for rebates to be paid to Mutual to compensate Mutual and its  customers for price erosion on the value of certain of its inventories of  Mutuals branded version of Periostat.   Accordingly, we have deferred revenues associated with our shipments of  these products until such future time as the selling price becomes fixed and  determinable.  At June 30, 2005, our  Condensed Consolidated Balance Sheet included $108,000 in deferred revenue  associated with sales of Mutuals branded version of Periostat.





We  recognize all other product sales revenue (excluding Periostat and Mutuals  branded version of Periostat) upon shipment, net of estimated returns, rebates,  chargebacks and wholesale distribution fees, if applicable, provided that  collection is determined to be probable and no significant obligations remain.





Pursuant to  our Promotion and Cooperation Agreement with Primus contract revenues for  Novacort and Alcortin are fee-based arrangements where revenue is earned as  prescriptions are filled and recognized as a percentage of the gross profit  earned by Primus.  We do not take title  to the inventory sold by Primus under the Promotion Agreement.





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Stock-Based Compensation





It is our  policy to apply Accounting Principles Board Opinion No. 25, Accounting  for Stock Issued to Employees, and related interpretations to account for our  stock option grants rather than Statement of Financial Accounting Standards  No. 123, Accounting for Stock-Based Compensation and related  interpretations.  As such, compensation  expense is recorded on fixed stock option grants only if the market value of  the underlying stock exceeds the exercise price of the option at the date of  grant and is recognized on a straight-line basis over the vesting period.  Had we applied SFAS No. 123, which  requires recording stock option grants at their fair value, our net income  (loss) would have varied from the reported net income (loss) as we would have  recorded additional expenses in each period.   See Note 1 to our Condensed Consolidated
Financial Statements for the  pro forma effect of applying SFAS No. 123 to our results of operations and  earnings per share allocable to common stockholders.





Deferred  Taxes





In
    assessing the realizability of deferred tax assets, we consider the likelihood
    that part or all of the deferred tax assets will not be realized.  This
    assessment requires significant judgment and estimates.  The ultimate
    realization of the deferred tax assets is dependent upon the generation of
    future taxable income during the period in which those temporary differences
    become deductible.  We consider our  history of losses, scheduled reversal
    of deferred tax assets and liabilities and projected future taxable income
    over the periods in which the deferred tax asset items are deductible.  The
    Tax Reform Act of 1986 contains provisions that may limit the net operating
    loss and research and experimentation credit carryforwards available to be
    used in any given year upon the occurrence of certain events, including significant
    changes in ownership interest.  While
    we have been profitable for the past two years, we have a loss for the six
    months ended June 30, 2005 and uncertainty regarding our future profitability
    has prevented us from reaching the more
    likely than not conclusion required under the applicable literature
    to recognize deferred tax assets on our consolidated balance sheet.





Acquired  Product Rights





We are  required to test for asset impairment of acquired product rights whenever  events or circumstances indicate that the carrying value of an asset may not be  recoverable.  We apply SFAS No. 144,  Accounting for the Impairment or Disposal of Long-Lived Assets, in order to  determine whether or not an asset was impaired.  This standard requires an impairment analysis when indicators of  impairment are present.  If such  indicators are present, the standard indicates that if the sum of the future  expected cash flows from the asset, undiscounted and without interest charges,  is less than the carrying value, an asset impairment must be recognized in the  financial statements.  The amount of the  impairment is the difference between the fair value of the asset and the  carrying value of the asset.





In making  future cash flow analyses of our acquired product rights, we make assumptions  relating to:  (i)
    the intended use of the product rights and the expected future cash flows
    resulting directly from such use; (ii) generic competitor activities and
    regulatory initiatives that affect our products; and (iii) customer preferences
and expected managed care reimbursement.





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Excess Inventory





During the  six month period ended June 30, 2005, we recorded a charge of $979,000 for the  estimated excess inventory of Periostat and Mutuals branded version of  Periostat due to decreased demand following the introduction of a third party  generic version of Periostat.





Critical  accounting estimates and the related assumptions are evaluated periodically as  conditions warrant, and changes to such estimates are recorded as new  information or changed conditions require revision.





Additional Risks That May Affect  Results





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 the Private Securities Litigation Reform Act  of 1995, Section 27A of the Securities Act of 1933, as amended, and  Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements regarding  future events and our future results are based on current expectations,  estimates, forecasts, and projections and the beliefs and assumptions of our  management including, without limitation, our expectations regarding results of  operations, selling, general and administrative expenses, research and  development expenses, the sufficiency of our cash for future operations and the  success of our pre-clinical, clinical and development programs and our  dermatology
franchise.  Forward-looking  statements may be identified by the use of forward-looking terminology such as  believes, may, will, expect, estimate, anticipate, continue, or  similar terms, variations of such terms or the negative of those terms.





We
    cannot assure investors that our assumptions and expectations will prove
    to have been correct.  Important factors could cause  our actual results
    to differ materially from those indicated or implied by forward-looking statements.  Such
    factors that could cause or contribute to such differences include those
    factors discussed below.  We undertake  no intention or obligation to
    update or revise any forward-looking statements, whether as a result of new
    information, future events or otherwise.  If any of the following risks
    actually occur, our business, financial condition, results of operations
    or liquidity would likely suffer.





We are depending heavily on the success of our most advanced  product candidate, Oracea, for the treatment of rosacea, which is still in  clinical development.  If we are unable  to obtain approval for and commercialize Oracea, or experience significant delays  in doing so, our business will be materially harmed.





We have  invested a significant portion of our recent efforts and financial resources on  the development of our most advanced product candidate, Oracea, for the  treatment of rosacea.  Our ability to  generate substantial product revenues from Oracea, which we do not expect will  occur for at least the next few years, if ever, will depend heavily on the  successful development and commercialization of Oracea.  The success of Oracea will depend on several  factors, including the following:





| |  | receipt of marketing approvals from the FDA and    similar foreign regulatory authorities; and
| | - | ----------------------------------------------------------------------------------------------




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| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | acceptance of the product by patients, the medical    community and third party payors.




If we are  unable to obtain FDA approval for and successfully commercialize Oracea, we may  never realize revenue from this product candidate and we may have to curtail  our other product development programs.   As a result, our business would be materially harmed.





If we are not able to obtain and  enforce patent protection for Oracea or our other discoveries, our ability to  commercialize our product candidates successfully will be harmed and we may not  be able to operate our business profitably.





Our success  depends, in part, on our ability to protect proprietary methods and  technologies that we develop under the patent and other intellectual property  laws of the United States and other countries, so that we can prevent others  from using our inventions and proprietary information.  However, we may not hold proprietary rights  to some patents related to our current or future products and  technologies.  Because patent  applications in the United States and many foreign jurisdictions are typically  not published until 18 months after filing, or in some cases not at all, and  because publications of discoveries in scientific literature lag behind actual  discoveries, we cannot be certain that we were the first to make the inventions  claimed in issued patents or pending patent applications, or that we were the  first to file for protection of the inventions set forth in our patent
applications.  As a result, we may be  required to obtain licenses under third-party patents to market our proposed  products.  If licenses are not available  to us on acceptable terms, or at all, we will not be able to market the  affected products.





Our  strategy depends on our ability to rapidly identify and seek patent protection  for our discoveries.  This process is expensive  and time consuming, and we may not be able to file and prosecute all necessary  or desirable patent applications at a reasonable cost or in a timely  manner.  Despite our efforts to protect  our proprietary rights, unauthorized parties may be able to obtain and use  information that we regard as proprietary.   The issuance of a patent does not guarantee that it is valid or  enforceable, so even if we obtain patents, they may not be valid or enforceable  against third parties.  In addition, the  issuance of a patent does not guarantee that we have the right to practice the  patented invention.  Third parties may  have blocking patents that could be used to prevent us from marketing our own  patented product and practicing our own patented
technology.





Our pending  patent applications may not result in issued patents.  The patent position of pharmaceutical or biotechnology companies,  including ours, is generally uncertain and involves complex legal and factual  considerations.  The standards which the  United States Patent and Trademark Office and its foreign counterparts use to  grant patents are not always applied predictably or uniformly and can  change.  There is also no uniform,  worldwide policy regarding the subject matter and scope of claims granted or  allowable in pharmaceutical or biotechnology patents.  The laws of some foreign countries do not protect proprietary  information to the same extent as the laws of the United States, and many  companies have encountered significant problems and costs in protecting their  proprietary information in these foreign countries.  Accordingly, we do not know the degree of
future protection for  our proprietary rights or the breadth of claims allowed in any patents issued  to us or to others.  The allowance of  broader claims may increase the incidence and cost of patent interference  proceedings and/or opposition proceedings, and the risk of infringement  litigation.  On the other hand, the  allowance of narrower claims may limit the value of our proprietary rights.





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If issued,  our patent for Oracea may not contain claims sufficiently broad to protect us  against third parties with similar products, or provide us with any competitive  advantage.  Moreover, once issued, any  of our patents may be challenged, narrowed, invalidated or circumvented.  In addition, the patent rights in our  products that derive from claims under method of use patents may be hard to  assert or enforce if medical professionals prescribe similar (including  generic), though non-approved, doxycycline products for indications covered by  our patents.  If our patents are  invalidated or otherwise limited, other companies will be better able to  develop products and technologies that compete with ours, which could adversely  affect our competitive business position, business prospects and financial  condition.





We cannot assure you that our pursuit of business in the  dermatology market will be successful.





We continue to implement our plans to  expand into the dermatology market.  We recently filed a New Drug Application with  the FDA for Oracea to treat rosacea, and we continue to seek additional product  licensing opportunities to enhance our near-term offerings to the dermatology  market.  We have also been  allowed by the United States Patent and Trademark Office a patent for the use  of sub-antimicrobial tetracyclines for the treatment of acne and acne rosacea,  including Oracea.





While we have experience in the sales and  marketing of dental products, we have limited experience in the dermatology  market.  This market is very competitive  and some of our competitors have substantially greater resources than we have.  Our future success will depend on, among  other things, our ability to: (i) achieve market acceptance for any current or  future dermatological offerings; (ii) hire and retain personnel with experience  in the dermatology market; (iii) execute our business plan with respect to this  market segment; and (iv) adapt to technical or regulatory changes once  operational.





At the same time, new product development is  a lengthy, complex and uncertain process that will require significant  attention and resources from management.   A product candidate can fail at any stage of the development process due  to, among other things, efficacy or safety concerns, the inability to obtain  necessary regulatory approvals, the difficulty or excessive cost to manufacture  and/or the infringement of patents or intellectual property rights of others.  Furthermore, the sales of new products may  prove to be disappointing and fail to reach anticipated levels.  We therefore cannot assure you that we will  be successful in our pursuit of business in the dermatology market, or that we  can sustain any business in which we achieve initial success.





The success  of our current technology platforms, and that of any other future technology  platforms we may purchase or in-license, will depend on the quality and  integrity of the technologies licensed or sold to us.  Despite our due diligence and the safeguards we have in place, we  cannot guarantee the effectiveness or integrity of such technologies, nor can  we be certain that others do not have intervening rights in such  technologies.  If any of our in-licensed  technologies proved ineffective, or if a third party successfully asserted any  right to such technologies, our ability to develop new products and implement  our strategies would be materially adversely affected.





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If we are not able to obtain required regulatory approvals,  we will not be able to commercialize our product candidates, and our ability to  generate revenue will be materially impaired.





Our product  candidates and the activities associated with their development and  commercialization, including their testing, manufacture, safety, efficacy,  recordkeeping, labeling, storage, approval, advertising, promotion, sale and  distribution, are subject to comprehensive regulation by the FDA and other  regulatory agencies in the United States and by comparable authorities in other  countries.  Failure to obtain regulatory  approval for a product candidate will prevent us from commercializing the product  candidate.  Other than Periostat, we  have not received regulatory approval to market any of our product candidates  in any jurisdiction.  We have only  limited experience in filing and prosecuting the applications necessary to gain  regulatory approvals.  Securing FDA  approval requires the submission of extensive preclinical and clinical data,  information about product
manufacturing processes and inspection of facilities  and supporting information to the FDA for each therapeutic indication to  establish the product candidates safety and efficacy.  Our future products may not be effective,  may be only moderately effective or may prove to have undesirable or unintended  side effects, toxicities or other characteristics that may preclude our  obtaining regulatory approval or prevent or limit commercial use.





The process  of obtaining regulatory approvals is expensive, often takes many years, if  approval is obtained at all, and can vary substantially based upon, among other  things, the type, complexity and novelty of the product candidates involved.  Changes in the regulatory approval policy  during the development period, changes in or the enactment of additional  statutes or regulations, or changes in regulatory review for each submitted  product application, may cause delays in the approval or rejection of an  application.  The FDA has substantial  discretion in the approval process and may refuse to accept any application or  may decide that our data is insufficient for approval and require additional  preclinical, clinical or other studies.   In addition, varying interpretations of the data obtained from  preclinical and clinical testing could delay, limit or prevent regulatory
approval of a product candidate.  Any  regulatory approval we ultimately obtain may be limited or subject to  restrictions or post-approval commitments that render the product not  commercially viable.





Our products could be subject to restrictions or withdrawal  from the market and we may be subject to penalties if we fail to comply with  regulatory requirements or if we experience unanticipated problems with our  products, when and if any of them are approved.





Any product  for which we obtain marketing approval, along with the manufacturing processes,  post-approval clinical data, labeling, advertising and promotional activities  for such product, will be subject to continual requirements of and review by  the FDA and comparable regulatory bodies.   These requirements include submissions of safety and other  post-marketing information and reports, registration requirements, current Good  Manufacturing Practice, or cGMP, requirements relating to quality control,  quality assurance and corresponding maintenance of records and documents,  requirements regarding the distribution of samples to





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physicians and recordkeeping.   Even if regulatory approval of a product is granted, the approval may be  subject to limitations on the indicated uses for which the product may be  marketed or to the conditions of approval, or contain requirements for costly  post-marketing testing and surveillance to monitor the safety or efficacy of  the product.  Later discovery of  previously unknown problems with our products, manufacturers or manufacturing  processes, or failure to comply with regulatory requirements, may result in:





| |  | restrictions on such products, manufacturers or    manufacturing processes;                       
| | - | --------------------------------------------------------------------------------------------------
| |   |                                                                                                   
| |  | warning letters;                                                                                  
| |   |                                                                                                   
| |  | withdrawal of the products from the market;                                                       
| |   |                                                                                                   
| |  | refusal to approve pending applications or    supplements to approved applications that we submit;
| |   |                                                                                                   
| |  | recall;                                                                                           
| |   |                                                                                                   
| |  | fines;                                                                                            
| |   |                                                                                                   
| |  | suspension or withdrawal of regulatory approvals;                                                 
| |   |                                                                                                   
| |  | refusal to permit the import or export of our    products;                                        
| |   |                                                                                                   
| |  | product seizure; and                                                                              
| |   |                                                                                                   
| |  | injunctions or the imposition of civil or criminal    penalties.                                  




We cannot predict with certainty the effect on our business  of the decline in revenues generated by the dental business following the  commercial launch of generic versions of Periostat and the termination of our  dental sales force.





We have  historically relied on sales of Periostat and Mutuals branded version of  Periostat, together with revenues generated by the other products that made up  our dental business, for most of our revenue.   During the six months ended June 30, 2005 and each of the years ended  December 31, 2004, 2003 and 2002, Periostat and Mutuals branded version of  Periostat (with respect to the six months ended June 30, 2005 and the year  ended December 31, 2004), accounted for approximately 83%, 88%, 82% and 82% of our total net revenues,  respectively.





On
    May 13, 2005, the FDA approved a third party generic version of Periostat
    and a generic product was launched soon thereafter in late May 2005.  Upon
    this generic launch, Mutual was no longer obligated to purchase and are not
    expected to purchase their branded product from us.   We
do not anticipate future shipments to Mutual of Mutuals branded version
of
Periostat.  In
addition, we have had to disband our dental sales force and delay or discontinue
certain research and development activities in the dental business.   Consequently,
while we continue to generate cash flow from the dental business, our revenues
and margins from Periostat and the volume of our other dental business, have
decreased significantly and are anticipated to





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continue to decrease as a result of the third  party introduction of a generic version of Periostat.  If this decrease is more significant than we expect, we may experience  difficulty in managing our cash, which would have a material adverse effect on  our ability execute our strategies and develop our dermatology business.





We cannot assure you that our  clinical trials will be completed in a timely manner or will meet agreed upon  end-points.





As part of  our plans to expand into the dermatology market, we will need to conduct extensive testing of  our products, pursuant to protocols that measure end points agreed with the  FDA.  We cannot guarantee that Phase I,  Phase II, or Phase III testing for our products in development will  be completed successfully within any specified period of time, if at all.  Many products that initially appear  promising are found, after clinical evaluation, not to be safe and effective.  Also, we, or the FDA, may suspend clinical  trials at any time on various grounds, including a finding that the subjects or  patients are being exposed to an unacceptable health risk.





Although we  have not to date experienced any significant delays in enrolling Phase III  clinical trial patients for our ongoing clinical trials, delays in patient  enrollment for future trials may result in increased costs and delays, which  could have a harmful effect on our ability to develop products.





It may take  several years to complete the testing of a product, and failure can occur at  any stage of testing.  For example:





| |  | interim results of preclinical or clinical studies    do not necessarily predict their final results, and results in early studies    might not be seen in later studies;                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                  
| |  | potential products that appear promising at early    stages of development may ultimately fail for a number of reasons, including    the possibility that the products may be ineffective, less effective than products    of our competitors or cause harmful side effects;                                     
| |   |                                                                                                                                                                                                                                                                                                                  
| |  | any preclinical or clinical test may fail to produce    results satisfactory to the FDA or foreign regulatory authorities;                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                  
| |  | preclinical and clinical data can be interpreted in    different ways, which could delay, limit or prevent regulatory approval;                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                  
| |  | negative or inconclusive results from a preclinical    study or clinical trial or adverse medical events during a clinical trial    could cause a preclinical study or clinical trial to be repeated or a program    to be terminated, even if other studies or trials relating to the program are    successful;
| |   |                                                                                                                                                                                                                                                                                                                  
| |  | the FDA can place a hold on a clinical trial if,    among other reasons, it finds that patients enrolled in the trial are or    would be exposed to an unreasonable and significant risk of illness or    injury;                                                                                                




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| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may encounter delays or rejections based on    changes in regulatory agency policies during the period in which we develop a    drug or the period required for review of any application for regulatory    agency approval; and
| |   |                                                                                                                                                                                                                                    
| |  | our clinical trials may not demonstrate the safety    and efficacy needed for our products to receive regulatory approval.                                                                                                         




If we are  required to conduct additional clinical trials or other studies beyond those  that we currently contemplate, if we are unable to successfully complete our  clinical trials or other studies or if the results of these trials or studies  are not positive or are only modestly positive, we may be delayed in obtaining  marketing approval, we may not be able to obtain marketing approval or we may  obtain approval for indications that are not as broad as intended.  Our product development costs will also  increase if we experience delays in testing or approvals.  Significant clinical trial delays could  allow our competitors to bring products to market before we do and impair our  ability to commercialize our products or potential products.  If any of this occurs, our business will be  materially harmed.





If we infringe or are alleged to infringe intellectual  property rights of third parties, it will adversely affect our business.





Our  research, development and commercialization activities, as well as any product  candidates or products resulting from these activities, may infringe or be  claimed to infringe patents or patent applications under which we do not hold  licenses or other rights.  Third parties  may own or control these patents and patent applications in the United States  and abroad.  These third parties could  bring claims against us or our collaborators that would cause us to incur  substantial expenses and, if successful against us, could cause us to pay  substantial damages.  Further, if a  patent infringement suit were brought against us or our collaborators, we or  they could be forced to stop or delay research, development, manufacturing or  sales of the product or product candidate that is the subject of the suit.





As a result  of patent infringement claims, or in order to avoid potential claims, we or our  collaborators may choose or be required to seek a license from the third party  and be required to pay license fees or royalties or both.  These licenses may not be available on  acceptable terms, or at all.  Even if we  or our collaborators were able to obtain a license, the rights may be  nonexclusive, which could result in our competitors gaining access to the same  intellectual property.  Ultimately, we  could be prevented from commercializing a product, or be forced to cease some  aspect of our business operations, if, as a result of actual or threatened  patent infringement claims, we or our collaborators are unable to enter into  licenses on acceptable terms.  This  could harm our business significantly.





There has  been substantial litigation and other proceedings regarding patent and other  intellectual property rights in the pharmaceutical and biotechnology  industries.  In addition to infringement  claims against us, we may become a party to other patent litigation and other  proceedings, including interference proceedings declared by the United States  Patent and Trademark Office and opposition proceedings in the European Patent  Office, regarding intellectual property rights with respect to our products and  technology.  The cost to us of any  patent litigation or other proceeding, even if resolved in our favor, could be  substantial.





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Some of our competitors may be able to sustain the costs of such litigation or  proceedings more effectively than we can because of their substantially greater  financial resources.  Uncertainties  resulting from the initiation and continuation of patent litigation or other  proceedings could have a material adverse effect on our ability to compete in  the marketplace.  Patent litigation and  other proceedings may also absorb significant management time.





We depend upon third party researchers and providers of  clinical services to perform as contractually required if we are to be  successful in bringing new products to market.





We do not  have the ability independently to conduct the clinical trials required to  obtain regulatory approval for our products.   We rely on independent clinical investigators, contract research  organizations and other third party service providers for successful execution  of our clinical trials, but do not control many aspects of their  activities.  We are responsible for  ensuring that each of our clinical trials is conducted in accordance with the  general investigational plan, protocols for the trial and applicable regulatory  requirements.  Moreover, the FDA  requires us to comply with standards, commonly referred to as Good Clinical  Practices, for conducting and recording and reporting the results of clinical  trials to assure that data and reported results are credible and accurate and  that the rights, integrity and confidentiality of trial participants are
protected.  Our reliance on third  parties that we do not control does not relieve us of these responsibilities  and requirements.  Third parties may  not, however, complete activities on schedule, or may not conduct our clinical  trials in accordance with regulatory requirements or our stated protocols.  Furthermore the data that they generate may not  be accurate or may, in extreme cases, be fraudulent.





Our ability  to bring our future products to market depends on the quality and integrity of  the data we present to regulatory authorities in order to obtain marketing  authorizations.  We cannot guarantee the  authenticity or accuracy of such data, nor can we be certain that such data has  not been fraudulently generated.  The  failure of these third parties to carry out their obligations would materially  adversely affect our ability to develop and market new products and implement  our strategies.





We depend upon certain key relationships to generate much of  the technology required to maintain our competitive position in the  marketplace.





Our
    IMPACS technology is licensed from SUNY (the SUNY License), and
    other academic and research institutions collaborating with SUNY.   Under
    the SUNY License, we have an exclusive worldwide license to SUNYs
    rights in certain patents and patent applications to make and sell products
    employing tetracyclines to treat certain disease conditions.  The SUNY
    License imposes various payment and reporting obligations on us, and our
    failure to comply with these requirements permits SUNY to terminate the SUNY
    License.   If the SUNY License is terminated, we would lose our right
    to exclude competitors from commercializing similar products, and we could
    be excluded from marketing the same products if SUNY licensed the underlying
    technology to a competitor after terminating the SUNY License.  The
    SUNY License is terminable by SUNY on 90 days prior notice only upon  our
    failure to make timely payments, reimbursements or reports, if the failure
    is not cured by us within 90 days.   The termination of the SUNY License,
    or the failure to obtain and maintain patent protection for our technologies,
    would have a material adverse effect on our business, financial condition,
    liquidity and results of operations.





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If our products cause injuries, we may incur significant  expense and liability.





Our  business may be adversely affected by potential product liability claims  arising out of the testing, manufacturing and marketing of Periostat and other  products developed by or for us or for which we have licensing or promotion and  cooperation rights.  We have an  aggregate of $10.0 million in product liability insurance ($5.0 million  for pediatric claims) covering Periostat and Mutuals branded version of  Periostat, our product candidates and products for which we have licensing or  promotion and cooperation rights.





Our insurer  has also notified us that our general product liability policy will not cover  claims arising from our past sales of Vioxx, to the extent such claims are made  after December 31, 2004.  This does not  affect our rights under the Co-Promotion Agreement with Merck, which provides  for indemnification of us by Merck against any claims arising from  manufacturing or design defects in the Vioxx product or for which we, as the  seller of the product, may be strictly liable as a seller of an inherently  dangerous product.





Our  insurance may not adequately protect us against product liability claims.  Insufficient insurance coverage or the  failure to obtain indemnification from third parties for their respective  liabilities may expose us to product liability claims and/or recalls and could  cause our business, financial condition and results of operations to decline.





Changes in stock option accounting rules may have a  significant adverse affect on our operating results.





We have a  history of using broad based employee stock option programs to hire,  incentivize and retain our workforce in a competitive marketplace.  Statement of Financial Accounting Standards  No. 123, Accounting for Stock-Based Compensation, allows companies the  choice of either using a fair value method of accounting for options that would  result in expense recognition for all options granted, or using an intrinsic  value method, as prescribed by Accounting Principles Board Opinion No. 25,  Accounting for Stock Issued to Employees, or APB 25, with a pro forma  disclosure of the impact on net income (loss) of using the fair value option  expense recognition method.  We have  elected to apply APB 25 and, accordingly, we generally have not recognized any  expense with respect to employee stock options as long as such options are  granted at exercise prices
equal to the fair value of our common stock on the  date of grant.





In December  2004, the Financial Accounting Standards Board issued Share-Based Payment  (Statement 123(R)).  Statement 123(R)  requires that the compensation cost relating to share-based payment  transactions be recognized in financial statements.  That cost will be measured based on the grant-date fair value of  the equity instruments issued.  In  determining the fair value of options and other equity-based awards, companies  may use different valuation models that may involve extensive and complex  analysis.  Statement 123(R) will be  effective for us no later than January 1, 2006, which is the first day of our  2006 fiscal year.  We are in the process  of reviewing Statement 123(R) to determine which model is more appropriate for  us.





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While we continue to evaluate the effect that the adoption of Statement  123(R) will have on our financial position and results of operations, we  currently expect that our adoption of Statement 123(R) will adversely affect  our operating results to some extent in future periods.





Our stock price is highly volatile and, therefore, the value  of your investment may fluctuate significantly.





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





The  following table sets forth the high and low closing market price per share for  our common stock for each of the quarters in the period beginning July 1, 2002  through June 30, 2005, as reported on the Nasdaq National Market:





|Quarter    Ended   |  | High |       | Low |  
|------------------ |  | ---- | ----- | --- | -
|                   |  |      |       |     |  
|September 30, 2002 |  | $    | 7.34  |     | $
|December 31, 2002  |  | $    | 9.74  |     | $
|March 31, 2003     |  | $    | 11.03 |     | $
|June 30, 2003      |  | $    | 13.27 |     | $
|September 30, 2003 |  | $    | 15.84 |     | $
|December 31, 2003  |  | $    | 11.82 |     | $
|March 31, 2004     |  | $    | 14.16 |     | $
|June 30, 2004      |  | $    | 13.21 |     | $
|September 30, 2004 |  | $    | 9.49  |     | $
|December 31, 2004  |  | $    | 7.49  |     | $
|March 31, 2005     |  | $    | 7.52  |     | $
|June 30, 2005      |  | $    | 7.61  |     | $




Item  3.     Quantitative and Qualitative Disclosures About  Market Risk.





We had cash  and cash equivalents and short-term investments at June 30, 2005 which are  exposed to the impact of interest rate changes and our interest income  fluctuates as interest rates change.   Due to the short-term nature of our investments in money market funds,  the carrying values of our cash equivalents approximate their fair value at  June 30, 2005.  Our short-term  investments in commercial paper and government notes are carried at fair value.





Item  4.     Controls and Procedures.





Our  management, with the participation of our chief executive officer and chief  financial officer, evaluated the effectiveness of the Companys disclosure  controls and procedures as of





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June 30, 2005.  The term  disclosure
    controls and procedures, as defined in Rules 13a-15(e) and  15d-15(e)
    under the Exchange Act, means controls and other procedures of a company
    that are designed to ensure that information required to be disclosed by
    a company in the reports that it files or submits under the Exchange Act
    is recorded, processed, summarized and reported, within the time periods
    specified in the SECs rules and forms.   Disclosure controls and
    procedures include, without limitation, controls and procedures designed
    to ensure that information required to be disclosed by a company in the reports
    that it files or submits under the Exchange Act is accumulated and communicated
    to the companys management, including its  principal executive and
    principal financial officer, as appropriate to allow timely decisions regarding
    required disclosure.  Our management recognizes that any controls and
    procedures,  no matter how well designed and operated, can provide only reasonable
    assurance of achieving their objectives and management necessarily applies
    its judgment in evaluating the cost-benefit relationship of possible controls
    and procedures.  Based on the evaluation of  our disclosure controls
    and procedures as of June 30, 2005, our chief executive officer and chief
    financial officer concluded that, as of such date, our disclosure controls
    and procedures were effective at the reasonable assurance level.





No change  in our internal control over financial reporting (as defined in  Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the  fiscal quarter ended June 30, 2005 that has materially affected, or is  reasonably likely to materially affect, our internal control over financial  reporting.





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PART II.  OTHER  INFORMATION





Item  1.          Legal  Proceedings.





On October  1, 2004, we filed a complaint for patent infringement against IVAX and  CorePharma in the United States District Court for the Eastern District of New  York.  In our complaint, we alleged that  the submission of ANDAs by each of IVAX and CorePharma for 20 mg tablets of  doxycycline hyclate infringed United States Patent RE 34,656, for which we are  the exclusive licensee.  We also alleged  that any manufacture, importation, marketing and sale of generic 20 mg tablets  of doxycycline hyclate by IVAX and CorePharma would infringe the RE 34,656  patent.  We sought an injunction  preventing IVAX and CorePharma from introducing 20 mg tablets of doxycycline  hyclate in the United States.  The
injunction was denied by the Court on June 16, 2005.  The litigation on the merits of our patent infringement claims is  ongoing.





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





Our Annual  Meeting of Stockholders was held on May 25, 2005.





There were  present at the Annual Meeting in person or by proxy stockholders holding an  aggregate of 13,184,711 shares of Common Stock and 189,000 shares of Series D  preferred stock, which shares of Series D preferred stock account for an  additional 1,910,385 shares of Common Stock on an as converted to Common Stock  basis.  The results of the vote taken at  the Annual Meeting with respect to the election of the nominees to be the  Common Stock directors were as follows:





|Common Stock Nominees     |  | For               |  | Withheld      
|------------------------- |  | ----------------- |  | --------------
|                          |  |                   |  |               
|Colin W. Stewart          |  | 12,829,170 Shares |  | 355,541 Shares
|Brian M. Gallagher, Ph.D. |  | 12,777,937 Shares |  | 406,774 Shares
|Peter R. Barnett, D.M.D.  |  | 12,850,871 Shares |  | 333,840 Shares
|Robert C. Black           |  | 12,536,884 Shares |  | 647,827 Shares
|James E. Daverman         |  | 12,853,790 Shares |  | 330,741 Shares
|Robert J. Easton          |  | 12,495,530 Shares |  | 689,181 Shares
|W. James OShea           |  | 12,539,874 Shares |  | 644,837 Shares




The results  of the vote taken at the Annual Meeting with respect to the election of the  nominee to be the Series D Director, Robert A. Beardsley, Ph.D., were as  follows: 1,910,385 shares of Series D preferred stock (on an as converted to  Common Stock basis) were voted for the Series D preferred stock nominee, with  no shares voting against or abstaining.





A vote of  the stockholders was taken at the Annual Meeting with respect to the proposal  to approve the Companys 2005 Equity Incentive Plan.  For the purposes of such vote, the holders of shares of Common  Stock and the holders of Series D preferred stock (on an as converted to Common  Stock basis) voted together as a single class.   Of such shares, 7,258,121 shares voted in favor of such proposal,  2,926,074 shares were voted against such proposal and 35,246 shares abstained  from voting.





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In  addition, a vote of the stockholders was taken at the Annual Meeting with  respect to the proposal to ratify the selection by the Audit Committee of the  appointment of KPMG LLP as the independent registered public accounting firm of  the Company for the fiscal year ending December 31, 2005.  For the purpose of such vote, the holders of  shares of Common Stock and the holders of Series D preferred stock (on an as  converted to Common Stock basis) voted together as a single class.  Of such shares, 15,065,685 shares voted in  favor of such proposal, 20,961 shares were voted against such proposal and  8,450 shares abstained from voting.





**Item  6.          Exhibits.**





|10.1 | Form of Nonstatutory Stock Option Agreement for 2005    Equity Incentive Plan.                                                                    
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                   
|10.2 | Form of Incentive Stock Option Agreement for 2005    Equity Incentive Plan.                                                                       
|     |                                                                                                                                                   
|10.3 | Nonstatutory Stock Option Agreement dated as of June    29, 2005 by and between CollaGenex Pharmaceuticals, Inc. and Peter R.    Barnett, D.M.D.  
|     |                                                                                                                                                   
|10.4 | Nonstatutory Stock Option Agreement dated as of June    29, 2005 by and between CollaGenex Pharmaceuticals, Inc. and Robert C. Black.             
|     |                                                                                                                                                   
|10.5 | Nonstatutory Stock Option Agreement dated as of May    26, 2005 by and between CollaGenex Pharmaceuticals, Inc. and Brian M.    Gallagher, Ph.D.  
|     |                                                                                                                                                   
|10.6 | Nonstatutory Stock Option Agreement dated as of May    26, 2005 by and between CollaGenex Pharmaceuticals, Inc. and James E.    Daverman.         
|     |                                                                                                                                                   
|10.7 | Nonstatutory Stock Option Agreement dated as of June    29, 2005 by and between CollaGenex Pharmaceuticals, Inc. and Robert J.    Easton.         
|     |                                                                                                                                                   
|10.8 | Nonstatutory Stock Option Agreement
      dated as of June 29, 2005 by and between CollaGenex Pharmaceuticals, Inc.
      and W. James OShea.    
|     |                                                                                                                                                   
|10.9 | Nonstatutory Stock Option Agreement dated as of June    29, 2005 by and between CollaGenex Pharmaceuticals, Inc. and Robert A.    Beardsley, Ph.D.
|     |                                                                                                                                                   
|31.1 | Certification pursuant to Section 302 of the    Sarbanes-Oxley Act of 2002.                                                                       
|     |                                                                                                                                                   
|31.2 | Certification pursuant to Section 302 of the    Sarbanes-Oxley Act of 2002.                                                                       
|     |                                                                                                                                                   
|32.1 | Certification Pursuant to 18 U.S.C. Section 1350.                                                                                                 




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SIGNATURES





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





|                         | COLLAGENEX PHARMACEUTICALS, INC.
|------------------------ | --------------------------------
|                         |                                 
|Date:     August 9, 2005 | By:                             
|                         |                                 
|                         |                                 
|                         |                                 
|                         |                                 
|                         |                                 
|Date:     August 9, 2005 | By:                             
|                         |                                 
|                         |                                 
|                         |                                 
|                         |                                 




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