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, 2002
                             Commission File Number
                                     0-28308


                        COLLAGENEX PHARMACEUTICALS, INC.
               ---------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


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


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


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


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

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

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

               Class                                 Number of Shares
               -----                                 ----------------
     Common Stock $.01 par value                         11,273,466


<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.

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

                                                                            Page
                                                                            ----

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

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

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

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

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

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

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

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

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

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

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

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

   Item 4.   Submission of Matters to a Vote of Security Holders .........   28

   Item 5.   Other Information............................................   29

   Item 6.   Exhibits and Reports on Form 8-K.............................   30

SIGNATURES................................................................   32



                                      - i -
<PAGE>


                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS.



                                      - 1 -
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                      Condensed Consolidated Balance Sheets
                       December 31, 2001 and June 30, 2002
                  (dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,         JUNE 30,
                                  ASSETS                                        2001                2002
                                                                             -----------        -----------
                                                                                                (unaudited)
<S>                                                                           <C>                <C>
Current assets:

   Cash and cash equivalents...........................................       $   6,171          $   5,605
   Accounts receivable, net of allowance of $950 and $1,217 at
     December 31, 2001 and June 30, 2002, respectively.................           4,478              4,643
   Inventories.........................................................           1,402              1,522
   Prepaid expenses and other current assets...........................           1,200              1,584
                                                                              ---------          ---------
         Total current assets..........................................          13,251             13,354
Equipment and leasehold improvements, net..............................             537                670
Other assets...........................................................             910              2,220
                                                                              ---------          ---------
         Total assets..................................................       $  14,698          $  16,244
                                                                              =========          =========

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

   Current portion of note payable.....................................       $      35          $      --
   Accounts payable....................................................           3,769              3,684
   Accrued expenses....................................................           3,153              4,793
                                                                              ---------          ---------
         Total current liabilities.....................................           6,957              8,477
                                                                              ---------          ---------
Deferred revenue.......................................................             614                537

Commitments

Stockholders' equity:

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

   Common stock, $0.01 par value; 25,000,000 shares authorized,
     10,999,573 and 11,273,466 shares issued and outstanding at
     December 31, 2001 and June 30, 2002, respectively.................             110                113

   Common stock to be issued (103,196 shares at December 31, 2001
     and 87,636 at June 30, 2002)......................................             840                611
   Additional paid in capital..........................................          80,129             82,230
   Accumulated deficit.................................................         (73,954)           (75,726)
                                                                              ---------          ---------
         Total stockholders' equity....................................           7,127              7,230
                                                                              ---------          ---------
         Total liabilities and stockholders' equity....................       $  14,698          $  16,244
                                                                              =========          =========
</TABLE>



See accompanying notes to unaudited condensed consolidated financial statements.

                                      - 2 -


<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                 Condensed Consolidated Statements of Operations
                For the Three Months Ended June 30, 2001 and 2002
                  (dollars in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED JUNE 30,
                                                                  ---------------------------
                                                                     2001             2002
                                                                  ----------       ----------

<S>                                                              <C>               <C>
Revenues:
  Product sales...........................................       $     7,267       $    10,377
  Contract revenues.......................................             1,024               555
  License revenues........................................               420                35
                                                                 -----------       -----------
       Total revenues.....................................             8,711            10,967
                                                                 -----------       -----------
Operating expenses:
  Cost of product sales...................................             1,516             1,598
  Research and development................................               874               870
  Selling, general and administrative.....................             9,070             8,899
                                                                 -----------       -----------
        Total operating expenses..........................            11,460            11,367
                                                                 -----------       -----------
        Operating loss....................................            (2,749)             (400)

Other income (expense):
  Interest income.........................................                74                15
  Interest expense........................................                (2)               (1)
  Other income (expense)..................................                (4)                1
                                                                 -----------       -----------
        Net loss..........................................            (2,681)             (385)
Preferred stock dividend..................................               420               409
                                                                 -----------       -----------
Net loss allocable to common stockholders.................       $    (3,101)      $      (794)
                                                                 ===========       ===========
Basic and diluted net loss per share allocable to common
  stockholders............................................       $     (0.29)      $     (0.07)
                                                                 ===========       ===========
Shares used in computing basic and diluted net loss per
  share allocable to common stockholders..................        10,550,638        11,163,585
                                                                 ===========       ===========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements.

                                      - 3 -
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                 Condensed Consolidated Statements of Operations
                 For the Six Months Ended June 30, 2001 and 2002
                  (dollars in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED JUNE 30,
                                                                 ----------------------------
                                                                     2001             2002
                                                                 ----------       -----------

<S>                                                              <C>              <C>
Revenues:
  Product sales...........................................       $   13,381       $    20,258
  Contract revenues.......................................            1,899             1,347
  License revenues........................................              456               122
                                                                 ----------       -----------
       Total revenues.....................................           15,736            21,727
                                                                 ----------       -----------

Operating expenses:
  Cost of product sales...................................            2,882             3,178
  Research and development................................            1,818             1,699
  Selling, general and administrative.....................           16,547            17,827
                                                                 ----------       -----------
        Total operating expenses..........................           21,247            22,704
                                                                 ----------       -----------
        Operating loss....................................           (5,511)             (977)

Other income (expense):
  Interest income.........................................              136                37
  Interest expense........................................               (5)               (2)
  Other income............................................                8                --
                                                                 ----------       -----------
        Net loss..........................................           (5,372)             (942)
Preferred stock dividend..................................              840               829
                                                                 ----------       -----------
Net loss allocable to common stockholders.................       $   (6,212)      $    (1,771)
                                                                 ==========       ===========

Basic and diluted net loss per share allocable to common
  stockholders............................................       $    (0.62)      $     (0.16)
                                                                 ==========       ===========

Shares used in computing basic and diluted net loss per
  share allocable to common stockholders..................        9,946,992        11,122,041
                                                                 ==========       ===========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                      - 4 -
<PAGE>

                        COLLAGENEX PHARMACEUTICALS, INC.
                                AND SUBSIDIARIES

                 Condensed Consolidated Statements of Cash Flows
                 For the Six Months Ended June 30, 2001 and 2002
                             (dollars in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                     SIX MONTHS ENDED JUNE 30,
                                                                   ----------------------------
                                                                       2001             2002
                                                                   ------------     ------------
<S>                                                                <C>              <C>
Cash flows from operating activities:
  Net loss..................................................       $  (5,372)       $    (942)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Noncash compensation expense..........................             178               --
      Depreciation and amortization expense.................             127              129
      Change in assets and liabilities:
        Accounts receivable, net............................            (825)            (165)
        Inventories.........................................            (939)            (120)
        Prepaid expenses and other assets...................            (198)          (1,942)
        Accounts payable....................................           2,013              (85)
        Accrued expenses....................................              64            1,640
        Deferred revenue....................................             (31)             (77)
                                                                   ---------        ---------
               Net cash used in operating activities........          (4,983)          (1,562)
                                                                   ---------        ---------

Cash flows from investing activities:
  Capital expenditures......................................             (49)            (262)
  Proceeds from the sale of short term investments..........           1,739               --
  Purchase of short term investments........................            (296)              --
                                                                   ---------        ---------
               Net cash provided by (used in) investing
                  activities................................           1,394             (262)
                                                                   ---------        ---------
Cash flows from financing activities:
  Net proceeds from issuance of common stock................           6,814            1,293
  Repayment of long-term debt...............................             (37)             (35)
                                                                   ---------        ---------
               Net cash provided by financing activities....           6,777            1,258

Net increase (decrease) in cash and cash equivalents........           3,188             (566)

Cash and cash equivalents at beginning of period............           3,709            6,171
                                                                   ---------        ---------
Cash and cash equivalents at end of period..................       $   6,897        $   5,605
                                                                   =========        =========

Supplemental schedule of noncash financing activities:
    Common stock dividends issued or issuable
    on preferred stock......................................       $     840        $     611
                                                                   =========        =========

    Cash dividends declared.................................              --              218
                                                                   =========        =========

    Issuance of common stock to be issued...................             872              840
                                                                   =========        =========

    Issuance of warrants to purchase common stock in
        connection with equity line.........................              --              248
                                                                   =========        =========

Supplemental disclosure of cash flow information:
    Cash paid during the period for interest................       $       8        $       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, 2001 and 2002
                             (dollars in thousands)
                                   (Unaudited)

NOTE 1 -- BASIS OF PRESENTATION:

     The unaudited condensed  consolidated  financial statements included herein
have been prepared by the Company,  pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with accounting  principles
generally  accepted in the United  States of America.  Certain  information  and
footnote  disclosures  normally  included  in the  annual  financial  statements
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America have been  condensed or omitted  pursuant to such rules
and regulations.  These unaudited condensed  consolidated  financial  statements
should be read in  conjunction  with the  Company's  2001  audited  consolidated
financial  statements and footnotes included in its Form 10-K for the year ended
December 31, 2001.

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

     In the opinion of the  Company's  management,  the  accompanying  unaudited
condensed  consolidated  financial  statements  have  been  prepared  on a basis
substantially  consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present  fairly the  Company's  consolidated  financial  position as of June 30,
2002,  their results of  operations  for the three and six months ended June 30,
2001 and 2002,  and their cash flows for the six months  ended June 30, 2001 and
2002. Interim results are not necessarily  indicative of results anticipated for
the full fiscal year.

NOTE 2 -- INVENTORIES:

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

                                        2001                2002
                                        ----                ----
        Raw materials...........     $      174          $      196
        Work-in-process.........             66                 800
        Finished goods..........          1,162                 526
                                     ----------          ----------
                                     $    1,402          $    1,522
                                     ==========          ==========


NOTE 3 -- COMMON STOCK AND DEBT FINANCING:

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


                                     - 6 -
<PAGE>

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

     The Facility may be used only for working capital purposes.  The Company is
not  obligated to draw  amounts  under the Facility and any such draws under the
Facility will bear interest at the then  prevailing  prime rate plus 1.0 to 1.5%
per annum.  The Company  must also  maintain (i) a tangible net worth of $5,000,
subject to certain upward  adjustments as defined in the amendment,  as a result
of  profitable  operation or  additional  debt or equity  financings  and (ii) a
minimum of $2,000 in cash,  net of borrowings  under the facility,  at all times
during the term of the  Facility,  which  expires  March 15,  2004.  Without the
consent of the Bank,  the Company,  among other  things,  shall not (i) merge or
consolidate with another entity; (ii) acquire assets outside the ordinary course
of business;  or (iii) pay or declare any cash dividends on the Company's Common
Stock. In addition,  the Company has secured its obligations  under the Facility
through the granting of a security interest in favor of the Bank with respect to
all of the Company's assets,  including its intellectual  property.  At June 30,
2002, there were no borrowings against the Facility, however, on March 26, 2002,
the  Company  issued an  irrevocable  letter of credit  under the  Facility  for
$1,343.  This  letter  of  credit  will be used to secure  future  purchases  of
inventory that the Company expects to make from a supplier.  As the Company pays
down  amounts  under the letter of credit,  the amount  available to the Company
under the Facility will increase.

     On February 14, 2002, the Company  entered into an equity line (the "Equity
Line")  arrangement  under the terms of a Common Stock  Purchase  Agreement (the
"Agreement") with Kingsbridge Capital Limited  ("Kingsbridge").  Under the terms
of the Agreement,  the Company may, at its sole discretion and from time to time
over the twelve  month period that began  February 14, 2002,  sell shares of its
Common  Stock to  Kingsbridge  at a discount  to market  price of up to 10%,  as
determined  prior to each such  sale.  The  maximum  amount of each draw down is
based on the Company's market capitalization and may not exceed $3,000. Pursuant
to the terms of the  Agreement,  the Company  committed to: (i) draw down on the
Equity Line an amount aggregating at least $1,500 in registered shares of Common
Stock, prior to August 14, 2002 (the "Minimum Commitment Amount"),  of which the
Company has drawn down an aggregate  of $1,266 as of June 30,  2002;  or (ii) if
the Company has not satisfied such Minimum Commitment Amount, pay to Kingsbridge
an amount  equal to 10% of the  amount by which the  Minimum  Commitment  Amount
exceeds the aggregate of all amounts drawn down under the Equity Line in respect
of the shares of Common Stock issued and sold thereunder, except if the price of
the  Company's  Common  Stock  is  below  certain  levels  during  this  period.
Kingsbridge  and the Company have agreed to extend the date by which the Company
must draw down the Minimum  Commitment  Amount to October 29,  2002.  The Equity
Line provides for the sale of up to an aggregate $8,500 in registered  shares of
Common  Stock.  In  connection  with the  consummation  of the Equity Line,  the
Company  issued to  Kingsbridge  a warrant to purchase  40,000  shares of Common
Stock at an exercise price of $9.38 per share. Such warrant is exercisable as of
August  14,  2002,  and will  expire on August 13,  2007.  The fair value of the
warrants issued in connection with the Equity Line of approximately  $248 has no
net impact as the increase to additional paid in capital  representing the value
of the warrants  issued is offset by the decrease in additional  paid in capital
representing a cost of the offering. On May 30, 2002,


                                     - 7 -
<PAGE>

the Company  issued 119,335 shares of its Common Stock under the Equity Line for
gross proceeds of approximately  $1,000 and on June 28, 2002, the Company issued
32,187  shares of its Common  Stock under the Equity Line for gross  proceeds of
approximately $266.

NOTE 4 -- COMMITMENTS:

     During 1999, the Company entered into a three-year  co-promotion  agreement
with Merck & Co.,  Inc.  for Vioxx under which the Company is committed to spend
up to $1,000 annually for promotional expenses,  unless the agreement is earlier
terminated pursuant to the terms of the agreement. The current agreement,  which
expires on September  22,  2002,  may be renewable  upon mutual  agreement.  The
Company is currently evaluating its options with respect thereto.

     Pursuant  to the  Company's  License  and  Marketing  Agreement  with Atrix
Laboratories,  the  Company is  committed  to: (i) expend no less than $2,000 in
advertising and selling expenses related to the Atrix products during the fiscal
year beginning January 1, 2002; (ii) maintain,  through 2003, a force of no less
than ninety full time dental consultants and divisional and regional managers to
make sales and product  recommendation calls on dental professionals;  and (iii)
make the Atrix products the subject of a specific  number of detail calls in the
United  States  during  2002.  The Company will also be required to make certain
minimum  expenditures  for advertising and  promotional  activities  after 2002,
including: (i) the lesser of $4,000 or 30% of the Company's contribution margin,
as defined in the  agreement,  relating  to a specific  Atrix  product  that the
Company's  markets,  and (ii)  the  lesser  of  $2,000  or 30% of the  Company's
contribution  margin, as defined in the agreement,  relating to a separate Atrix
product that the Company  markets.  For the six months ended June 30, 2002,  the
Company had  fulfilled  $1,079 of the $2,000  advertising  and  selling  expense
commitment for 2002.

     On February 11, 2002, the Company executed a Co-operation,  Development and
Licensing  Agreement with Thomas Skold pursuant to which the Company was granted
an  exclusive,   sublicenseable,   transferable  license  with  respect  to  the
Restoraderm(TM)  topical  drug  delivery  system  which the  Company  intends to
develop  for  dermatological  applications.   Pursuant  to  the  terms  of  such
agreement,  upon the occurrence of certain events,  the Company will be required
to pay certain  consulting,  royalty  and  milestone  payments in the  aggregate
amount of up to  $4,030,  of which no more than  $393,  $950,  $1,650 and $1,037
shall be payable  prior to December 31, 2002,  January 1, 2003,  January 1, 2004
and January 1, 2005, respectively. The term of such agreement is for the life of
any patent that may be issued to the  Company for the first  product the Company
develops  utilizing  such  technology,  or, if the Company  does not acquire any
patentable products, seven years.

     On May 24, 2002,  the Company  executed a Sublicense  Agreement with Altana
Inc.  ("Altana"),  the United States subsidiary of Altana Pharma AG, pursuant to
which the Company was granted the  exclusive  right to create  improvements  to,
market, advertise,  promote,  distribute, offer for sale and sell, in the United
States and Puerto Rico,  Pandel(R) Cream, a mid-potency  topical  corticosteroid
that is indicated for the relief of mild-to-moderate  inflammatory  disorders of
the skin, such as atopic  dermatitis and psoriasis.  Altana  currently  licenses
such  rights from Taisho  Pharmaceutical  Co.,  Ltd.,  a company  organized  and
existing  under the laws of Japan.  The Company  will  purchase  from Altana all
Pandel products to be sold. Pursuant to the terms of


                                     - 8 -
<PAGE>

such agreement,  the Company agreed to pay Altana an aggregate sublicense fee of
$1,700,  of which $800 was  payable on June 30, 2002 and $900 of which is due on
May 31, 2003. The sublicense fee has been  capitalized  and will be amortized to
cost of product sales over the estimated  term of  agreement.  In addition,  the
Company is required to pay a royalty fee equal to a percentage  of the net sales
of the product,  if any. The agreement may be terminated by the Company:  (i) at
any time, without cause, upon twelve months prior written notice; (ii) if Altana
shall commit any uncured,  willful or material  breach of the  provisions of the
agreement;  or (iii) if Altana shall cease to  manufacture or supply the product
to the Company.  Altana may terminate the  agreement:  (i) at any time,  without
cause,  upon twelve months written notice;  (ii) if the Company shall commit any
uncured, willful or material breach of the provisions of the agreement; (iii) if
the Company shall cease to offer the product for  distribution to its customers;
or (iv) if the  Company  fails  to make  certain  payments  or  fulfill  certain
invoicing obligations.  In certain  circumstances,  all monies paid to the other
party  under  the  agreement   shall  be  refunded  to  the  paying  party  upon
termination.

     On June  10,  2002,  the  Company  executed  a  Development  and  Licensing
Agreement with Shire Laboratories,  Inc. ("Shire") pursuant to which the Company
was granted an exclusive  worldwide license  (including the right to sublicense)
to develop,  make, have made, use,  supply,  export,  import,  register and sell
products  for the  treatment of various  inflammatory  disorders  using  Shire's
technology.  In  addition,  under the  agreement,  Shire shall  perform  certain
product  development  functions for the Company.  Also under the agreement,  the
Company  has  committed  to  payments,  in cash or at the  Company's  option,  a
combination  of cash and the Company's  Common Stock,  upon the  achievement  of
certain  clinical and  regulatory  milestones  in the event the Company  pursues
certain  applications  of the  technology  which could total up to $7,900 in the
aggregate.  Pursuant to the terms of such agreement,  the Company shall also pay
to Shire a percentage  of certain net sales of products,  if any,  utilizing any
part of Shire's  technology.  The Company may terminate the agreement upon sixty
days notice.

NOTE 5 -- STOCK OPTION PLANS:

     At the Company's 2002 Annual Meeting of  Stockholders  held on May 9, 2002,
the  stockholders of the Company approved a proposal to amend the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan") to increase the maximum  number
of shares of the Company's  Common Stock  available for issuance  under the 1996
Stock  Option  Plan  from  2,000,000  to  2,500,000  shares  and to  reserve  an
additional  500,000  shares  of the  Company's  Common  Stock  for  issuance  in
connection with awards granted under the 1996 Stock Option Plan.

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

     On May 29, 2002, the Company's  Board of Directors  approved an Amended and
Restated Shareholder  Protection Rights Agreement (the "Rights Agreement").  The
Rights  Agreement  amended and  restated,  in its entirety,  the Company's  then
existing Shareholder  Protection Rights Agreement (the "Prior Rights Agreement")
dated  September 15, 1997,  as amended,  by and between the Company and American
Stock  Transfer & Trust  Company,  as rights agent  thereunder.  American  Stock
Transfer & Trust  Company  remains as rights  agent under the Rights  Agreement.
Each  right  previously  authorized  and  distributed  under  the  Prior  Rights
Agreement


                                     - 9 -
<PAGE>

was deemed to  constitute a Right under the Rights  Agreement  effective May 29,
2002.  The Board of Directors  further  authorized the issuance of one Right for
each share of the Company's  Common Stock issued  between the date of the Rights
Agreement and the earlier of the  Distribution  Date or the Expiration  Date, as
defined in the Rights Agreement.

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



                                     - 10 -
<PAGE>

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

OVERVIEW

     CollaGenex   Pharmaceuticals,   Inc.  and   subsidiaries   is  a  specialty
pharmaceutical   company  currently  focused  on  providing  innovative  medical
therapies to the dental and dermatology markets.  Our first product,  Periostat,
is an orally administered, prescription pharmaceutical product that was approved
by the United States Food and Drug  Administration  in September 1998 and is the
first and only  pharmaceutical  to treat adult  periodontitis  by inhibiting the
enzymes that destroy  periodontal support tissues. We are marketing Periostat to
the dental community through our own professional  dental  pharmaceutical  sales
force of approximately 120 sales  representatives  and managers.  Pursuant to an
exclusive  License and Marketing  Agreement  with Atrix  Laboratories,  Inc., we
began, in October 2001, to actively market Atrix's  proprietary dental products,
Atridox(R),  Atrisorb FreeFlow(R) and Atrisorb-D(R), to the United States dental
market.  In May 2002,  we executed a sublicense  agreement  with Altana Inc. to,
among other things, market and distribute, in the United States and Puerto Rico,
Pandel(R),  a  topical  corticosteroid  product  developed  by Altana  Inc.  and
indicated for dermatologic use. We distribute  Periostat and,  effective July 1,
2002,  Pandel,  through drug  wholesalers  and large retail chains in the United
States.  Periostat is also sold through  wholesalers in the United Kingdom.  The
Atrix dental products are distributed through a specialty  distributor who sells
these products directly to dental  practitioners in the United States. Our sales
force  also  currently   co-promotes   Vioxx,   a   prescription   non-steroidal
anti-inflammatory drug developed by Merck & Co., Inc., in the United States.

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

     We have incurred  losses each year since  inception and have an accumulated
deficit of $75.7 million at June 30, 2002.

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


                                     - 11 -
<PAGE>

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

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

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

RESULTS OF OPERATIONS

     During the three months ended June 30, 2002,  we achieved net product sales
of $10.4 million.  We launched each of Atridox and Atrisorb  FreeFlow in October
2001, and launched  Atrisorb-D in February  2002. In addition,  during the three
months ended June 30, 2002, we generated  $555,000 in contract revenues from our
two  co-promotion  agreements  for Vioxx and Pandel,  and  $35,000 in  licensing
revenue.

     Critical Accounting Judgments and Estimates

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



                                     - 12 -
<PAGE>

     We recognize product sales revenue upon shipment, net of estimated returns,
provided  that  collection  is  determined  to be  probable  and no  significant
obligations  remain.  Sales  revenue from our customers is subject to agreements
allowing limited rights of return, rebates and price protection. Accordingly, we
reduce  revenue  recognized  for  estimated  future  returns,  rebates and price
protection  at the time the  related  revenue is  recorded.  The  estimates  for
returns  are  adjusted  periodically  based upon  historical  rates of  returns,
inventory  levels in the distribution  channel and other related factors.  While
management  believes it can make reliable  estimates for these  matters,  unsold
products  in  these   distribution   channels  may  be  exposed  to  expiration.
Accordingly,  it is possible that these  estimates  will change in the future or
that the actual  amounts could vary  materially  from our estimates and that the
amounts of such  changes  could  impact our  results  of  operations,  financial
condition and our business.

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

     Three  Months  Ended June 30, 2002  Compared to Three Months Ended June 30,
2001

REVENUES

--------------------------------------------------------------------------------
Revenues
(dollars in thousands)              2002            CHANGE             2001
--------------------------------------------------------------------------------
Product Sales.................   $ 10,377           42.8%           $  7,267
--------------------------------------------------------------------------------
Contract Revenues.............        555          (45.8)%             1,024
--------------------------------------------------------------------------------
License Revenues..............         35          (91.7)%               420
                                 --------                           --------
--------------------------------------------------------------------------------
    Total.....................   $ 10,967           25.9%           $  8,711
--------------------------------------------------------------------------------

     Total  revenues  during the three  months  ended  June 30,  2002 were $11.0
million,  representing  a 25.9%  increase  over total  revenues of $8.7  million
during  the three  months  ended  June 30,  2001.  Such 2002  revenues  included
approximately $10.4 million in net product sales of Periostat, Atridox, Atrisorb
FreeFlow and Atrisorb-D,  $555,000 in contract revenues, which were derived from
our co-promotion of Vioxx and Pandel, and $35,000 in previously deferred foreign
license  income and milestone  revenues for Periostat.  Product sales  increased
$3.1 million,  or 42.8%, to $10.4 million during the three months ended June 30,
2002 compared to $7.3 million during the three months ended June 30, 2001 due to
significantly  higher  prescriptions for Periostat and the addition of the Atrix
dental products which we began marketing in October 2001.


                                     - 13 -
<PAGE>

     Contract  revenues for the three months ended June 30, 2002 declined  45.8%
to $555,000  from $1.0 million  during the three months ended June 30, 2001 as a
result  of the  termination  in  April  2001  of  our  agreement  with  Novartis
Pharmaceuticals  to co-promote  Denavir and a decline in contract  revenues from
Merck  relating to our  co-promotion  of Vioxx.  Contact  revenues for the three
months  ended June 30, 2001  included  $122,000  in  co-promotion  revenues  for
Denavir.  There were no contract  revenues for Denavir in the three months ended
June 30,  2002.  The  decline in contract  revenues  from Merck was due to lower
levels of prescriptions for Vioxx resulting from negative  publicity relating to
adverse cardiovascular events experienced by a small segment of patients who had
been administered Vioxx.

     In accordance  with SAB 101, which we adopted in 2000, we recorded  $15,000
in  licensing  revenues  during each of the three months ended June 30, 2002 and
June 30, 2001.  This revenue was  attributable  to our recognition of previously
recognized  up-front  license  fees  received for various  agreements  that were
deferred upon the adoption of SAB 101 and is being recognized as income over the
expected  performance  period of these  agreements.  We also recorded  milestone
revenues from our foreign licensing  partners of $20,000 and $405,000 during the
three months ended June 30, 2002 and 2001, respectively.

COST OF PRODUCT SALES

--------------------------------------------------------------------------------
Cost of Product Sales
(dollars in thousands)             2002             CHANGE            2001
--------------------------------------------------------------------------------
Cost of Product Sales.........   $ 1,598              5.4%          $ 1,516
--------------------------------------------------------------------------------
Percent of Product Sales......     15.4%                              20.9%
--------------------------------------------------------------------------------

     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 and the Atrix products.

     Cost of product sales were $1.6  million,  or 15.4% of product sales during
the three  months  ended June 30, 2002,  compared to $1.5  million,  or 20.9% of
product sales during the three months ended June 30, 2001. Cost of product sales
increased in absolute  dollars but  decreased as a percentage  of product  sales
during such period in 2002 compared to 2001, primarily due to manufacturing cost
savings for  Periostat  tablets,  which we  launched  in July 2001,  compared to
Periostat capsules.

RESEARCH AND DEVELOPMENT

--------------------------------------------------------------------------------
Research and Development
(dollars in thousands)             2002             CHANGE            2001
--------------------------------------------------------------------------------
Research and development......    $ 870             (0.5)%           $ 874
--------------------------------------------------------------------------------
Percentage of total revenue...     7.9%                              10.0%
--------------------------------------------------------------------------------

     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.



                                     - 14 -
<PAGE>

     Research and development  expenses  decreased $4,000 to $870,000 during the
three  months  ended June 30, 2002 from  $874,000  during the three months ended
June 30, 2001.

     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.  Future  development  of  the  once-a-day
technology  will be  contingent  on the  outcome  of the  initial  phase  of the
project,  which is  expected  to be  determined  by the end of 2002.  Additional
expenses  ranging  from  approximately  $1.0  million in 2002 to as much as $6.0
million through completion could be incurred if the project is successful.

     Clinical  projects totaling $256,000 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 (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.  Until the outcome of these trials are determined,
it is premature to estimate the future costs  associated with the development of
Periostat for dermatological indications.

     Other  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  $138,000  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 $67,000 in consulting travel and other office expenses.

     Research and  development  expenses  incurred during the three months ended
June  30,  2001  included   $73,000  in  research  grants  to  various  academic
institutions for conducting  research related to our core technology,  $5,000 in
Periostat  Phase IV clinical trial grants,  $156,000 in contracted  clinical and
development expenses related to a safety and pharmacokinetic  study for Metastat
and other IMPACS compounds in the development stage.

     Other  expenses  incurred  during  the three  months  ended  June 30,  2001
included  $232,000  in  regulatory  consulting  and filing fees under the Mutual
Recognition  Procedure  in Europe and  $149,000  for various  regulatory  costs,
including annual FDA filing fees and legal and regulatory expenses in the United
States  related to obtaining  FDA approval for Periostat  tablets.  Research and
development  expenses  incurred during the three months ended June 30, 2001 also
included  $134,000 in direct  salaries  and other  personnel  related  expenses,
$164,000 related to stock compensation  expense and an expense credit of $39,000
relating to consulting, travel and other office expenses.


                                     - 15 -
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE

--------------------------------------------------------------------------------
Selling, General and Administrative
(dollars in thousands)                      2002          CHANGE         2001
--------------------------------------------------------------------------------
Selling, general and administrative..     $ 8,899          (1.9)%      $ 9,070
--------------------------------------------------------------------------------
Percentage of total revenue..........       81.1%                       104.1%
--------------------------------------------------------------------------------

     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.

     This  decrease of $171,000,  or 1.9%,  from the three months ended June 30,
2001 to the three months ended June 30, 2002,  was  primarily  the result of the
reduction  in our  Direct-to-Consumer,  or DTC,  expenditures  offset in part by
additional  promotional  expenses  for the Atrix  dental  products,  Pandel  and
additional incentive compensation for our sales force.

     During the three months ended June 30, 2002 we incurred $1.3 million in DTC
advertising expenses compared to $2.4 million during the same period in 2001.

     Selling, general and administrative expenses decreased 1.9% to $8.9 million
during the three months  ended June 30, 2002 from $9.1 million  during the three
months  ended June 30,  2001.  Significant  components  of selling,  general and
administrative  expenses  incurred  during the three  months ended June 30, 2002
included  $3.8  million in direct  selling  and sales  training  expenses,  $3.5
million in marketing expenses (including Periostat DTC advertising expenditures,
launch expenditures for the Atrix products and co-promotion expenses relating to
Vioxx and Pandel) and $1.6 million in general and administrative expenses, which
include  business  development,  finance and corporate  activities.  Significant
components  of selling,  general and  administrative  expenses  during the three
months ended June 30, 2001 included $3.3 million in direct  selling and training
expenses,   $4.5  million  in  marketing  expenses   (including   Periostat  DTC
advertising  expenditures and  co-promotion  expenses related to Vioxx) and $1.3
million in general and administrative expenses.

OTHER INCOME/EXPENSE

--------------------------------------------------------------------------------
Other Income/Expense               2002             CHANGE            2001
--------------------------------------------------------------------------------
Interest income...............   $  15,000          (79.7)%        $  74,000
--------------------------------------------------------------------------------
Interest expense..............   $   1,000          (50.0)%        $   2,000
--------------------------------------------------------------------------------
Other Income (Expense)........   $   1,000           N/A           $  (4,000)
--------------------------------------------------------------------------------

     Interest  income  decreased  to $15,000 for the three months ended June 30,
2002 compared to $74,000 for the three months ended June 30, 2001. This decrease
was due to lower average  balances in cash and short-term  investments and lower
investment yields during the three months ended June 30, 2002.  Interest expense
for the three months ended June 30, 2002 was $1,000,  compared to $2,000 for the
three  months ended June 30,  2001.  Other income  during the three months ended
June 30, 2002 was $1,000.  Other expense  during the three months ended June 30,
2001  of  $4,000  resulted  from  exchange  rate  changes  on  foreign  currency
transactions.



                                     - 16 -
<PAGE>

PREFERRED STOCK DIVIDEND

     Preferred  stock  dividends  were $409,000 and $420,000  during each of the
three months ended June 30, 2002 and June 30, 2001, 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,  and we
became obligated to pay such dividends in cash, at a rate equal to 8% per annum.
Cash  dividends  accrued  for the  period  May 12,  2002 to June 30,  2002  were
approximately $218,000.

     Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

REVENUES

--------------------------------------------------------------------------------
Revenues
(dollars in thousands)              2002          CHANGE              2001
--------------------------------------------------------------------------------
Product Sales.................   $ 20,258          51.4%           $ 13,381
--------------------------------------------------------------------------------
Contract Revenues.............      1,347         (29.1)%             1,899
--------------------------------------------------------------------------------
License Revenues..............        122         (73.2)%               456
                                 --------                         ---------
--------------------------------------------------------------------------------
    Total.....................   $ 21,727          38.1%           $ 15,736
--------------------------------------------------------------------------------

     Total  revenues  during  the six  months  ended  June 30,  2002 were  $21.7
million,  representing  a 38.1%  increase  over total  revenues of $15.7 million
during  the six  months  ended  June  30,  2001.  Such  2002  revenues  included
approximately $20.3 million in net product sales of Periostat, Atridox, Atrisorb
FreeFlow,  Atrisorb-D and Dentaplex,  $1.3 million in contract  revenues,  which
were derived from our co-promotion of Vioxx and Pandel, and $122,000 in deferred
foreign  license and milestone  revenues for Periostat.  Product sales increased
$6.9  million,  or 51.4%,  during  the six months  ended June 30,  2002 to $20.3
million  compared to $13.4  million  during the six months  ended June 30, 2001,
mainly due to significantly  higher prescriptions for Periostat and the addition
of the Atrix dental products, which we began marketing in October 2001.

     Contract  revenues for the six months ended June 30, 2002 declined 29.1% to
$1.3 million  from $1.9  million  during the six months ended June 30, 2001 as a
result  of the  termination  in  April  2001  of  our  agreement  with  Novartis
Pharmaceuticals  to co-promote  Denavir and a decline in contract  revenues from
Merck  relating to our  co-promotion  of Vioxx.  Contract  revenues  for the six
months  ended June 30, 2001  included  $297,000  in  co-promotion  revenues  for
Denavir.  There were no contract  revenues  for Denavir in the six months  ended
June 30,  2002.  The  decline in contract  revenues  from Merck was due to lower
levels of prescriptions for Vioxx resulting from negative  publicity relating to
adverse cardiovascular events experienced by a small segment of patients who had
been administered Vioxx.

     In accordance  with SAB 101, which we adopted in 2000, we recorded  $30,000
in licensing revenues during each of the six months ended June 30, 2002 and June
30,  2001.  This  revenue was  attributable  to our  recognition  of  previously
recognized  up-front  license  fees



                                     - 17 -
<PAGE>

received for various  agreements that were deferred upon the adoption of SAB 101
and is being recognized as income over the expected  performance period of these
agreements.  We also  recorded  milestone  revenues  from our foreign  licensing
partners of $92,000 and  $426,000  during the six months ended June 30, 2002 and
2001, respectively.

COST OF PRODUCT SALES

--------------------------------------------------------------------------------
Cost of Product Sales
(dollars in thousands)             2002            CHANGE             2001
--------------------------------------------------------------------------------
Cost of Product Sales.........   $ 3,178           10.3%            $ 2,882
--------------------------------------------------------------------------------
Percent of Product Sales......      15.7%                              21.5%
--------------------------------------------------------------------------------

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

     Cost of product sales were $3.2  million,  or 15.7% of product sales during
the six months  ended  June 30,  2002,  compared  to $2.9  million,  or 21.5% of
product  sales during the six months ended June 30, 2001.  Cost of product sales
increased in absolute  dollars but  decreased as a percentage  of product  sales
during such period in 2002 compared to 2001, primarily due to manufacturing cost
savings for  Periostat  tablets,  which we  launched  in July 2001,  compared to
Periostat capsules.

RESEARCH AND DEVELOPMENT

--------------------------------------------------------------------------------
Research and Development
(dollars in thousands)             2002            CHANGE            2001
--------------------------------------------------------------------------------
Research and development......   $ 1,699           (6.5)%           $ 1,818
--------------------------------------------------------------------------------
Percentage of total revenue...       7.8%                              11.6%
--------------------------------------------------------------------------------

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

     Research and development  expenses decreased to $1.7 million during the six
months  ended June 30, 2002 from $1.8  million  during the six months ended June
30, 2001.  This decrease of $119,000,  or 6.5%,  was mainly the result of higher
research and clinical  development  expenses  incurred  exclusively  in 2001 for
Metastat, our antiangiogenesis drug, and Dentaplex, a nutritional supplement, as
well as European regulatory expenses for Periostat. This was partially offset by
the initial  spending in 2002 for clinical  trials for Periostat in dermatologic
and ophthalmologic indications.

     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.  Future  development  of the



                                     - 18 -
<PAGE>

once-a-day  technology will be contingent on the outcome of the initial phase of
the project,  which is expected to be determined by the end of 2002.  Additional
expenses  ranging  from  approximately  $1.0  million in 2002 to as much as $6.0
million through completion could be incurred if the project is successful.

     Clinical  projects  totaling  $528,000 were conducted during the six months
ended June 30,  2001 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.  Until the outcome of these trials are determined,
it is premature to estimate the future costs  associated with the development of
Periostat for dermatological indications.

     Other 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 $198,000 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 $151,000 in
travel and other office expenses.

     Research and development expenses incurred during the six months ended June
30, 2001 included  $175,000 in research grants to various academic  institutions
for conducting  research related to our core  technology,  $110,000 in Periostat
Phase IV clinical trial grants,  $335,000 in contracted clinical and development
expenses  related to a safety and  pharmacokinetic  study for Metastat and other
IMPACS  compounds  in  the  development   stage  and  $71,000  in  manufacturing
development and validation expenses for Dentaplex.

     Other expenses  incurred during the six months ended June 30, 2001 included
$322,000 in regulatory  consulting and filing fees under the Mutual  Recognition
Procedure in Europe and $240,000 for various regulatory costs,  including annual
FDA filing fees and legal and  regulatory  expenses in the United States related
to obtaining  FDA  approval  for  Periostat  tablets.  Research and  development
expenses  incurred  during the six  months  ended  June 30,  2001 also  included
$229,000 in direct  salaries  and other  personnel  related  expenses,  $164,000
related to stock  compensation  expense and $172,000 in  consulting,  travel and
other office expenses.

SELLING, GENERAL AND ADMINISTRATIVE

--------------------------------------------------------------------------------
Selling, General and Administrative         2002          CHANGE         2001
(dollars in thousands)
--------------------------------------------------------------------------------
Selling, general and administrative.....  $ 17,827          7.7%      $ 16,547
--------------------------------------------------------------------------------
Percentage of total revenue.............      82.0%                      105.2%
--------------------------------------------------------------------------------

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



                                     - 19 -
<PAGE>

     The  increase  of $1.3  million  in  selling,  general  and  administrative
expenses,  or 7.7%,  from the six months  ended June 30,  2001 to the six months
ended  June 30,  2002,  was  primarily  the result of the  reduction  in our DTC
expenditures  offset by  additional  promoting  expenses  for the  Atrix  dental
products,  Pandel and  additional  incentive  compensation  for our sales force.
Additionally,  we  incurred  an  incremental  $1.3  million in selling  expenses
associated with our Atrix dental products and our Pandel  co-promotion  which we
began in 2002.

     During the six months  ended June 30, 2002 we incurred  $2.8 million in DTC
advertising expenses compared to $3.8 million during the same period in 2001.

     Selling,  general  and  administrative  expenses  increased  7.7% to  $17.8
million  during the six months ended June 30, 2002 from $16.5 million during the
six months ended June 30, 2001. Significant  components of selling,  general and
administrative  expenses  incurred  during  the six months  ended June 30,  2002
included  $8.2  million in direct  selling  and sales  training  expenses,  $6.7
million in marketing expenses (including Periostat DTC advertising expenditures,
launch expenditures for the Atrix products and co-promotion expenses relating to
Vioxx and Pandel) and $2.9 million in general and administrative expenses, which
include  business  development,  finance and corporate  activities.  Significant
components of selling, general and administrative expenses during the six months
ended June 30,  2001  included  $6.7  million  in direct  selling  and  training
expenses,   $7.5  million  in  marketing  expenses   (including   Periostat  DTC
advertising  expenditures and  co-promotion  expenses related to Vioxx) and $2.3
million in general and administrative expenses.

OTHER INCOME/EXPENSE

--------------------------------------------------------------------------------
Other Income/Expense               2002             CHANGE            2001
--------------------------------------------------------------------------------
Interest income...............  $  37,000          (72.8)%         $  136,000
--------------------------------------------------------------------------------
Interest expense..............  $   2,000          (60.0)%         $    5,000
--------------------------------------------------------------------------------
Other income..................  $      --             N/A          $    8,000
--------------------------------------------------------------------------------

     Interest income decreased to $37,000 for the six months ended June 30, 2002
compared to $136,000 for the six months ended June 30, 2001.  This  decrease was
due to lower  average  balances  in cash and  short-term  investments  and lower
investment  yields during the six months ended June 30, 2002.  Interest  expense
for the six months  ended June 30, 2002 was  $2,000,  compared to $5,000 for the
six months  ended June 30, 2001.  Other income  during the six months ended June
30, 2001 of $8,000 was recognized as a result of foreign currency transactions.

PREFERRED STOCK DIVIDEND

     Preferred stock dividends were $829,000 and $840,000 during each of the six
months ended June 30, 2002 and June 30, 2001, respectively. Such preferred stock
dividends,  paid in  shares  of our  Common  Stock  through  May 11,  2002,  and
thereafter in cash,  were the result of our  obligations in connection  with the
issuance of our Series D Preferred Stock in May 1999. As more fully set forth in
the Amended  Certificate of Designation,  Preferences and Rights of the Series D
Cumulative  Convertible  Preferred  Stock,  after May 11, 2002, we no longer pay
dividends on the Series D Preferred Stock in shares of our Common Stock,  and we
became


                                     - 20 -
<PAGE>

obligated to pay such  dividends in cash, at a rate equal to 8% per annum.  Cash
dividends   accrued  for  the  period  May  12,  2002  to  June  30,  2002  were
approximately $218,000.

LIQUIDITY AND CAPITAL RESOURCES

     Since our origin in January 1992, we have financed our  operations  through
private placements of our preferred and Common Stock, an initial public offering
of  2,000,000  shares of Common  Stock,  which  generated  net proceeds to us of
approximately $18.0 million after underwriting fees and related expenses,  and a
subsequent public offering of 1,000,000 shares of Common Stock,  which generated
net proceeds to us of approximately  $11.6 million after  underwriting  fees and
related  expenses.  On May 12, 1999, we  consummated  a $20.0 million  financing
through the  issuance  of our Series D  Preferred  Stock,  which  generated  net
proceeds to us of $18.5  million.  The issuance of the Series D Preferred  Stock
was  approved  by a  majority  of our  stockholders  at our  Annual  Meeting  of
Stockholders  on May 11,  1999.  A  portion  of the  proceeds  of the  Series  D
Preferred  Stock  financing  consummated  in May 1999 were used to repay a $10.0
million  senior  secured  convertible  note  provided by one of the investors on
March 19, 1999 in connection  with such financing.  The remaining  proceeds have
been and will be used for general working capital purposes.

     The Series D Preferred  Stock is convertible at any time into shares of our
Common Stock at a current  conversion price of $9.91 per share, which conversion
price reflects a decrease from the initial  conversion price of $11.00 per share
as a  result  of both a Common  Stock  financing  in March  2001 and the sale of
shares of our Common  Stock to Atrix  Laboratories,  Inc. in August  2001.  Such
conversion price is not subject to reset except in the event that we should fail
to declare and pay dividends  when due or we should issue new equity  securities
or convertible  securities at a price per share or having a conversion price per
share lower than the then applicable  conversion price of the Series D Preferred
Stock. During the first three years following issuance,  holders of the Series D
Preferred Stock received  dividends payable in shares of fully registered Common
Stock at a rate of 8.4% per annum. Thereafter, and beginning on May 12, 2002, we
began paying such dividends in cash at a rate of 8.0% per annum.

     All or a portion of the shares of Series D Preferred  Stock  shall,  at our
option (as  determined by our board of  directors),  automatically  be converted
into fully paid,  registered and  non-assessable  shares of Common Stock, if the
following two conditions  are met: (i) the last sale price,  or, in case no such
sale takes place on such day, the average of the closing bid and asked prices on
the  Nasdaq  National  Market is at least 200% of the  conversion  price then in
effect  (as of June 30,  2002,  such  conversion  price was $9.91 per share) for
forty consecutive  trading days; and (ii) a shelf  registration  statement is in
effect for the shares of Common Stock to be issued upon conversion of the Series
D  Preferred  Stock.  Without  written  approval of a majority of the holders of
record of the Series D Preferred Stock,  we, among other things,  shall not: (i)
declare or pay any dividend or  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


                                     - 21 -
<PAGE>

period,  unless  we have  reported  positive  net  income  for four  consecutive
quarters immediately prior to such twelve month period.

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

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

     On March 19, 2001, we consummated a revolving  credit facility with Silicon
Valley Bank, which was subsequently  amended in March 2002. The credit facility,
as amended,  extends  through  March 15, 2004. We may borrow up to the lesser of
$4.0 million or 80% of eligible accounts receivable, as defined under the credit
facility.  The amount available to us is also reduced by outstanding  letters of
credit which may be issued under the credit  facility in amounts  totaling up to
$1.5  million.  On March 26,  2002,  we  secured  our  expected  purchase  order
commitments for Periostat from Pharmaceutical  Manufacturing  Research Services,
Inc., a contract manufacturing company, with a letter of credit under the credit
facility for approximately $1.3 million. As we pay down amounts under the letter
of credit,  the amount available to us under the Facility will increase.  We are
not obligated to draw amounts and any such  borrowings  bear  interest,  payable
monthly,  currently at the prime rate plus 1.0 to 1.5% per annum and may be used
only for working  capital  purposes.  Without the consent of the Silicon  Valley
Bank, we, among other things,  shall not (i) merge or  consolidate  with another
entity;  (ii) acquire assets outside the ordinary  course of business;  or (iii)
pay or declare any cash  dividends on our Common Stock.  We must also maintain a
certain  tangible  net worth and a minimum  of $2.0  million  in cash at Silicon
Valley Bank, net of borrowings  under the credit  facility,  at all times during
the term thereto. In addition,  we have secured our obligations under the credit
facility  through the granting of a security  interest in favor of the bank with
respect to all of our assets,  including our intellectual  property.  As of June
30, 2002, we had no current borrowings outstanding against the credit facility.



                                     - 22 -
<PAGE>

     On August 24, 2001, we signed a License and Marketing  Agreement with Atrix
Laboratories,  Inc. to market  Atrix's  proprietary  dental  products,  Atridox,
Atrisorb FreeFlow and Atrisorb-D,  to the United States dental market.  Pursuant
to the terms of this agreement,  among other things:  (i) Atrix will manufacture
the dental  products  for us at an agreed upon  transfer  price and will receive
royalties on future net sales of the products each calendar  year;  (ii) we paid
to Atrix a $1.0 million  licensing  fee to market such  products;  (iii) we have
committed  to no less than $2.0  million in  advertising  and  selling  expenses
related to the Atrix products  during the fiscal year beginning  January 1, 2002
($1.1  million  of which we have  expended  as of June 30,  2002);  (iv) we have
agreed to  maintain,  for a period of 24 months,  a force of no less than ninety
full time dental  consultants and divisional and regional managers to make sales
and product recommendation calls on dental professionals; and (v) we have agreed
that the Atrix products will be the subject of a specific number of detail calls
in the United  States  during  2002.  We will also be required  to make  certain
minimum  expenditures  for  advertising  and  promotional  activities  beginning
January  1,  2003,  including:  (i)  the  lesser  of  $4,000,000  or  30% of our
contribution  margin  relating to a specific  Atrix product that we market,  and
(ii) the lesser of $2,000,000 or 30% of our  contribution  margin  relating to a
separate Atrix product that we market.

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

     On February 14, 2002, we entered into an equity line arrangement  under the
terms of a Common Stock Purchase  Agreement with  Kingsbridge  Capital  Limited.
Pursuant to this agreement, we may, at our sole discretion and from time to time
through  February 13, 2003,  sell shares of our Common Stock to Kingsbridge at a
discount to market price, as determined prior to each such sale. Under the terms
of the agreement,  we committed to: (i) draw down on this equity line, an amount
aggregating at least $1.5 million in registered shares of Common Stock, prior to
August 14, 2002;  or (ii) if, prior to August 14, 2002, we had not drawn down an
amount  aggregating at least $1.5 million in registered  shares of Common Stock,
we were  obligated to pay  Kingsbridge,  in cash,  an amount equal to 10% of the
amount by which $1.5 million  exceeds the aggregate of all amounts drawn down by
us under the equity  line up to that date.  We and  Kingsbridge  have  agreed to
extend  the date by which we must draw down such  minimum  commitment  amount to
October 29, 2002. The equity line provides for the sale of up to $8.5 million in
registered  shares of our Common Stock to  Kingsbridge.  As of June 30, 2002, we
had  drawn  down and  issued an  aggregate  of  approximately  $1.3  million  in
registered shares of Common Stock under such equity line arrangement.

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



                                     - 23 -
<PAGE>

registered  an aggregate  of 964,880  shares of our Common  Stock.  On April 29,
2002, the Securities and Exchange  Commission  declared such shelf  registration
statement on Form S-3 effective.

     At June 30, 2002, we had cash and cash  equivalents of  approximately  $5.6
million,  a decrease of $566,000  from the $6.2 million  balance at December 31,
2001.  In  accordance  with  investment  guidelines  approved  by our  Board  of
Directors,  cash balances in excess of those  required to fund  operations  have
been invested in short-term  United States  Treasury  securities  and commercial
paper with a credit rating no lower than A1/P1.  Our working capital at June 30,
2002 was $4.9 million,  a decrease of $1.4 million from $6.3 million at December
31, 2001. This decrease  primarily reflects our current obligation to Altana for
the sublicensing rights for Pandel acquired in June 2002.

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

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

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

     o    The success of our dermatology franchise;

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

     o    The  receptivity of the capital  markets to future  financings and our
          ability to draw down on our equity line at desired price levels;

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

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

CONTRACTUAL OBLIGATIONS

     Our major outstanding  contractual  obligations relate to cash dividends on
our outstanding Series D Preferred Stock,  operating leases for our office space
and other  contractual  commitments  with our  marketing  partners  for  certain
selling and promotional  expenses  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.



                                     - 24 -
<PAGE>

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

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

     During 1999, we entered into a three-year co-promotion agreement with Merck
& Co.,  Inc. for Vioxx under which we are  committed to spend up to $1.0 million
annually for promotional  expenses,  unless the agreement is earlier terminated.
The current  agreement,  which expires on September  22, 2002,  may be renewable
upon mutual  agreement.  We are  currently  evaluating  our options with respect
thereto.

     Pursuant to our License and Marketing Agreement with Atrix Laboratories, we
have  committed  to: (i) expend no less than $2.0  million  in  advertising  and
selling  expenses related to the Atrix products during the fiscal year beginning
January 1, 2002;  (ii)  maintain,  through  2003, a force of no less than ninety
full time dental  consultants and divisional and regional managers to make sales
and product  recommendation  calls on dental  professionals;  and (iii) make the
Atrix  products  the subject of a specific  number of detail calls in the United
States  during  2002.  We  will  also  be  required  to  make  certain   minimum
expenditures for advertising and promotional  activities after 2002,  including:
(i) the lesser of $4.0 million or 30% of our contribution  margin, as defined in
the agreement, relating to a specific Atrix product that we market, and (ii) the
lesser of $2.0  million  or 30% of our  contribution  margin,  as defined in the
agreement,  relating to a separate  Atrix  product  that we market.  For the six
months ended June 30, 2002,  we had  fulfilled  $1.1 million of the $2.0 million
advertising and selling expense commitment for 2002.

     On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement  with Thomas  Skold  pursuant to which we were  granted an  exclusive,
sublicenseable, transferable license with respect to the Restoraderm(TM) topical
drug delivery system which we intend to develop for dermatological applications.
Pursuant to the terms of such agreement,  upon the occurrence of certain events,
we will be required to pay certain consulting, royalty and milestone payments in
the  aggregate  amount of up to $4.0  million,  of which no more than  $393,000,
$950,000, $1,650,000 and $1,037,000 shall be payable prior to December 31, 2002,
January 1, 2003, January 1, 2004 and January 1, 2005, respectively.  The term of
such  agreement  is for the life of any patent  that may be issued to us for the
first product we develop utilizing such technology, or, if we do not acquire any
patentable products, seven years.

     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

                                     - 25 -
<PAGE>

sell products for the treatment of various inflammatory  disorders using Shire's
technology.  In  addition,  under the  agreement,  Shire shall  perform  certain
product  development  functions for us. Pursuant to the terms of such agreement,
we will pay to Shire a percentage of certain net sales of products utilizing any
part of Shire's  technology.  Also under the  agreement,  we have  committed  to
payments,  in cash or at our option, a combination of cash and our Common Stock,
upon the achievement of certain clinical and regulatory  milestones in the event
we pursue certain  applications  of the technology  which could total up to $7.9
million in the aggregate.

     Below is a table which presents our contractual  obligations and commercial
commitments as of June 30, 2002:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                   PAYMENTS DUE BY PERIOD
                         ---------------------------------------------------------------------------------
                                             SIX MONTHS
                                               ENDING
     CONTRACTUAL                             DECEMBER 31,        2003 AND                         2007 AND
     OBLIGATIONS             TOTAL               2002              2004         2005 AND 2006       AFTER
----------------------------------------------------------------------------------------------------------
<S>             <C>      <C>               <C>                <C>                <C>              <C>
OPERATING LEASES(1)..    $  2,364,000      $    167,000       $   667,000        $   668,000      $862,000
----------------------------------------------------------------------------------------------------------
UNCONDITIONAL                              $    341,000(2)
  PURCHASE                                 $    870,000(3)
  OBLIGATIONS........    $  2,132,000      $    921,000(4)    $        --(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)
----------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL
  OBLIGATIONS........    $ 11,696,000      $  3,099,000       $ 3,867,000        $ 3,868,000      $862,000
----------------------------------------------------------------------------------------------------------
</TABLE>

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

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

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

     (4)  Such amounts are payable under the terms of our  Agreement  with Atrix
          Pharmaceuticals.  As of June 30,  2002,  we will be required to expend
          $921,000  in  advertising  and selling  expenses  related to the Atrix
          products  in  2002,  and to  make  certain  minimum  expenditures  for
          advertising and promotional activities after 2002, including:  (i) the
          lesser of $4,000,000 or 30% of our contribution  margin (as defined in
          the  agreement)  relating to a specific  Atrix product that we market,
          and (ii) the lesser of  $2,000,000 or 30% of our  contribution  margin
          (as defined in the  agreement)  relating to a separate  Atrix  product
          that we market.

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



                                     - 26 -
<PAGE>

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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



                                     - 27 -
<PAGE>

                           PART II. OTHER INFORMATION

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

     The Annual Meeting of Stockholders was held on May 9, 2002.

     There were present at the Annual Meeting in person or by proxy stockholders
holding an aggregate of 8,236,579  shares of Common Stock and 199,000  shares of
Series  D Stock,  which  shares  of  Series D Stock  account  for an  additional
2,007,771  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.          7,923,356 Shares       313,223 Shares
       Peter R. Barnett, D.M.D.           7,923,356 Shares       313,223 Shares
       Robert C. Black                    7,923,356 Shares       313,223 Shares
       James E. Daverman                  7,923,356 Shares       313,223 Shares
       Robert J. Easton                   7,923,356 Shares       313,223 Shares
       W. James O'Shea                    7,923,356 Shares       313,223 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:  2,007,771 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  2,000,000  to  2,500,000  shares and to reserve an  additional
500,000  shares of Common Stock of the Company for issuance in  connection  with
awards  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,  9,547,107  shares voted in favor of such proposal,  692,637 shares were
voted against such proposal and 4,606 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, 2002. 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, 10,211,544 shares voted in favor of such proposal, 29,580
shares were voted against such proposal and 3,266 shares abstained from voting.



                                     - 28 -
<PAGE>


ITEM 5.    OTHER INFORMATION.

Sublicense Agreement

     On May 24,  2002,  we  executed a  Sublicense  Agreement  with  Altana Inc.
("Altana"),  the United States subsidiary of Altana Pharma AG, pursuant to which
we  were  granted  the  exclusive  right  to  create  improvements  to,  market,
advertise,  promote,  distribute,  offer for sale and sell, in the United States
and Puerto Rico,  Pandel Cream,  a mid-potency  topical  corticosteroid  that is
indicated for the relief of mild-to-moderate inflammatory disorders of the skin,
such as atopic dermatitis and psoriasis.  Altana currently  licenses such rights
from Taisho Pharmaceutical Co., Ltd., a company organized and existing under the
laws of Japan.  We will  purchase  from  Altana all Pandel  products to be sold.
Pursuant to the terms of such  agreement,  we agreed to pay Altana an  aggregate
sublicense fee of $1,700,000, $800,000 of which was payable on June 30, 2002 and
$900,000 of which is due on May 31, 2003. In addition,  we are required to pay a
royalty fee equal to a percentage of the net sales of the product, if any.

Shareholder Protection Rights Agreement

     On June 5, 2002,  we announced  that our Board of Directors  had adopted an
Amended and Restated Shareholder Protection Rights Agreement which superceded in
its entirety our then  existing  Shareholder  Protection  Rights  Agreement,  as
amended.

     Rights  attached to  outstanding  shares of Common Stock under the original
plan and rights  attached to shares of Common  Stock issued by us after the date
of adoption are governed pursuant to the terms of the amended and restated plan.

     The amended and  restated  plan was not adopted in response to any specific
effort to acquire  control of CollaGenex,  but rather to continue to ensure that
all of our  stockholders  are  treated  fairly  in the  event of an  unsolicited
takeover of CollaGenex  or other tactics  intended to gain control of CollaGenex
without maximizing stockholder value.

Development and Licensing Agreement

     On June 10, 2002, we executed a Development  and Licensing  Agreement  with
Shire  Laboratories,  Inc.  ("Shire")  pursuant  to  which  we were  granted  an
exclusive  worldwide  license  (including the right to  sub-license) to develop,
make, have made, use, supply, export, import, register and sell products for the
treatment  of  various  inflammatory  disorders  using  Shire's  technology.  In
addition,  under the agreement,  Shire shall perform certain product development
functions for us. Pursuant to the terms of such agreement,  we will pay to Shire
a  percentage  of certain  net sales of products  utilizing  any part of Shire's
technology.  Also under the agreement, we have committed to payments, in cash or
at our option, a combination of cash and our Common Stock,  upon the achievement
of certain  clinical and  regulatory  milestones in the event we pursue  certain
applications  of the  technology  which  could  total up to $7.9  million in the
aggregate.



                                     - 29 -
<PAGE>


Initiation of Clinical Studies

     On June 17,  2002,  we  announced  that we had  initiated  a  multi-center,
double-blinded,  placebo-controlled  clinical  study to evaluate the efficacy of
Periostat for the treatment of  meibomianitis,  also known as ocular rosacea and
characterized by symptoms of "dry eye."

     On August 13, 2002,  we  announced  that we had  initiated a  multi-center,
double-blinded,  placebo-controlled  Phase III  clinical  study to evaluate  the
efficacy of Periostat for the treatment of rosacea, a chronic  inflammatory skin
disease.

Receipt of Marketing Authorization

     On June  25,  2002,  we  announced  that we had  received  final  Marketing
Authorizations for our lead product, Periostat, from the Ministries of Health in
the Netherlands and Portugal. Both the Netherlands and Portugal will be supplied
product by  CollaGenex  International  Ltd.,  our  wholly-owned  United  Kingdom
subsidiary.  We will partner in Portugal  with the  Portuguese  affiliate of our
Spanish  partner,  ISDIN S.A. We are  currently in  discussions  with  potential
partners in the Netherlands.

Publication of Clinical Data

     On July 11, 2002, we announced  that data with respect to new evidence from
a Phase IV clinical trial of the adjunctive use of Periostat  would be published
in the July 2002 issue of the Journal of Periodontology.

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

     (a)  Exhibits

          *    10.1   Agreement    between    Altana   Inc.   and    CollaGenex
                      Pharmaceuticals, Inc., dated May 24, 2002.

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

     (b)  Reports on Form 8-K.

          On May 20, 2002,  the Company filed a current  report on Form 8-K with
          the Securities and Exchange Commission relating to an amendment to the
          Company's Shareholder Protection Rights Agreement.

          On May 30, 2002,  the Company filed a current  report on Form 8-K with
          the  Securities  and Exchange  Commission  relating to the issuance of
          119,335  shares  of  Common  Stock  under  its  existing  Equity  Line
          arrangement.

          On June 5, 2002,  the Company filed a current  report on Form 8-K with
          the  Securities  and  Exchange  Commission  relating to the  Company's
          adoption  of an Amended and  Restated  Shareholder  Protection  Rights
          Agreement.


                                     - 30 -
<PAGE>

          On June 28, 2002,  the Company filed a current report on Form 8-K with
          the  Securities  and Exchange  Commission  relating to the issuance of
          32,187  shares  of  Common  Stock  under  its  existing   Equity  Line
          arrangement.

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



                                     - 31 -
<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, 2002                 By: /s/ Brian M. Gallagher, Ph.D.
                                          --------------------------------------
                                          Brian M. Gallagher, Ph.D.
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)



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