SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                              --------------------

                                    FORM 10-Q
               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2003
                             Commission File Number
                                     0-28308

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

          Delaware                                      52-1758016
--------------------------------              -------------------------------
(State or Other Jurisdiction of                      (I.R.S. Employer
 Incorporation or Organization                      Identification No.)

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

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

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

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

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

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

     Indicate  the  number of  shares  outstanding  of each of the  Registrant's
classes of Common Stock as of July 25, 2003:

                Class                                 Number of Shares
    -------------------------------            -----------------------------
       Common Stock $.01 par value                      11,498,960


<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.

                                TABLE OF CONTENTS
                                -----------------


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

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

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

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

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

          Condensed Consolidated Statements of Cash Flows for the Six
              Months Ended June 30, 2003 and 2002.......................     5

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

   Item 2.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................     12

               Results of Operations....................................     14

               Liquidity and Capital Resources..........................     22

   Item 3.  Quantitative and Qualitative  Disclosures  About Market Risk     27

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

PART II. OTHER INFORMATION..............................................     29

   Item 1.  Legal Proceedings...........................................     29

   Item 2.  Changes in Securities and Use of Proceeds...................     31

   Item 4.  Submission of Matters to a Vote of Security Holders.........     32

   Item 5.  Other Information...........................................     32

   Item 6.  Exhibits and Reports on Form 8-K............................     35

SIGNATURES..............................................................     36


                                      -i-
<PAGE>

                          PART I. FINANCIAL INFORMATION

                    Item 1. Financial Statements (unaudited).


                                       -1-

<PAGE>

<TABLE>
<CAPTION>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

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

                                                                      JUNE 30,    DECEMBER 31,
                      ASSETS                                            2003          2002
                                                                     -----------  ------------
Current assets:

<S>                                                                  <C>          <C>
  Cash and cash equivalents.......................................   $  11,455    $ 10,112
  Accounts receivable, net of allowance of $1,700 and $1,412 at
   at June 30, 2003 and December 31, 2002, respectively...........       1,741       2,142
  Inventories.....................................................       1,689       1,415
  Prepaid expenses and other current assets.......................       1,995       1,630
                                                                      ---------   ---------
      Total current assets........................................      16,880      15,299
Equipment and leasehold improvements, net.........................         631         559
Deferred license fees.............................................       1,456       1,749
Other assets......................................................          27          27
                                                                      ---------   ---------
      Total assets................................................   $  18,994    $ 17,634
                                                                     =========    ========
       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Accounts payable................................................   $   3,309    $  3,616
  Accrued expenses................................................       3,209       4,305
  Preferred dividends payable.....................................          --         800
                                                                      ---------   ---------
      Total current liabilities...................................       6,518       8,721
                                                                      ---------   ---------
Deferred revenue..................................................         342         561

Commitments and Contingencies

Stockholders' equity:

  Preferred stock, $0.01 par value, 5,000,000 shares authorized;
   200,000 shares of Series D cumulative  convertible preferred
   stock issued and outstanding at June 30, 2003 and December
   31, 2002 (liquidation  value of $20,000);  150,000 shares of
   Series A participating preferred stock, $0.01 par value,
   designated and no shares issued and outstanding at June 30,
   2003 and December 31, 2002.....................................           2           2
  Common stock, $0.01 par value; 25,000,000 shares authorized,
   11,495,837 and 11,377,631 shares issued and outstanding at
   June 30, 2003 and December 31, 2002, respectively..............         115         114
  Additional paid in capital......................................      83,872      82,917
  Accumulated deficit.............................................     (71,855)    (74,681)
                                                                      ---------   ---------
      Total stockholders' equity..................................      12,134       8,352
                                                                      ---------   ---------
      Total liabilities and stockholders' equity..................   $  18,994    $ 17,634
                                                                     =========    ========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                      -2-

<PAGE>

<TABLE>
<CAPTION>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
                For the Three Months Ended June 30, 2003 and 2002
                 (dollars in thousands, except per share data)
                                   (unaudited)

                                                                       Three Months Ended June 30,
                                                                     -------------------------------
                                                                         2003               2002
                                                                     -----------         -----------
Revenues:
<S>                                                                    <C>               <C>
  Net product sales...............................................     $ 11,750          $ 10,377
  Contract revenues...............................................          503               555
  License revenues................................................          433                35
                                                                       --------          --------
      Total revenues..............................................       12,686            10,967
                                                                       --------          --------
Operating expenses:
  Cost of product sales...........................................        1,738             1,598
  Research and development........................................        1,654               771
  Selling, general and administrative.............................        7,718             8,998
                                                                       --------          --------
      Total operating expenses....................................       11,110            11,367

Other income (expense):
  Interest income.................................................           25                15
  Interest expense................................................           --                (1)
  Other (expense) income..........................................           (4)                1
                                                                       --------          --------
      Net income (loss)...........................................        1,597              (385)
Preferred stock dividend..........................................          400               409
                                                                       --------          --------
Net income (loss) allocable to common stockholders................     $  1,197          $   (794)
                                                                       ========          =========
Net income (loss) per basic share allocable to common
  stockholders....................................................     $   0.10          $  (0.07)
                                                                       ========          =========
Weighted average shares used in computing net income (loss) per
  basic share allocable to common stockholders....................   11,427,420        11,163,585
                                                                     ===========      ============
Net income (loss) per diluted share allocable to common
  stockholders....................................................     $   0.10          $  (0.07)
                                                                     ===========      ============
Weighted average shares used in computing net income (loss) per
  diluted share allocable to common stockholders..................   12,369,971        11,163,585
                                                                     ===========      ============
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements

                                      -3-

<PAGE>


<TABLE>
<CAPTION>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                Condensed Consolidated Statements of Operations
                For the Six Months Ended June 30, 2003 and 2002
                 (dollars in thousands, except per share data)
                                   (unaudited)
                                                                            Six Months Ended June 30,
                                                                            -------------------------
                                                                                2003          2002
                                                                            -----------    ----------
Revenues:
<S>                                                                          <C>            <C>
  Net product sales....................................................      $ 23,120       $ 20,258
  Contract revenues....................................................         1,053          1,347
  License revenues.....................................................           670            122
                                                                             --------        -------
      Total revenues...................................................        24,843         21,727
                                                                             --------        -------
Operating expenses:
  Cost of product sales................................................         3,652          3,178
  Research and development.............................................         2,621          1,580
  Selling, general and administrative - other..........................        15,540         17,946
  Selling, general and administrative -
   stock compensation charge...........................................           251             --
                                                                             --------        -------
      Total operating expenses.........................................        22,064         22,704
                                                                             --------        -------
Other (expense) income:
  Interest income......................................................            56             37
  Interest expense.....................................................            --             (2)
  Other expense........................................................           (10)            --
                                                                             --------        -------
      Net income (loss)................................................         2,825           (942)
Preferred stock dividend...............................................           800            829
                                                                             --------        -------
Net income (loss) allocable to common stockholders.....................      $  2,025       $ (1,771)
                                                                            =========       ========
Net income (loss) per basic share allocable to
  common stockholders..................................................      $   0.18       $  (0.16)
                                                                            =========       ========
Weighted average shares used in computing net income (loss)
  per basic share allocable to common stockholders.....................    11,410,914     11,122,041
                                                                           ==========     ==========
Net income (loss) per diluted share allocable to common
  stockholders.........................................................      $   0.17       $  (0.16)
                                                                            =========       ========
Weighted average shares used in computing net income (loss) per
  diluted share allocable to common stockholders.......................    12,252,893     11,122,041
                                                                           ==========     ==========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                      -4-

<PAGE>

<TABLE>
<CAPTION>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
                 For the Six Months Ended June 30, 2003 and 2002
                             (dollars in thousands)
                                   (unaudited)

                                                                             Six Months Ended June 30,
                                                                             -------------------------
                                                                                2003            2002
                                                                              -------         --------
Cash flows from operating activities:
<S>                                                                          <C>             <C>
  Net income (loss)......................................................    $  2,825        $   (942)
  Adjustments to reconcile net income (loss) to net cash provided
   by (used in) operating activities:
      Non-cash compensation expense......................................         251              --
      Depreciation and amortization expense..............................         445             129
      Accounts receivable provisions.....................................         288
     Changes in operating assets and liabilities:
      Accounts receivable................................................         113            (165)
      Inventories........................................................        (274)           (120)
      Prepaid expenses and other assets..................................        (365)         (1,942)
      Accounts payable...................................................        (307)            (85)
      Accrued expenses...................................................        (196)          1,640
      Deferred revenue...................................................        (219)            (77)
                                                                             --------        ---------
         Net cash provided by (used in) operating activities.............       2,561          (1,562)
                                                                             --------        ---------
Cash flows from investing activities:
  Capital expenditures...................................................        (224)           (262)
  Payment for Altana license.............................................        (900)             --
                                                                             --------        ---------
         Net cash used in investing activities...........................      (1,124)           (262)
                                                                             --------        ---------
Cash flows from financing activities:
  Net proceeds from issuance of common stock.............................         704           1,293
  Payment of preferred dividends.........................................        (800)             --
  Repayment of long-term debt............................................          --             (35)
                                                                             --------        ---------
         Net cash provided by (used in) financing activities.............         (94)          1,258
                                                                             --------        ---------
         Net increase (decrease) in cash and cash equivalents............       1,343            (566)
Cash and cash equivalents at beginning of period.........................      10,112           6,171
                                                                             --------        ---------
Cash and cash equivalents at end of period...............................    $ 11,455        $  5,605
                                                                             ========        ========

Supplemental schedule of noncash investing and financing
  activities:

   Common stock dividends issued or issuable on preferred stock..........    $     --        $    611
                                                                             ========        ========
   Cash dividends declared...............................................    $     --        $    218
                                                                             ========        ========
   Issuance of warrants to purchase common stock in connection with
         equity line.....................................................    $     --        $    248
                                                                             ========        ========
Supplemental disclosure of cash flow information:
   Cash paid during the period for interest..............................    $     --        $      2
                                                                             ========        ========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                      -5-

<PAGE>
                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 2003 and 2002
                             (dollars in thousands)
                                   (Unaudited)

NOTE 1 -- BASIS OF PRESENTATION

     The unaudited condensed  consolidated  financial statements included herein
have been prepared by the Company,  pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with accounting  principles
generally  accepted in the United  States of America.  Certain  information  and
footnote  disclosures  normally  included in the annual  consolidated  financial
statements prepared in accordance with accounting  principles generally accepted
in the United States of America have been condensed or omitted  pursuant to such
rules  and  regulations.   These  unaudited  condensed   consolidated  financial
statements  should  be read in  conjunction  with  the  Company's  2002  audited
consolidated financial statements and footnotes included in its Annual Report on
Form 10-K for the year ended December 31, 2002.

     The accompanying  unaudited  condensed  consolidated  financial  statements
include  the  results of the  Company  and its  wholly-owned  subsidiaries.  All
intercompany  accounts and transactions  have been eliminated in  consolidation.
Certain  amounts  in  the  2002  consolidated  financial  statements  have  been
reclassified to conform to the 2003 presentation.

     In the opinion of the  Company's  management,  the  accompanying  unaudited
condensed  consolidated  financial  statements  have  been  prepared  on a basis
substantially  consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present  fairly the  Company's  consolidated  financial  position as of June 30,
2003,  their results of  operations  for the three and six months ended June 30,
2003 and 2002,  and their cash flows for the six months  ended June 30, 2003 and
2002. Interim results are not necessarily  indicative of results anticipated for
the full fiscal year.

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

     As set forth  below,  the pro forma  disclosures  of net loss  allocable to
common  stockholders and loss per share allocable to common  stockholders are as
if the Company had

                                      -6-
<PAGE>


adopted the fair value based method of accounting  in  accordance  with SFAS No.
123, as amended by SFAS No. 148,  which  assumes the fair value based  method of
accounting had been adopted:

                                  Three Months Ended       Six Months Ended
                                       June 30,                 June 30
                                  ------------------       -----------------
                                   2003        2002        2003        2002
                                   ----        ----        ----        ----
Net income (loss)
   allocable to common
   stockholders:
   As reported.........           $1,197     $ (794)      $ 2,025    $(1,771)
   Add: Stock-based
   employee
   compensation
   expenses included
   in net loss
   allocable to
   common stockholders.               --         --            --         --
   Less: Stock-based
   employee compensation
   under fair value based
   method..............           (1,343)      (934)       (2,537)    (1,868)
                                  ------     ------        ------     ------
   Pro forma...........           $ (146)   $(1,728)      $  (512)   $(3,639)
                                  ======    =======       =======    =======

Basic net income (loss)
   per share allocable to
   common stockholders:
   As reported.........           $ 0.10    $ (0.07)      $  0.18    $ (0.16)
                                  ======    =======       =======    =======
   Pro forma...........           $(0.01)   $ (0.15)      $ (0.04)   $ (0.33)
                                  ======    =======       =======    =======

Diluted net income (loss)
   per share allocable to
   common stockholders:
   As reported.........           $ 0.10    $ (0.07)      $  0.17    $ (0.16)
                                  ======    =======       =======    =======
   Pro forma...........           $(0.01)   $ (0.15)      $ (0.04)   $ (0.33)
                                  ======    =======       =======    =======



                                      -7-
<PAGE>

NOTE 2 -- INVENTORIES

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

                               2003            2002
                         --------------    ------------
Raw materials.......      $       16       $     233
Work-in-process.....             658              56
Finished goods......           1,015           1,126
                            --------         --------
                          $    1,689       $   1,415
                          ==========       =========

NOTE 3 -- LINE OF CREDIT

     The Company has a revolving credit facility with Silicon Valley Bank, which
expires on March 15, 2004.  The Company may borrow up to the lesser of $4,000 or
80% of eligible accounts receivable,  as defined under the credit facility.  The
amount available to the Company is also reduced by outstanding letters of credit
which may be issued under the credit facility in amounts  totaling up to $1,500.
On April 1, 2003, the Company  secured its expected  purchase order  commitments
for the next twelve months with a letter of credit for approximately  $1,061. As
of June 30, 2003,  the letter of credit had been reduced to $761. As the Company
continues to pay down amounts under the letter of credit,  the amount  available
to it under the Facility  will  increase.  The Company is not  obligated to draw
amounts and any such borrowings bear interest, payable monthly, currently at the
prime rate plus 1.0% to 1.5% per annum and may be used only for working  capital
purposes.  Without the consent of Silicon Valley Bank, the Company,  among other
things,  shall not (i) merge or consolidate  with another  entity;  (ii) acquire
assets outside the ordinary course of business; or (iii) pay or declare any cash
dividends  on the  Company's  common  stock.  The Company  must also  maintain a
certain tangible net worth of $5,000, subject to certain upward adjustments,  as
defined in the  amendment,  as a result of  profitable  operations or additional
debt or equity  financings  and a minimum  of $2,000 in cash at  Silicon  Valley
Bank, net of borrowings under the credit facility. In addition,  the Company has
secured its  obligations  under the credit  facility  through the  granting of a
security  interest  in favor  of the bank  with  respect  to all of its  assets,
including  intellectual  property.  As of June  30,  2003,  the  Company  had no
borrowings outstanding against the credit facility.

NOTE 4 -- COMMITMENTS AND CONTINGENCIES

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

     On August 24, 2001, the Company signed an exclusive  License Agreement (the
"Atrix  License  Agreement")  with Atrix to market  Atrix's  proprietary  dental
products,  Atridox(R),  Atrisorb(R)  FreeFlow and  Atrisorb(R)-D,  to the United
States dental market. Pursuant to the terms of the Atrix License Agreement,  the
Company will be required to make certain  annual  minimum  expenditures  for the
lesser of $4,000 or 30% of the Company's  contribution margin, as defined in the
agreement, relating to a specific Atrix product that the Company markets and the
lesser of $2,000 or 30% of the Company's contribution margin, as defined


                                      -8-

<PAGE>

in the agreement,  relating to a separate Atrix product that the Company markets
commencing  with fiscal year 2003.  Additionally,  the Company  must  maintain a
minimum amount of full time sales  professionals  and make a specific  amount of
sales presentations through August 2003.

     On February 11, 2002, the Company executed a Co-operation,  Development and
Licensing  Agreement  pursuant to which the  Company  was granted an  exclusive,
sublicenseable, transferable license with respect to the Restoraderm(TM) topical
drug  delivery  system which the Company  intends to develop for  dermatological
applications.  Pursuant to the terms of such  agreement,  upon the occurrence of
certain events,  the Company will be required to pay certain future  consulting,
royalty and milestone  payments in the aggregate  amount of up to  approximately
$3,300,  of which no more than $2,225 shall be payable  prior to January 1, 2004
and of which no more than an additional $1,037 shall be payable prior to January
1, 2005. The Company paid $526 under this Agreement in the six months ended June
30, 2003.  The term of such  agreement is for the life of any patent that may be
issued to the Company for the first product the Company develops  utilizing such
technology,  or, if the Company does not acquire any patentable products,  seven
years.

     On June  10,  2002,  the  Company  executed  a  Development  and  Licensing
Agreement  with Shire  Laboratories,  Inc.  pursuant  to which the  Company  was
granted an exclusive  worldwide  license  (including the right to sublicense) to
develop,  make,  have made,  use,  supply,  export,  import,  register  and sell
products for the treatment of various inflammatory disorders. In addition, under
the agreement,  certain product development functions shall be performed for the
Company.  Also under the  agreement,  the Company has committed to payments,  in
cash or at the Company's  option, a combination of cash and the Company's common
stock, upon the achievement of certain clinical and regulatory milestones in the
event the Company  pursues certain  applications  of the technology  which could
total up to $8,200 in the  aggregate.  Pursuant to the terms of such  agreement,
the Company  shall also pay a percentage  of certain net sales of  products,  if
any,  utilizing  any part of the  technology.  The  Company  may  terminate  the
agreement upon sixty days notice.

     On November 18,  2002,  the Company  filed a complaint  and on February 13,
2003, the Company filed a preliminary  injunction in the United States  District
Court  for the  Eastern  District  of New  York  seeking  to  prevent  West-ward
Pharmaceutical  Corporation  ("West-ward")  from  selling  20  mg.  capsules  of
doxycycline  hyclate to treat  periodontal  disease,  which the Company believes
would infringe patents covering the Company's  Periostat product.  The Company's
suit alleges infringement on patents to which it is the exclusive licensee.

     On July 8, 2003,  the Company  filed a complaint  against  United  Research
Laboratories/Mutual  Pharmaceutical  Company  ("Mutual")  in the  United  States
District  Court for the Eastern  District of New York seeking to prevent  Mutual
from  introducing 20 mg.  tablets of doxycycline  hyclate into the market in the
United States. The Company's suit alleges infringement on patents to which it is
the exclusive licensee. The complaint was served on Mutual on July 11, 2003.


                                       -9-
<PAGE>

     On July 9, 2003, Mutual filed a complaint against the Company in the United
States District Court for the Eastern  District of  Pennsylvania.  The complaint
was served on the Company on July 10, 2003.  Mutual alleges that the Company has
engaged in an overall scheme to monopolize  the market for low-dose  doxycycline
products.  In  addition,  the suit  alleges  that the  Company has engaged in an
exclusionary,  unfair,  anticompetitive  manner.  The  remedies  that  Mutual is
seeking include an award of treble  damages,  injunctive  relief,  compensatory,
punitive and exemplary damages and reasonable attorneys' fees.

     On July 15,  2003,  the Company  filed and served a motion for  preliminary
injunction in the United States  District Court for the Eastern  District of New
York in connection with the Company's  patent  infringement  litigation  against
Mutual.  As  discussed  below,  as a result of the ruling of the  United  States
District Court for the District of Columbia, the Company withdrew its motion for
a  temporary  restraining  order  and  preliminary   injunction  in  its  patent
infringement suit against Mutual, although its complaint remains outstanding.

     On June 26,  2003,  the Company  filed a  complaint,  and on June 30, 2003,
filed a motion for a preliminary injunction, in the Unites States District Court
for the  District of  Columbia  seeking to prevent  the FDA from  approving  any
application,  from West-ward, Mutual or any other marketers of generic drugs, to
introduce  20 mg.  tablets or capsules of  doxycycline  hyclate  into the market
until the  expiration of the period of market  exclusivity  and up to a 30 month
stay of approvals that attaches while patent infringement litigation is pending,
to which the Company claims  entitlement under the Hatch Waxman Act. On July 22,
2003, the Court granted a preliminary injunction temporarily restraining the FDA
from approving any Abbreviated New Drug  Applications  ("ANDA")  submitted for a
generic version of Periostat (doxycycline hyclate) 20 mg.

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

     As a result  of the  ruling in the  United  States  District  Court for the
District  of  Columbia,   the  Company  withdrew  its  motion  for  a  temporary
restraining  order and preliminary  injunction in its patent  infringement  suit
against Mutual,  which was previously  filed in the United States District Court
for  the  Eastern  District  of  New  York,   although  its  complaint   remains
outstanding.  In addition,  the Company is  considering  its  alternatives  with
respect to its motion for preliminary  injunction against West-ward filed in the
same jurisdiction.

     The  Company  anticipates  that its  future  legal  costs in these  matters
relating to patent infringement will be reimbursed by the Research Foundation of
the State  University  of New York  ("SUNY")  pursuant to a  Technology  License
Agreement with SUNY.  Legal costs  relating to the  litigation  with the FDA and
anti-trust matters,  however, are not eligible for reimbursement by SUNY. During
the three and six months  ended June 30,  2003,  the Company  incurred  $396 and
$594, respectively, in legal defense costs for the aforementioned law suits with
West-ward and Mutual, all of which were deducted from royalties payable to SUNY.
In the event such legal  costs  exceed  the amount of the  royalties  payable to
SUNY, the Company will not be able to recover such legal costs from SUNY.


                                      -10-

<PAGE>


NOTE 5 -- STOCK OPTION PLANS

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

NOTE 6 -- SUCCESSION PLAN FOR CHIEF EXECUTIVE OFFICER

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

     The Company has executed an agreement with Dr. Gallagher, pursuant to which
Dr. Gallagher will be compensated  for, among other things,  his services during
the  transition  period and to recognize  his  historical  contributions  to the
Company.  As a result of this  agreement,  the  Company  recognized  a  non-cash
compensation  charge relating to certain  modifications of Dr. Gallagher's stock
option  agreements  of  approximately  $251 during the six months ended June 30,
2003.  The  Company  has  also  entered  into a  consulting  agreement  with Dr.
Gallagher  pursuant to which he will provide  consulting  services to CollaGenex
for a period of 24 months  following  the  employment  of a new chief  executive
officer.

NOTE 7 -- TERMINATION OF LICENSE AGREEMENT

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


                                      -11-
<PAGE>


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

OVERVIEW

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

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

     With the  exception of the year ended  December 31, 2002,  the three months
ended March 31, 2003 and the three months ended June 30, 2003, during which year
and quarters we achieved net income of  approximately  $902,000,  $1,228,000 and
$1,597,000, respectively, we have incurred losses each year and quarterly period
since  inception  and have an  accumulated  deficit of $71.9 million at June 30,
2003.

     Statements  contained or incorporated by reference in this Quarterly Report
on Form  10-Q  that  are not  based  on  historical  fact  are  "forward-looking
statements" within the meaning of Section 21E of the Securities  Exchange Act of
1934,  as amended.  Forward-looking  statements  may be identified by the use of
forward-looking   terminology  such  as  "may,"  "will,"  "expect,"  "estimate,"
"anticipate,"  "continue,"  or similar  terms,  variations  of such terms or the
negative of those terms. This Form 10-Q contains forward-looking statements that
involve  risks  and  uncertainties.  Our  business  of  selling,  marketing  and
developing  pharmaceutical products is subject to a number of significant risks,
including risks relating to the implementation of


                                      -12-
<PAGE>


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

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

     Critical Accounting Policies and Estimates

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

                                      -13-
<PAGE>

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

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

RESULTS OF OPERATIONS

     During the three months ended June 30, 2003,  we achieved net product sales
of $11.8  million  from  the  sale of  Periostat,  Atridox,  Atrisorb  FreeFlow,
Atrisorb-D and Pandel. In addition, during the three months ended June 30, 2003,
we  generated  $503,000  in  contract  revenues  mainly  from  our  co-promotion
activities with respect to Vioxx, Denavir and AVAR and $433,000 in international
licensing revenues.

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

REVENUES

-------------------------------------------------------------------------------
Revenues
(dollars in thousands)                   2003          Change          2002
-------------------------------------------------------------------------------
Net Product Sales...............      $  11,750        13.2%        $  10,377
-------------------------------------------------------------------------------
Contract Revenues...............            503        (9.4)%             555
-------------------------------------------------------------------------------
License Revenues................            433     1,137.1%               35
                                      ---------     --------        ---------
-------------------------------------------------------------------------------
   Total........................      $  12,686        15.7%        $  10,967
-------------------------------------------------------------------------------

                                      -14-
<PAGE>

     Total  revenues  during the three  months  ended  June 30,  2003 were $12.7
million,  representing  a 15.7%  increase  over total  revenues of $11.0 million
during  the three  months  ended  June 30,  2002.  Such 2003  revenues  included
approximately  $11.8 million in net product  sales of Periostat,  Pandel and the
Atrix  Products,  $503,000 in contract  revenues,  which were  derived  from our
co-promotion of Vioxx, Denavir and AVAR, and $433,000 of international licensing
revenues for Periostat.  Net product sales increased $1.4 million,  or 13.2%, to
$11.8  million  during the three  months  ended June 30, 2003  compared to $10.4
million  during the three  months  ended June 30, 2002  primarily  due to higher
Periostat  sales and the  addition  of the  Pandel  product  line which we began
selling direct in July 2002.

     Contract  revenues for the three months ended June 30, 2003  decreased 9.4%
to $503,000 from $555,000 during the three months ended June 30, 2002, primarily
due to the absence of Pandel  contract  revenues  during 2003 and slightly lower
Vioxx contract revenues,  which were partially offset by the addition of Denavir
and AVAR contract revenues in 2003.

     We recorded  $8,000 and $15,000 in licensing  revenues for the three months
ended  June  30,  2003  and  June  30,  2002,  respectively.  This  revenue  was
attributable to our  recognition of previously  received  up-front  license fees
recognized for various agreements that were deferred and are being recognized as
licensing  revenue over the expected  performance  period of the agreements.  We
also recorded licensing revenues of $425,000 and $20,000 during the three months
ended  June 30,  2003 and 2002,  respectfully,  that  represent  milestone  fees
received  from  foreign  licensing  partners  upon the  achievement  of  certain
milestones.

COST OF PRODUCT SALES

-------------------------------------------------------------------------------
Cost of Product Sales                    2003          Change         2002
(dollars in thousands)
-------------------------------------------------------------------------------
Cost of Product Sales............       $ 1,738         8.8%        $  1,598
-------------------------------------------------------------------------------
Percent of Net Product Sales.....          14.8%        N/A             15.4%
-------------------------------------------------------------------------------

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

     Cost of product  sales were $1.7  million,  or 14.8% of net  product  sales
during the three months ended June 30, 2003,  compared to $1.6 million, or 15.4%
of net product  sales during the three  months  ended June 30, 2002.  During the
three months ended June 30, 2003,  cost of product  sales  increased in absolute
dollars as a result of increased  product sales.  As a percentage of net product
sales, cost of product sales decreased,  compared to the three months ended June
30, 2002, primarily due to product price increases for Periostat, offset in part
by increased cost of product sales for the Pandel product line, launched in July
2002.

                                      -15-

<PAGE>

RESEARCH AND DEVELOPMENT

-------------------------------------------------------------------------------
Research and Development                 2003          Change         2002
(dollars in thousands)
-------------------------------------------------------------------------------
Research and development.........       $ 1,654        114.5%       $   771
-------------------------------------------------------------------------------
Percentage of Total revenues.....          13.0%         N/A            7.0%
-------------------------------------------------------------------------------

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

     Research and development  expenses increased  $883,000,  or 114.5%, to $1.7
million  during the three  months ended June 30, 2003 from  $771,000  during the
three months ended June 30, 2002.

     Development  projects conducted during the three months ended June 30, 2003
included  our  continuing   formulation   development   work  for  a  once-a-day
formulation  of Periostat  and  formulation  and  stability  testing for several
potential products utilizing our licensed Restoraderm technology,  which totaled
$462,000  and  $535,000,  respectively.  Future  development  of the  once-a-day
technology  will be  contingent  on the  outcome  of the  initial  phase  of the
project,  which  should  be  determined  by the  end  of  2003.  If  successful,
additional expenses could be as much as $4.1 million through 2006.

     Clinical  projects totaling $252,000 were conducted during the three months
ended June 30,  2003 and  included  several  Phase IV studies for  Periostat  in
various dental indications and continued  clinical  development work relating to
Periostat in  dermatological  indications and including a Phase III trial in 150
patients to evaluate  Periostat for the treatment of rosacea.  Until the outcome
of these  trials is  determined,  it is  premature  to estimate the future costs
associated with the development of Periostat for any indication.

     Other research and  development  expenses  incurred during the three months
ended June 30, 2003  included  $42,000 in  regulatory  consulting  and legal and
filing fees under the Mutual  Recognition  Procedure  in Europe and $137,000 for
various regulatory costs, including annual FDA filing fees, legal and regulatory
expenses in the United  States.  Direct  salaries and other  personnel  expenses
incurred   during  the  three  months   ended  June  30,  2003  were   $131,000.
Additionally,  during such period we incurred $95,000 in consulting,  travel and
other office expenses.

     Development  projects conducted during the three months ended June 30, 2002
included  our  continuing   formulation   development   work  for  a  once-a-day
formulation  of Periostat  and  formulation  and  stability  testing for several
potential products utilizing our licensed Restoraderm technology,  which totaled
$92,000 and $140,000, respectively.

     Clinical  projects totaling $282,000 were conducted during the three months
ended June 30,  2002 and  included  several  Phase IV studies for  Periostat  in
various  dental  indications,  initiation  of a  70-patient  clinical  study  to
evaluate the efficacy of Periostat to treat meibomiantis

                                      -16-
<PAGE>

(an ocular  condition)  and clinical  development  work relating to Periostat in
dermatological  indications.  In August  2002,  we launched a Phase III trial to
evaluate Periostat for the treatment of rosacea.

     Other  expenses  incurred  during  the three  months  ended  June 30,  2002
included  $55,000 in  regulatory  consulting  and  filing  fees under the Mutual
Recognition  Procedure  in Europe and  $22,000  for  various  regulatory  costs,
including annual FDA filing fees,  legal, and regulatory  expenses in the United
States.  Direct salaries and other personnel  expenses incurred during the three
months ended June 30, 2002 were  $122,000.  Additionally,  during such period we
incurred $58,000 in consulting, travel and other office expenses.

SELLING, GENERAL AND ADMINISTRATIVE

--------------------------------------------------------------------------------
Selling, General and Administrative      2003          Change         2002
(dollars in thousands)
-------------------------------------------------------------------------------
Selling, General and Administrative... $ 7,718        (14.2)%      $  8,998
--------------------------------------------------------------------------------
Percentage of Total Revenues..........    60.8%         N/A            82.0%
--------------------------------------------------------------------------------

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

     Selling,  general  and  administrative  expenses  decreased  14.2%  to $7.7
million during the three months ended June 30, 2003 from $9.0 million during the
three months ended June 30, 2002.  This  decrease of $1.3 million was  primarily
the result of a $1.7 million reduction in selling and marketing expenditures for
Periostat and the Atrix Products,  offset in part by  approximately  $367,000 in
additional promotional expenses for AVAR and Pandel product lines and $50,000 in
increased administrative costs.

     Significant  components  of selling,  general and  administrative  expenses
incurred  during the three months ended June 30, 2003  included  $3.8 million in
direct selling and sales training  expenses,  $2.0 million in marketing expenses
(including  advertising  and promotion  expenditures  for  Periostat,  the Atrix
Products and Pandel and  co-promotion  expenses  relating to Vioxx and AVAR) and
$1.9 million in general and  administrative  expenses,  which  include  business
development, finance, legal and corporate activities.  Significant components of
selling,  general and administrative expenses during the three months ended June
30, 2002 included  $3.8 million in direct  selling and training  expenses,  $3.5
million  in   marketing   expenses   (including   Periostat   Direct-to-Consumer
advertising   expenditures,   launch   expenses  for  the  Atrix   Products  and
co-promotion  expenses  related to Vioxx and Pandel) and $1.7 million in general
and  administrative  expenses,  which included business,  development,  finance,
legal and corporate activities.


                                      -17-
<PAGE>


OTHER INCOME/EXPENSE

--------------------------------------------------------------------------------
Other Income/Expense                     2003          Change         2002
--------------------------------------------------------------------------------
Interest income..................       $25,000         66.7%       $ 15,000
--------------------------------------------------------------------------------
Interest expense.................       $    --        (100)%       $ (1,000)
--------------------------------------------------------------------------------
Other (expense) income...........       $(4,000)       (500)%       $  1,000
--------------------------------------------------------------------------------

     Interest  income  increased  to $25,000 for the three months ended June 30,
2003 compared to $15,000 for the three months ended June 30, 2002. This increase
was due to higher  average  investment  balances in 2003.  There was no interest
expense for the three  months  ended June 30,  2003,  compared to $1,000 for the
three  months  ended June 30,  2002.  Other  expenses  were $4,000 for the three
months  ended June 30,  2003  compared  to other  income of $1,000 for the three
months ended June 30, 2002. Such expenses were  attributable to foreign currency
transaction losses experienced in 2003.

PREFERRED STOCK DIVIDEND

     Preferred  stock  dividends  were $400,000 and $409,000  during each of the
three months ended June 30, 2003 and June 30, 2002, respectively. Such preferred
stock  dividends,  paid in shares of our Common Stock through May 11, 2002,  and
thereafter in cash,  are the result of our  obligations  in connection  with the
issuance of our Series D preferred stock in May 1999. As more fully set forth in
the Amended  Certificate of Designation,  Preferences and Rights of the Series D
Cumulative  Convertible  Preferred  Stock,  after May 11, 2002, we no longer pay
dividends  on the Series D  preferred  stock in shares of our Common  Stock at a
rate of 8.4%,  and we became  obligated to pay such dividends in cash, at a rate
equal to 8% per annum.

     Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

REVENUES

Revenues                                2003          Change          2002
(dollars in thousands)
--------------------------------------------------------------------------------
Net Product Sales...............      $  23,120        14.1%        $  20,258
--------------------------------------------------------------------------------
Contract Revenues...............          1,053       (21.8)%           1,347
--------------------------------------------------------------------------------
License Revenues................            670       449.2%              122
                                      ---------       ------        ---------
--------------------------------------------------------------------------------
   Total........................      $  24,843        14.3%        $  21,727
--------------------------------------------------------------------------------

     Total  revenues  during  the six  months  ended  June 30,  2003 were  $24.8
million,  representing  a 14.3%  increase  over total  revenues of $21.7 million
during  the six  months  ended  June  30,  2002.  Such  2003  revenues  included
approximately  $23.1 million in net product  sales of Periostat,  Pandel and the
Atrix Products,  $1.1 million in contract revenues,  which were derived from our
co-promotion of Vioxx, Denavir and AVAR, and $670,000 in international licensing
revenues for Periostat.  Net product sales increased $2.9 million,  or 14.1%, to
$23.1  million  during the six  months  ended June 30,  2003  compared  to $20.3
million  during  the six  months  ended June 30,  2002  primarily  due to higher
Periostat  sales and the  addition  of the  Pandel  product  line which we began
selling direct in July 2002.


                                      -18-
<PAGE>

     Contract revenues for the six months ended June 30, 2003 decreased 21.8% to
$1.1  million  from $1.3  million  during  the six months  ended June 30,  2002,
primarily  due to the  absence  of  Pandel  contract  revenues  during  2003 and
slightly  lower Vioxx  contract  revenues,  which were  partially  offset by the
addition of Denavir and AVAR contract revenues in 2003.

     We recorded  $23,000 and $30,000 in  licensing  revenues for the six months
ended  June  30,  2003  and  June  30,  2002,  respectively.  This  revenue  was
attributable to our  recognition of previously  received  up-front  license fees
recognized for various agreements that were deferred and are being recognized as
licensing  revenue over the expected  performance  period of the agreements.  We
also recorded  licensing  revenues of $222,000 and $47,000 during the six months
ended June 30, 2003 and 2002,  respectfully,  that represent previously deferred
foreign up-front licensing fees where the recognition of revenue was accelerated
in connection with certain  licensing  agreements that were mutually  terminated
during the respective  periods.  Additionally,  during the six months ended June
30, 2003 and 2002,  respectively,  we recognized $425,000 and $45,000 in license
milestone fees received from foreign licensing  partners upon the achievement of
certain milestones.

COST OF PRODUCT SALES

--------------------------------------------------------------------------------
Cost of Product Sales                    2003          Change         2002
(dollars in thousands)
--------------------------------------------------------------------------------
Cost of Product Sales............       $ 3,652        14.9%        $  3,178
--------------------------------------------------------------------------------
Percent of Net Product Sales.....          15.8%        N/A             15.7%
--------------------------------------------------------------------------------

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

     Cost of product  sales were $3.7  million,  or 15.8% of net  product  sales
during the six months ended June 30, 2003, compared to $3.2 million, or 15.7% of
net product  sales  during the six months  ended June 30,  2002.  During the six
months  ended June 30,  2003,  cost of net product  sales  increased in absolute
dollars as a result of increased  product sales.  As a percentage of net product
sales, cost of product sales increased as a result of increased costs of product
sales for the Pandel  product  line  launched  in July  2002,  offset in part by
Periostat price increases.

RESEARCH AND DEVELOPMENT

--------------------------------------------------------------------------------
Research and Development                 2003          Change         2002
(dollars in thousands)
--------------------------------------------------------------------------------
Research and development.........       $ 2,621         65.9%       $ 1,580
--------------------------------------------------------------------------------
Percentage of Total revenues.....          10.6%         N/A            7.3%
--------------------------------------------------------------------------------

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

                                      -19-
<PAGE>


     Research and development expenses increased $1.0 million, or 65.9%, to $2.6
million  during the six months ended June 30, 2003 from $1.6 million  during the
six months ended June 30, 2002.

     Development  projects  conducted  during the six months ended June 30, 2003
included  our  continuing   formulation   development   work  for  a  once-a-day
formulation  of Periostat  and  formulation  and  stability  testing for several
potential products utilizing our licensed Restoraderm technology,  which totaled
$782,000  and  $584,000,  respectively.  Future  development  of the  once-a-day
technology  will be  contingent  on the  outcome  of the  initial  phase  of the
project,  which  should  be  determined  by the  end  of  2003.  If  successful,
additional expenses could be as much as $4.1 million through 2006.

     Clinical  projects  totaling  $500,000 were conducted during the six months
ended June 30,  2003 and  included  several  Phase IV studies for  Periostat  in
various dental indications and continued  clinical  development work relating to
Periostat in  dermatological  indications and including a Phase III trial in 150
patients to evaluate  Periostat for the treatment of rosacea.  Until the outcome
of these  trials is  determined,  it is  premature  to estimate the future costs
associated with the development of Periostat for any indication.

     Other  research and  development  expenses  incurred  during the six months
ended June 30, 2003  included  $53,000 in  regulatory  consulting  and legal and
filing fees under the Mutual  Recognition  Procedure  in Europe and $243,000 for
various regulatory costs, including annual FDA filing fees, legal and regulatory
expenses in the United  States.  Direct  salaries and other  personnel  expenses
incurred during the six months ended June 30, 2003 were $271,000.  Additionally,
during such period we incurred  $188,000 in consulting,  travel and other office
expenses.

     Development  projects  conducted  during the six months ended June 30, 2002
included  our  continuing   formulation   development   work  for  a  once-a-day
formulation  of Periostat  and  formulation  and  stability  testing for several
potential products utilizing our licensed Restoraderm technology,  which totaled
$247,000 and $210,000, respectively.

     Clinical  projects  totaling  $510,000 were conducted during the six months
ended June 30,  2002 and  included  several  Phase IV studies for  Periostat  in
various  dental  indications,  initiation  of a  70-patient  clinical  study  to
evaluate the efficacy of Periostat to treat  meibomiantis (an ocular  condition)
and  clinical   development   work  relating  to  Periostat  in   dermatological
indications. In August 2002, we launched a Phase III trial to evaluate Periostat
for the treatment of rosacea.

     Other expenses  incurred during the six months ended June 30, 2002 included
$99,000 in regulatory  consulting  and filing fees under the Mutual  Recognition
Procedure in Europe and $83,000 for various  regulatory costs,  including annual
FDA filing fees,  legal,  and regulatory  expenses in the United States.  Direct
salaries and other personnel  expenses incurred during the six months ended June
30, 2002 were $266,000. Additionally, during such period we incurred $165,000 in
travel and other office expenses.

                                      -20-
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE

--------------------------------------------------------------------------------
Selling, General and Administrative      2003          Change         2002
(dollars in thousands)
--------------------------------------------------------------------------------
Selling, General and Administrative     $15,540         (13.4)%     $ 17,946
-       other....................
--------------------------------------------------------------------------------
Selling, General and Administrative
-    stock compensation charge...           251         100%              --
--------------------------------------------------------------------------------
Subtotal.........................       $15,791        (12.0)%      $ 17,946
--------------------------------------------------------------------------------
Percentage of Total Revenues.....          63.6%         N/A           82.6%
--------------------------------------------------------------------------------

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

     Selling,  general and  administrative  - other expenses  decreased 13.4% to
$15.5  million  during the six months  ended  June 30,  2003 from $17.9  million
during the six months  ended June 30,  2002.  This  decrease of $2.4 million was
primarily  the  result of a $3.2  million  reduction  in selling  and  marketing
expenditures   for  Periostat  and  the  Atrix  Products,   offset  in  part  by
approximately  $643,000 in additional  promotional  expenses for AVAR and Pandel
and $200,000 in increased administrative costs.

     Significant  components  of  selling,  general and  administrative  - other
expenses  incurred  during the six  months  ended June 30,  2003  included  $7.9
million in direct selling and sales training expenses, $4.0 million in marketing
expenses (including  advertising and promotion  expenditures for Periostat,  the
Atrix Products and Pandel and co-promotion  expenses relating to Vioxx and AVAR)
and $3.6 million in general and administrative  expenses, which include business
development, finance, legal and corporate activities.  Significant components of
selling,  general and  administrative  expenses during the six months ended June
30, 2002 included  $8.2 million in direct  selling and training  expenses,  $6.7
million  in   marketing   expenses   (including   Periostat   Direct-to-Consumer
advertising   expenditures,   launch   expenses  for  the  Atrix   products  and
co-promotion  expenses  related to Vioxx and Pandel) and $3.0 million in general
and  administrative  expenses,  which included business,  development,  finance,
legal and corporate activities.

     Selling, general and administrative - stock compensation charge of $251,000
during the six months ended June 30, 2003  resulted  from certain  modifications
made to stock option agreements held by Brian M. Gallagher, Ph.D., our chairman,
chief executive officer and president, in connection with a Transition Agreement
we executed with Dr. Gallagher on March 18, 2003.

OTHER INCOME/EXPENSE

--------------------------------------------------------------------------------
Other Income/Expense                     2003          Change         2002
--------------------------------------------------------------------------------
Interest income..................       $56,000         51.4%       $ 37,000
--------------------------------------------------------------------------------
Interest expense.................       $    --        (100)%       $ (2,000)
--------------------------------------------------------------------------------
Other expense....................       $10,000         100%        $     --
--------------------------------------------------------------------------------

                                      -21-
<PAGE>

     Interest income increased to $56,000 for the six months ended June 30, 2003
compared to $37,000 for the six months  ended June 30, 2002.  This  increase was
due to higher average investment balances in 2003. There was no interest expense
for the six months  ended June 30,  2003,  compared to $2,000 for the six months
ended June 30, 2002. Other expense was $10,000 for the six months ended June 30,
2003  compared to other  expense of zero for the six months ended June 30, 2002.
Such  increase  was   attributable  to  foreign  currency   transaction   losses
experienced in 2003.

PREFERRED STOCK DIVIDEND

     Preferred stock dividends were $800,000 and $829,000 during each of the six
months ended June 30, 2003 and June 30, 2002, respectively. Such preferred stock
dividends,  paid in  shares  of our  Common  Stock  through  May 11,  2002,  and
thereafter in cash,  are the result of our  obligations  in connection  with the
issuance of our Series D preferred stock in May 1999. As more fully set forth in
the Amended  Certificate of Designation,  Preferences and Rights of the Series D
Cumulative  Convertible  Preferred  Stock,  after May 11, 2002, we no longer pay
dividends  on the Series D  preferred  stock in shares of our Common  Stock at a
rate of 8.4%,  and we became  obligated to pay such dividends in cash, at a rate
equal to 8% per annum.

LIQUIDITY AND CAPITAL RESOURCES

     On May 12, 1999,  we  consummated  a $20.0  million  financing  through the
issuance of our Series D preferred stock,  which generated net proceeds to us of
$18.5  million.  The issuance of the Series D preferred  stock was approved by a
majority of our  stockholders  at our Annual Meeting of  Stockholders on May 11,
1999.  A portion of the  proceeds  of the  Series D  preferred  stock  financing
consummated  in May 1999  were  used to  repay a $10.0  million  senior  secured
convertible  note  provided  by  one of the  investors  on  March  19,  1999  in
connection  with  such  financing.  The  remaining  proceeds  have been used for
general working capital purposes.

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

     All or a portion of the shares of Series D preferred  stock  shall,  at our
option (as  determined by our board of  directors),  automatically  be converted
into fully paid,  registered and  non-assessable  shares of common stock, if the
following two conditions  are met: (i) the last sale price,  or, in case no such
sale takes place on such day, the average of the closing bid and asked prices on
the  Nasdaq  National  Market is at least 200% of the  conversion  price then in
effect  (as of June 30,  2003,  such  conversion  price was $9.89 per share) for
forty consecutive  trading days; and (ii) a shelf  registration  statement is in
effect for the shares of common stock to be issued

                                      -22-
<PAGE>


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

     We have a revolving  credit facility with Silicon Valley Bank which expires
on March 15,  2004.  We may  borrow up to the  lesser of $4.0  million or 80% of
eligible accounts receivable,  as defined under the credit facility.  The amount
available  to us is also reduced by  outstanding  letters of credit which may be
issued  under the credit  facility in amounts  totaling up to $1.5  million.  On
April 1, 2003, we secured our expected  purchase order  commitments for the next
twelve months with a letter of credit for approximately $1.1 million. As of June
30, 2003,  the letter of credit had been reduced to $761,000.  As we continue to
pay down amounts  under the letter of credit,  the amount  available to us under
the Facility  will  increase.  We are not obligated to draw amounts and any such
borrowings bear interest, payable monthly, currently at the prime rate plus 1.0%
to 1.5% per annum and may be used only for working capital purposes. Without the
consent of Silicon Valley Bank, we, among other things,  shall not: (i) merge or
consolidate with another entity; (ii) acquire assets outside the ordinary course
of business;  or (iii) pay or declare any cash dividends on our common stock. We
must also  maintain a certain  tangible  net worth of $5.0  million,  subject to
certain  upward  adjustments,  as  defined  in the  amendment,  as a  result  of
profitable  operations or additional debt or equity  financings and a minimum of
$2.0 million in cash at Silicon Valley Bank, net of borrowings  under the credit
facility. In addition, we have secured our obligations under the credit facility
through the granting of a security interest in favor of the bank with respect to
all of our assets,  including our intellectual property. As of June 30, 2003, we
had no borrowings outstanding against the credit facility.

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

     On August 24, 2001, we signed a License and Marketing  Agreement with Atrix
Laboratories,  Inc. to market  Atrix's  proprietary  dental  products,  Atridox,
Atrisorb FreeFlow and Atrisorb-D,  to the United States dental market.  Pursuant
to the terms of this agreement,  among other things:  (i) Atrix will manufacture
the dental  products  for us at an agreed upon  transfer  price and will receive
royalties on future net sales of the products each calendar  year;  (ii) we paid
to  Atrix a $1.0  million  licensing  fee to  market  such  products;  (iii)  we
committed  to no less than $2.0  million in  advertising  and  selling  expenses
related to the Atrix products  during the fiscal year beginning  January 1, 2002
(which requirement we met during 2002); (iv) we have agreed to



                                      -23-
<PAGE>

maintain,  through  August 2003, a force of no less than ninety full time dental
consultants  and  divisional  and  regional  managers  to make sales and product
recommendation calls on dental  professionals;  and (v) we agreed that the Atrix
products would be the subject of a specific number of detail calls in the United
States  during  2002,  which we achieved.  We are also  required to make certain
annual minimum expenditures for advertising and promotional  activities over the
term of the agreement  beginning January 1, 2003,  including:  (i) the lesser of
$4.0 million or 30% of our  contribution  margin,  as defined in the  agreement,
relating to aspecific Atrix product that we market,  and (ii) the lesser of $2.0
million or 30% of our contribution margin, as defined in the agreement, relating
to a separate Atrix product that we market.

     On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement  pursuant  to  which we were  granted  an  exclusive,  sublicenseable,
transferable  license with respect to the Restoraderm(TM)  topical drug delivery
system which we intend to develop for dermatological  applications.  Pursuant to
the terms of such agreement,  upon the occurrence of certain events,  we will be
required to pay certain future consulting, royalty and milestone payments in the
aggregate amount of up to approximately $3.3 million, of which no more than $2.2
million  shall be payable  prior to January 1, 2004 and of which no more than an
additional  $1.1  million  shall be payable  prior to  January 1, 2005.  We paid
$526,000 under this Agreement in the six months ended June 30, 2003. The term of
such  agreement  is for the life of any patent  that may be issued to us for the
first product we develop utilizing such technology, or, if we do not acquire any
patentable products, seven years.

     At June 30, 2003, we had cash and cash equivalents of  approximately  $11.5
million,  an increase of $1.4 million from the $10.1 million balance at December
31, 2002.  In accordance  with  investment  guidelines  approved by our Board of
Directors,  cash balances in excess of those  required to fund  operations  have
been invested in short-term  United States  Treasury  securities  and commercial
paper with a credit rating no lower than A1/P1.  Our working capital at June 30,
2003 was $10.4  million,  an  increase  of $3.8  million  from $6.6  million  at
December 31, 2002.  This  increase was primarily  attributable  to the operating
profitability  experienced  during  2003 and the  addition  of  $704,000 in cash
proceeds from the exercise of stock options and warrants.  During the six months
ended June 30,  2003,  we  generated  $2.6  million  in cash from our  operating
activities  principally  from net income of $2.8 million less changes in certain
assets and  liabilities.  During the six months ended June 30, 2003, we invested
$224,000 in capital  expenditures  and $900,000 in licensing  payments to Altana
Inc. and received  $704,000 in proceeds  from the exercise of stock  options and
warrants to purchase  common stock and we paid $800,000 in cash dividends to the
holders of our Series D preferred stock.

     Prior to the  third  quarter  of 2002,  we had  negative  cash  flows  from
operations  and have used the net proceeds of public and private  placements  of
our equity to fund operations.  We currently believe that projected increases in
sales of our United States  marketed  products in combination  with contract and
license  revenues,  working  capital at June 30, 2003 and available cash inflows
from our revolving  credit  facility  with Silicon  Valley Bank will allow us to
fund  our  operations,   capital   expenditures  and  preferred  stock  dividend
requirements  for at least the next twelve  months.  At this time,  however,  we
cannot accurately  predict the effect of certain  developments on future product
sales such as the degree of market  acceptance  of our products and  technology,
competition, the effectiveness of our sales and marketing efforts and the


                                      -24-
<PAGE>

outcome of our research and  development to demonstrate the utility of Periostat
in indications beyond those already included in the FDA approved label. Contract
and  license  revenues  include  receipts  from   co-promotion   agreements  and
performance  milestones.  The continuation of any of these agreements is subject
to the  achievement of certain  milestones and to periodic review by the parties
involved.

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

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

     o    The success of our dermatology franchise;

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

     o    The receptivity of the capital markets to future financings;

     o    Our ability to enter into additional  strategic  collaborations and to
          maintain

          existing   and   new   collaborations   and   the   success   of  such
          collaborations;

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

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

CONTRACTUAL OBLIGATIONS

     Our major outstanding  contractual  obligations relate to cash dividends on
our outstanding Series D preferred stock,  operating leases for our office space
and contractual  commitments with our marketing partners for certain selling and
promotional  expenses  associated with the products we are currently  detailing.
Additionally,  we also  expect  to make  certain  inventory  purchases  from our
contract  manufacturer  of Periostat,  guaranteed by our  irrevocable  Letter of
Credit with Silicon Valley Bank.

                                      -25-
<PAGE>


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

<TABLE>
<CAPTION>
                                      Payments Due by Period
-------------------------------------------------------------------------------------------
                                    Six Months
                                      ending
 Contractual                         December        2004 and                    2008 and
 Obligations        Total            31, 2003          2005      2006 and 2007     after
-------------------------------------------------------------------------------------------
Operating
<S>                <C>               <C>            <C>            <C>             <C>
  Leases(1)......  $2,055,000        $ 163,000      $ 678,000      $ 684,000       $530,000
-------------------------------------------------------------------------------------------
Unconditional
  Purchase             (3)(4)           (3)(4)
  Obligations....  $  761,000(2)    $ 761,000(2)       (4)            (4)            (4)
-------------------------------------------------------------------------------------------
Cash Dividends on
  Series D
  Preferred Stock. $7,200,000(5)     $ 800,000(5)   $3,200,000(5) $3,200,000(5)       (5)
-------------------------------------------------------------------------------------------
Consulting
  Payments.......  $  649,000(6)        (6)         $649,000(6)        --            --
-------------------------------------------------------------------------------------------
Total
  Contractual
  Obligations....  $10,665,000       $1,724,000     $4,527,000    $3,884,000      $530,000
-------------------------------------------------------------------------------------------
</TABLE>

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

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

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

     (4)  We will be required to make certain  annual minimum  expenditures  for
          advertising and promotional activities amounting to: (i) the lesser of
          $4.0  million or 30% of our  contribution  margin  (as  defined in the
          agreement)  relating to a specific  Atrix product that we market,  and
          (ii) the lesser of $2.0 million or 30% of our contribution  margin (as
          defined in the agreement) relating to a separate Atrix product that we
          market.  See  further  information  regarding  the Atrix  License  and
          Marketing   Agreement   under  the  heading   "Liquidity  and  Capital
          Resources."

     (5)  Pursuant to the terms of our Series D Cumulative Convertible preferred
          stock and unless earlier converted  pursuant to its terms, the holders
          of the Series D preferred  stock are entitled to dividends  payable in
          cash at a rate of 8.0% per annum.  See further  information  regarding
          our Series D preferred stock under the heading  "Liquidity and Capital
          Resources."

                                      -26-
<PAGE>

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

     In May 1999, we entered into a lease agreement relating to our office space
in Newtown,  Pennsylvania.  The lease has an initial term of ten years.  Rent is
expected  to be  approximately  $318,000  per  year  and is  subject  to  market
adjustments in 2004.

     On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement  pursuant  to  which we were  granted  an  exclusive,  sublicenseable,
transferable  license with respect to the Restoraderm(TM)  topical drug delivery
system which we intend to develop for dermatological  applications.  Pursuant to
the terms of such agreement,  upon the occurrence of certain events,  we will be
required to pay certain future consulting, royalty and milestone payments in the
aggregate amount of up to $3.3 million, of which no more than $2.2 million shall
be payable prior to January 1, 2004 and of which no more than an additional $1.1
million shall be payable prior to January 1, 2005. The term of such agreement is
for the life of any  patent  that may be issued to us for the first  product  we
develop  utilizing  such  technology,  or, if we do not acquire  any  patentable
products, seven years.

     On June 10, 2002, we executed a Development  and Licensing  Agreement  with
Shire  Laboratories,  Inc.  pursuant  to  which  we were  granted  an  exclusive
worldwide  license  (including the right to sublicense) to develop,  make,  have
made, use, supply, export, import,  register and sell products for the treatment
of various inflammatory  disorders.  In addition,  under the agreement,  certain
product  development  functions shall be performed for us. Pursuant to the terms
of such  agreement,  we will pay to Shire a  percentage  of certain net sales of
products,  if any,  utilizing  any part of  Shire's  technology.  Also under the
agreement,  we  have  committed  to  payments,  in  cash  or at  our  option,  a
combination  of cash and our  common  stock,  upon the  achievement  of  certain
clinical and regulatory  milestones in the event we pursue certain  applications
of the technology which could total up to $8.2 million in the aggregate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM 4. CONTROLS AND PROCEDURES.

     (a) Evaluation of disclosure controls and procedures. Our management,  with
the  participation of our chief executive  officer and chief financial  officer,
evaluated  the  effectiveness  of our  disclosure  controls and  procedures  (as
defined in Rules  13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30,
2003.  In designing  and  evaluating  our  disclosure  controls and  procedures,
management  recognized  that any  controls  and  procedures,  no matter how well
designed and operated,  can provide only reasonable assurance of achieving their
objectives  and  management  necessarily  applied its judgment in evaluating the
cost-benefit  relationship of possible  controls and  procedures.  Based on this
evaluation, our chief executive officer and chief


                                      -27-
<PAGE>

financial officer  concluded that, as of June 30, 2003, our disclosure  controls
and procedures were (1) designed to ensure that material information relating to
us,  including  our  consolidated  subsidiaries,  is  made  known  to our  chief
executive  officer and chief financial  officer by others within those entities,
particularly  during the period in which this report was being  prepared and (2)
effective,  in that they provide reasonable  assurance that information required
to be  disclosed  by us in our reports that we file or submit under the Exchange
Act is recorded,  processed,  summarized  and  reported  within the time periods
specified in the SEC's rules and forms.

      (b) Changes in internal  controls.  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, 2003 that has
materially affected,  or is reasonably likely to materially affect, our internal
control over financial reporting.


                                      -28-
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

West-ward Pharmaceutical Corporation Litigation

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

     As discussed below, as a result of the ruling of the United States District
Court for the District of Columbia,  we are  considering our  alternatives  with
respect to our motion for a preliminary  injunction  in our patent  infringement
suit against  West-ward.  At the Court's  request,  we are continuing to conduct
settlement discussions.

     To date,  West-ward  has not  received  FDA  approval  to market  its 20 mg
doxycycline hyclate capsules.

United Research Laboratories/Mutual Pharmaceutical Company Litigation

     On  July  8,  2003,   we  filed  a  complaint   against   United   Research
Laboratories/Mutual  Pharmaceutical  Company  ("Mutual")  in the  United  States
District  Court for the Eastern  District of New York seeking to prevent  Mutual
from  introducing 20 mg.  tablets of doxycycline  hyclate into the market in the
United States. The compliant was served on Mutual on July 11, 2003.

     Our suit alleges that Mutual has infringed our Periostat  patents under the
Hatch-Waxman  Act by filing an ANDA for a tablet  formulation  of Periostat.  In
addition,  we specifically  allege that Mutual infringes and intends to continue
to infringe two patents to which we are the exclusive licensee:  U.S. Patent No.
4,666,897  and Re-Issue  Patent RE 34,656.  We have also alleged that Mutual has
engaged in unfair  competition  and that it has tortiously  interfered  with our
present and  prospective  contractual and business  relationships.  The remedies
that we are seeking  include an award of treble  damages,  costs and  reasonable
attorneys' fees. To date,  Mutual has not received FDA approval to market its 20
mg. doxycycline tablet.

     On July 9, 2003,  Mutual filed a complaint  against us in the United States
District  Court for the Eastern  District of  Pennsylvania.  The  complaint  was
served on us on July 10, 2003. Mutual alleges that we have engaged in an overall
scheme to monopolize the market for low-dose doxycycline  products. In addition,
the  suit   alleges   that  we  have   engaged  in  an   exclusionary,   unfair,
anticompetitive  manner. The remedies that Mutual is seeking include an award of
treble damages, injunctive relief, compensatory,  punitive and exemplary damages
and reasonable attorneys' fees.

                                      -29-
<PAGE>


     On July 15, 2003, we filed and served a motion for  preliminary  injunction
in the United  States  District  Court for the  Eastern  District of New York in
connection with our patent infringement  litigation against Mutual. As discussed
below,  as a result of the ruling of the United  States  District  Court for the
District of Columbia,  we withdrew our motion for a temporary  restraining order
and  preliminary  injunction  in our patent  infringement  suit against  Mutual,
although our complaint remains outstanding.

FDA Litigation

     On June 26,  2003,  we filed a  complaint,  and on June 30,  2003,  filed a
motion for a preliminary injunction, in the Unites States District Court for the
District of Columbia  seeking to prevent the FDA from approving any application,
from West-ward,  Mutual or any other marketers of generic drugs, to introduce 20
mg.  tablets or  capsules  of  doxycycline  hyclate  into the  market  until the
expiration  of the  period of market  exclusivity  and up to a 30 month  stay of
approvals  that attaches  while patent  infringement  litigation is pending,  to
which we claim  entitlement  under the Hatch Waxman Act. On July 22,  2003,  the
United States District Court for the District of Columbia  granted a preliminary
injunction  temporarily  restraining  the FDA from approving any ANDAs submitted
for a generic version of Periostat (doxycycline hyclate) 20 mg.

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

     As a result  of the  ruling in the  United  States  District  Court for the
District of Columbia,  we withdrew our motion for a temporary  restraining order
and preliminary injunction in our patent infringement suit against Mutual, which
was previously filed in the District Court for the Eastern District of New York,
although our complaint remains outstanding.  In addition, we are considering our
alternatives  with  respect  to our motion for  preliminary  injunction  against
West-ward filed in the same jurisdiction.


                                      -30-

<PAGE>


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

Changes in Securities

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

     Option Grants

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

                                         Weighted Average
                 Number of Shares         Exercise Price
                 ----------------       -----------------
                      93,150                  $10.79

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



                                      -31-
<PAGE>


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     The Annual Meeting of Stockholders was held on May 20, 2003.

      There  were  present  at  the  Annual   Meeting  in  person  or  by  proxy
stockholders  holding  an  aggregate  of  7,636,873  shares of Common  Stock and
199,000 shares of Series D Stock,  which shares of Series D Stock account for an
additional  2,011,463  shares of Common Stock on an as converted to Common Stock
basis.  The results of the vote taken at such Annual Meeting with respect to the
election of the nominees to be the Common Stock directors were as follows:

              Common Stock Nominees            For             Withheld
           -------------------------    ----------------    ---------------
           Brian M. Gallagher, Ph.D.    7,388,713 Shares    248,160 Shares
           Peter R. Barnett, D.M.D.     7,388,713 Shares    248,160 Shares
           Robert C. Black              6,879,586 Shares    757,287 Shares
           James E. Daverman            7,181,563 Shares    455,310 Shares
           Robert J. Easton             6,672,436 Shares    964,437 Shares
           W. James O'Shea              6,879,586 Shares    757,287 Shares

     The results of the vote taken at such Annual  Meeting  with  respect to the
election of the nominee to be the Series D Director,  Stephen A. Kaplan, were as
follows:  2,011,463 shares of Series D Stock (on an as converted to Common Stock
basis) were voted for the Series D Stock nominee,  with no shares voting against
or abstaining.

     A vote of the stockholders was taken at such Annual Meeting with respect to
the  proposal to amend the  Company's  1996 Stock  Option  Plan to increase  the
maximum  aggregate  number  of shares of Common  Stock  available  for  issuance
thereunder  from  2,500,000  to  3,000,000  shares and to reserve an  additional
500,000  shares of Common Stock of the Company for issuance in  connection  with
such increase for awards to be granted under the 1996 Stock Option Plan. For the
purposes of such vote,  the holders of shares of Common Stock and the holders of
Series D Stock (on an as converted  to Common  Stock basis) voted  together as a
single class. Of such shares,  6,198,864 shares voted in favor of such proposal,
1,435,284  shares were voted  against such  proposal and 2,725 shares  abstained
from voting.

     In addition,  a vote of the stockholders was taken at the Annual Meeting on
the proposal to ratify the appointment of KPMG LLP as the  independent  auditors
of the Company for the fiscal year ending  December 31, 2003. For the purpose of
such vote,  the  holders of shares of Common  Stock and the  holders of Series D
Stock (on an as converted  to Common  Stock  basis)  voted  together as a single
class. Of such shares,  7,626,348 shares voted in favor of such proposal,  9,075
shares were voted against such proposal and 1,450 shares abstained from voting.

ITEM 5. OTHER INFORMATION.

Collaboration Agreement

     On May  20,  2003,  we  announced  that  we had  entered  into a  strategic
collaborative  agreement  with  EpiTan  Limited and Thomas  Skold of  Norrtalje,
Sweden,  to develop a topical  formulation  for  EpiTan's  lead drug  candidate,
Melanotan(R), based on the Restoraderm(TM) topical


                                      -32-
<PAGE>

drug delivery technology.  The Restoraderm technology is exclusively licensed to
us and has been  sublicensed to EpiTan.  Mr. Skold, the inventor of Restoraderm,
will be working  directly with EpiTan on the development of the topical delivery
of Melanotan.

Results of Phase II Clinical Study For Rosacea Treatment

     On  June  24,   2003,   we  announced   the  results  of  a   double-blind,
placebo-controlled clinical study designed to evaluate the efficacy of Periostat
combined with  MetroLotion(R)  (metronidazole)  Topical Lotion,  0.75%,  for the
treatment  of  rosacea.   Forty  patients  were  randomized  to  receive  either
MetroLotion  and Periostat  tablets or  MetroLotion  and placebo  tablets for 12
weeks.  After week 12,  patients  discontinued  the use of MetroLotion  and were
maintained  on either  Periostat or placebo for an  additional  4 weeks.  Lesion
counts,  along with an  assessment of erythema  (redness)  and overall  clinical
disease severity were obtained at baseline,  4, 8, 12 and 16 weeks. Patients who
were maintained on Periostat for an additional 4 weeks retained the improvements
observed at 12 weeks, whereas those on placebo began to deteriorate.

Publication of an Independent  Experience  Trial of Periostat in the Treatment
of Rosacea

     On  July  14,  2003,  we  announced  that  the  July/August  issue  of  the
peer-reviewed  dermatology journal Skin Med features an article about the use of
subantimicrobial  dose  doxycycline in acne and rosacea.  The article includes a
report  describing  the  outcome  of a  physician-sponsored  clinical  study  of
Periostat in the treatment of rosacea.

United Research Laboratories/Mutual Pharmaceutical Company Litigation

     On July 14,  2003,  we  announced  that we filed and served a complaint  on
United Research Laboratories/Mutual  Pharmaceutical Company in the United States
District  Court for the Eastern  District of New York seeking to prevent  Mutual
from  introducing 20 mg. capsules of doxycycline  hyclate into the market in the
United States.

     Our suit alleges that Mutual has infringed our Periostat  patents under the
Hatch-Waxman  Act by filing an ANDA for a tablet  formulation  of Periostat.  In
addition,  we specifically  allege that Mutual infringes and intends to continue
to infringe two patents to which we are the exclusive licensee:  U.S. Patent No.
4,666,897  and Re-Issue  Patent RE 34,656.  We have also alleged that Mutual has
engaged in unfair  competition  and that it has tortuously  interfered  with our
present and  prospective  contractual and business  relationships.  The remedies
that we are seeking  include an award of treble  damages,  costs and  reasonable
attorneys' fees. To date,  Mutual has not received FDA approval to market its 20
mg doxycycline tablet.

     On July 14,  2003,  we  announced  that we were served with a complaint  by
Mutual,  filed in the United States  District Court for the Eastern  District of
Pennsylvania.  Mutual  alleges  that we have  engaged  in an  overall  scheme to
monopolize the market for low-dose doxycycline products.  In addition,  the suit
alleges that we have engaged in an exclusionary, unfair, anticompetitive manner.
The  remedies  that  Mutual  is  seeking  include  an award of  treble  damages,
injunctive relief,  compensatory,  punitive and exemplary damages and reasonable
attorneys' fees.

                                      -33-
<PAGE>


Service of Preliminary Injunction in Suit with Mutual

     On July 16,  2003,  we  announced  that we filed  and  served a motion  for
preliminary  injunction  in the United  States  District  Court for the  Eastern
District  of New York in  connection  with our  patent  infringement  litigation
against Mutual.

FDA Litigation

     On July 23, 2003, we announced  that the United States  District  Court for
the  District  of  Columbia  had granted a  preliminary  injunction  temporarily
restraining  the FDA from approving any ANDAs submitted for a generic version of
Periostat (doxycycline hyclate) 20 mg.

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

     As a result  of the  ruling in the  United  States  District  Court for the
District of Columbia,  we withdrew our motion for a temporary  restraining order
and preliminary injunction in our patent infringement suit against Mutual, which
was previously filed in the District Court for the Eastern District of New York,
although our complaint remains outstanding.  In addition, we are considering our
alternatives  with  respect  to our motion for  preliminary  injunction  against
West-ward Pharmaceutical Corporation filed in the same jurisdiction.

Initiation  of Phase II Clinical  Study to Evaluate  COL-3 as a Treatment  for
Rosacea

     On July 24, 2003,  we announced  that we have  initiated a  double-blinded,
placebo-controlled  Phase II clinical  study to evaluate the safety and efficacy
of our novel,  non-antimicrobial tetracycline derivative COL-3 for the treatment
of rosacea.

     This  study,  which will  enroll 30  patients,  is being  conducted  by Guy
Webster, MD, Ph.D., Professor of Dermatology at Thomas Jefferson University. The
study design calls for 28 days of oral  administration  of either 10 mg of COL-3
or an identical placebo, with a 21-day, post-dosing follow-up period.

Report Progress with  Development of Sustained  Release  Once-Daily  Periostat
Formulation

     On July 25, 2003, we announced that we have successfully  completed initial
Phase  I  clinical  studies  to  establish  the  pharmacokinetics  of  our  lead
formulation  of a  sustained  release  ("SR"),  once-daily  version  of our lead
product,  Periostat.  These single-dose  pharmacokinetic  studies have confirmed
that the  formulation  falls within our  pre-defined  criteria for maximum serum
concentration  and total  dose  delivered,  which  will  enable  development  to
progress to the next stage.

     The  development  of Periostat SR was conducted in  conjunction  with Shire
Laboratories Inc., a subsidiary of Shire Pharmaceuticals Group plc, and utilizes
Shire's proprietary controlled release delivery technology.

                                      -34-
<PAGE>


     Certain novel features of the lead Periostat SR formulation have led to the
filing  of  specific   intellectual  property  protection  for  this  particular
formulation of the drug.  Manufacturing  development is currently  underway and,
following  confirmative  steady-state  pharmacokinetic  studies,  which  will be
conducted  in the third  quarter  of 2003,  it is  anticipated  that  definitive
clinical studies will begin before the end of 2003.

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

     (a) Exhibits

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

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

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

     (b) Reports on Form 8-K.

          On April 22,  2003,  we  furnished a Current  Report on Form 8-K under
          Item 9, containing a copy of our earnings release for the period ended
          March 31, 2003 (including financial  information)  pursuant to Item 12
          (Results of Operations and Financial Condition).

                                      -35-

<PAGE>


                                   SIGNATURES


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

                                    CollaGenex Pharmaceuticals, Inc.



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



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


                                      -36-