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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

    For the fiscal year ended December 31, 2001

                                       or

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

                        Commission file number 000-29839

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

                                OraPharma, Inc.
             (Exact name of registrant as specified in its charter)

               Delaware                                22-3473777
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
    incorporation or organization)

           732 Louis Drive                            215/956-2200
    Warminster, Pennsylvania 18974          (Registrant's telephone number,
   (Address of principal executive                including area code)
               offices)

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

        Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, $0.001 par value
                         ------------------------------
                                (Title of Class)


   Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]


   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

   The aggregate market value of the voting common stock held by non-affiliates
of the registrant, based on the closing sale price of the common stock on March
12, 2002, as reported by The Nasdaq Stock Market, was approximately $55,539,829
(assuming, but not admitting for any purpose, that all directors and executive
officers of the registrant are affiliates).

   The number of shares of the registrant's common stock, $0.001 par value,
issued and outstanding as of March 12, 2002, was 13,544,498.

                      DOCUMENTS INCORPORATED BY REFERENCE:

   Portions of part III, Items 10, 11, 12 and 13 of this report are
incorporated by reference to the registrant's definitive Proxy Statement for
its 2002 Annual Meeting of Stockholders scheduled to be held on June 18, 2002.

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<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
 Item                                                                      Page
 ----                                                                      ----
 <C>  <S>                                                                  <C>
                                    PART I


 1.   Business..........................................................     1
 2.   Properties........................................................    18
 3.   Legal Proceedings.................................................    18
 4.   Submission of Matters to a Vote of Security Holders...............    18
 4A.  Executive Officers of the Registrant..............................    18


                                    PART II


 5.   Market for the Company's Common Equity and Related Stockholder
       Matters..........................................................    21
 6.   Selected Consolidated Financial Data..............................    22
 7.   Management's Discussion and Analysis of Financial Condition and
       Results of Operations............................................    22
 7A.  Quantitative and Qualitative Disclosures About Market Risk........    30
 8.   Financial Statements and Supplementary Data.......................    30
 9.   Changes in and Disagreements with Accountants on Accounting and
       Financial Disclosure.............................................    30


                                   PART III


 10.  Director and Executive Officers of the Company....................    31
 11.  Executive Compensation............................................    31
 12.  Security Ownership of Certain Beneficial Owners and Management....    31
 13.  Certain Relationships and Related Transactions....................    31


                                    PART IV


 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K...   32
 SIGNATURES .............................................................   33
 EXHIBIT INDEX ..........................................................   35
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS .............................  F-1
</TABLE>

<PAGE>

                                     PART I

ITEM 1. BUSINESS

Introduction

   OraPharma is a specialty pharmaceutical company that is engaged in
discovering, developing, and commercializing pharmaceutical products, with an
initial focus on oral health care. We began selling our first product,
Arestin(TM), in the United States in April 2001. Arestin(TM) is a locally
administered antibiotic indicated for the adjunctive treatment of adult
periodontitis, following a mechanical procedure known as scaling and root
planing. In February 2001, we received approval from the U.S. Food and Drug
Administration ("FDA") to market Arestin(TM) in the United States. Our Phase 3
clinical trials demonstrated that Arestin(TM), used adjunctively, significantly
reduced the depth of periodontal pockets compared to scaling and root planing
alone. In December 2000, we submitted a Marketing Authorization Application to
obtain approval to market Arestin(TM) in Sweden. In accordance with the
European mutual recognition procedure, we plan to use Sweden as the sponsor
country in order to gain approval to market Arestin(TM) throughout the European
Union. We plan to sell Arestin(TM) in Europe through one or more distribution
partners, though we have not yet entered into any agreements with potential
partners.

   We are directing our research and development programs at further
establishing a presence in specialty pharmaceuticals that address oncology,
dental implantation, orthopedics, central nervous system conditions, and pain
management, as well as a second-generation therapeutic for periodontal disease
and a treatment for traumatic injury to teeth.

Business Strategy

   Our fundamental business strategy is to use our expertise in drug
formulation and drug delivery to develop specialty drugs that address large and
growing unmet medical needs. Our drug development strategy focuses on well
characterized compounds, as opposed to new chemical entities, since the
therapeutic areas in which we have the greatest interest tend to have a
compelling need for proper delivery of safe and effective drugs. In addition,
by focusing on well characterized compounds, we are more likely to experience
lower risk, lower cost and a faster drug development time than we would if our
focus was on new chemical entities. Where possible, we attempt to integrate
this drug development strategy into our expertise in drug delivery
technologies. Finally, where possible, we intend to target relatively
accessible markets, typically markets driven by specialist rather than general
practitioners, because that preserves for us the potential to participate in
product commercialization, while minimizing marketing and sales infrastructure
costs.

Key Initiatives

   First and foremost, we currently have, as our primary focus, making
Arestin(TM) the most successful locally administered antibiotic for the
treatment of periodontal disease. We believe that dental pharmaceuticals is a
rapidly emerging field and presents an opportunity for us to become a leader in
the development and marketing of pharmaceutical products for the treatment of
oral diseases such as periodontitis. We further believe that Arestin(TM) has
already shown itself to be the best currently available locally administered
antibiotic for the treatment of periodontal disease.

   We are using our direct sales and marketing organization to sell
Arestin(TM). We have built an internal field sales and marketing organization
consisting of 81 professionals as of December 31, 2001, who are selling and
promoting Arestin(TM) in the U.S. directly to a defined number of periodontists
and dentists who treat adult periodontitis. We believe we can continue to
successfully sell Arestin(TM) within the United States by focusing on this
concentrated group of oral care specialists. Outside of the United States, we
intend to engage one or more distribution partners to market and sell
Arestin(TM).

                                       1
<PAGE>

   During the nine months of 2001 in which we generated revenue, we sold
Arestin(TM) to approximately 8,500 dental professionals, and recorded revenues
of approximately $7.7 million. We believe this level of revenue is higher than
that generated during 2001 by any other locally administered antibiotic for the
treatment of periodontal disease available at this time.

   The strategy we employed in developing Arestin(TM) is consistent with our
overall drug development strategy. The active, ingredient in Arestin(TM),
minocycline, is an FDA-approved antibiotic that has been available for over
twenty years. We have integrated this drug into a sustained-release drug
delivery technology developed by our scientists, using microsphere time release
for local delivery of the antibiotic directly into periodontal pockets. In
addition, the market, which consists of approximately 30,000 periodontists and
general dentists that treat periodontal disease, is a market that is accessible
to our existing field force.

   Second, to the extent we can do so on attractive terms, we intend to either
in-license, acquire or co-promote products developed by other companies that
will enable us to leverage our sales force and customer base by promoting
products in addition to Arestin(TM) to this audience of dental practitioners.

   Third, we intend to continue to advance our pipeline of potential new
product candidates. The following chart contains information regarding this
product candidate pipeline:

<TABLE>
<CAPTION>
        Product or
     Potential Product                                                                   Licensors/Research
         Candidate            Therapeutic Indication        Development Status              Institutions
 ------------------------   -------------------------- ---------------------------- -----------------------------
 <S>                        <C>                        <C>                          <C>
 Arestin(TM)                Periodontitis/Pocket-      FDA approved; launched       American Home Products
                            depth Reduction            April 2001


 OC-1012                    Mucositis                  Phase 1 trials initiated in  Brigham and Women's
                                                       September 2001               Hospital/Mucosal Therapeutics


 OC-1016                    Bone Regeneration for      Preclinical                  Children's Medical Center
                            use in dental implantation                              Corporation
                            and orthopedics

 Drug Delivery System for   Oncology, central nervous  Early stage research and     Internal development effort
  Large and Small           system conditions and      development proof-of-concept
  Molecule Drugs            pain management            initiative
</TABLE>

   In addition to the above-listed product candidates, we continue to advance
early stage research and development efforts for other potential product
candidates using the technology on which Arestin(TM) is based. These include a
second-generation therapeutic for periodontal disease and a therapeutic to
treat traumatic injuries to teeth.

Arestin(TM) for the Treatment of Periodontitis

Periodontitis, and the Market

   Periodontitis, a condition caused by plaque build-up on teeth, is
characterized by the progressive, chronic infection and inflammation of the
gums and surrounding tissue. In its mildest form, the disease is termed
gingivitis, which is accompanied by swollen, bleeding gums. When gingivitis is
not controlled, the disease often progresses to periodontitis. This chronic
infection and inflammation causes destruction of a tooth's supporting
structures, primarily bone and periodontal ligament, and results in the
formation of spaces between the gums and teeth, or periodontal pockets.

   An average case of periodontitis affects three to four teeth, according to
The Journal of Periodontology. Our estimates suggest that the average
periodontal patient has 12 periodontal pockets. These periodontal pockets
provide a site for the accumulation of disease-causing bacteria. With
increasing depth of the pocket, bacterial plaque becomes less accessible to
typical oral hygiene practices, such as brushing and flossing, and

                                       2
<PAGE>

routine dental procedures, such as checkups and cleanings. In pockets deeper
than 4mm, brushing and bacterial mouth rinses, which may be effective in
treating gingivitis, cannot reach the base of the pocket and the bacteria
in the pocket that cause the disease. A pocket depth of 5mm to 7mm constitutes
moderate periodontitis and a pocket depth of greater than 7mm constitutes
severe periodontitis. The destructive process caused by periodontitis will
continue at the base of the pocket in spite of the continuing use of typical
oral hygiene, unless treated by an oral care professional. If left untreated,
periodontitis will continue to progress and eventually lead to tooth and bone
loss.

   Periodontitis has no known cure and is the most common cause of adult tooth
loss. According to published reports citing the ADA, approximately 50 million
Americans have periodontal disease and less than 30% of that population are
currently receiving treatment. Along with this widespread prevalence, the ADA
estimated that in 1990, oral care professionals treated approximately 14
million patients that have periodontitis. According to industry sources, the
U.S. population spends more than $6.0 billion per year on products and services
to treat periodontitis.

   Effective treatment consists of the elimination of bacteria from, and
reduction of the depth of, periodontal pockets. Effective treatment is possible
only through periodic professional intervention. The most common treatment is a
mechanical procedure, scaling and root planing, used to remove accumulated
plaque above and below the gumline, and may require the oral care professional
to anesthetize the gums. A patient's typical course of treatment involves two
scaling and root planing procedures annually. For more serious cases, treatment
may include various forms of gum surgery. These procedures are painful, may
increase gum recession and root sensitivity and may compromise aesthetics.
These treatments are seldom curative because the bacteria typically return and
the infection recurs. In an attempt to stabilize the disease progression, oral
care professionals generally place patients on maintenance programs that
involve frequent follow-up for evaluation and ongoing scaling and root planing.

   Systemic antibiotics have occasionally been used in conjunction with scaling
and root planing to treat periodontitis. However, concerns over side effects
and antibiotic resistance have prompted the search for alternatives. Several
therapeutics have been approved by the FDA for the treatment of periodontitis.
Arestin(TM), was approved in February 2001, and the following three
therapeutics were introduced in the U.S. in 1998:

  . Atridox, a biodegradable gel that delivers the antibiotic doxycycline
    into periodontal pockets. Atridox is a product consisting of a powder and
    a gel that must be stored in a refrigerated environment and then mixed
    immediately prior to use. Mixing involves manually pumping the powder and
    gel 100 times between two interconnected syringes. After mixing, the
    practitioner draws the product into one syringe, removes the other
    syringe and replaces it with an application tip. The product is then
    injected into the periodontal pockets. The practitioner is then
    instructed to cover those pockets filled with Atridox with either a
    periodontal dressing or a dental adhesive. FDA-approved labeling also
    specifies that the patient should not brush any treated areas for seven
    days following the application of Atridox.

  . PerioChip, a sustained-release biodegradable collagen chip containing
    chlorhexidine, an anti-microbial, which is released over seven to 10
    days. A chip is inserted into each periodontal pocket by the
    practitioner. FDA-approved labeling limits each treatment to eight chips,
    and the product must be stored in a refrigerated environment. FDA
    labeling also indicates that mild to moderate sensitivity is normal
    during the first week after placement, and patients are advised to
    promptly notify the practitioner if a chip dislodges.

  . Periostat, a 20 mg systemic doxycycline tablet taken orally twice daily
    for up to nine months. The dosage is not intended to be sufficient for an
    antibiotic effect, but is intended to suppress collagenase, an enzyme
    that causes tissue destruction. The product is a prescription drug, not a
    chair-side treatment, as are Atridox and Periochip.

   Like Arestin(TM), PerioChip and Periostat are indicated for use in
conjunction with scaling and root planing, the standard of treatment adopted by
oral care professionals. Atridox is indicated as a stand-alone treatment for
periodontitis.

                                       3
<PAGE>

Arestin(TM) Treatment Approach and Core Technology

   Arestin(TM) uses our core technology and consists of a drug that is
prepackaged in a specially designed dispenser tip. The drug substance is
specially formulated into microspheres. Microspheres are small particles
consisting of the active drug ingredient, minocycline, which is distributed in
a bioresorbable polymer. When Arestin(TM) is administered, the polymer begins
to slowly dissolve thereby releasing minocycline at a sustained rate for at
least 14 days. As the polymer dissolves, it is bioresorbed, that is, it
chemically breaks down into components that are excreted from the body.

   The polymer, PGLA, or poly (glycolide-co-dl-lactide), has three functions:
to control the rate of drug release, to provide adhesion in the periodontal
pocket and to stabilize the active drug. Polymers of this type have a long
history of use in medical devices such as sutures and in other drug-delivery
systems.

   We chose minocycline as the active ingredient because:

  . its antibiotic profile places it among the most effective agents against
    the pathogens associated with periodontitis; and

  . studies suggest that it promotes gum reattachment through alteration of
    tooth root surface chemistry.

   The Arestin(TM) microspheres are in a dry powder form, and are packaged in a
small disposable cartridge that attaches to a specially designed autoclaveable
handle. To administer Arestin(TM), the oral care professional removes the
disposable cartridge from its package and simply connects the cartridge to the
handle, and then dispenses the microspheres directly into the periodontal
pocket. Each cartridge contains a metered dose for one periodontal pocket and
can be administered in only a few seconds. Exposure to moisture in the
periodontal pocket causes the microspheres to adhere to tissue in the pocket,
and then begin to break down, thereby releasing the active ingredient at a
sustained rate. We designed the sustained release profile to maintain drug
levels sufficient to kill bacteria for at least 14 days. Because the
microspheres totally disintegrate, a return visit will not be required to
remove Arestin(TM). Further, Arestin's(TM) adhesion characteristics ensure
retention without the need for a periodontal dressing or adhesive. We designed
Arestin(TM) to eliminate the restricted dosage, refrigeration, mixing, dental
dressing and/or nonchair-side limitations of other therapeutics.

   We developed Arestin(TM) to be administered immediately following scaling
and root planing, with periodically repeated application of Arestin(TM) for as
long as a periodontal pocket of at least 5mm exists. Arestin(TM) enables drug
placement directly into the periodontal pocket. This local administration of
Arestin(TM) permits delivery of an antibiotic to affected tissues with minimal
systemic exposure. This administration also generates significantly higher
local drug concentrations than could be safely obtained with systemic
administration. Finally, its administration by oral care professionals
eliminates the concern about patient compliance, a common problem with
pharmacy-dispensed and orally administered drugs.

   In summary, we believe that Arestin's(TM) advantages include:

  . high drug concentration at the infection site with reduced risk of
    antibiotic resistance;

  . simple preparation without the need for mixing;

  . rapid and easy administration;

  . precise dosage control;

  . improved patient compliance, comfort and convenience;

  . simplified storage that avoids the need for refrigeration;

  . bioresorbability, eliminating the need for a follow-up visit to remove
    the product; and

  . elimination of the need for adhesives and dressings.

                                       4
<PAGE>

Arestin's(TM) Clinical Trials

 Phases 1 and 2

   Arestin's(TM) clinical trial history includes two Phase 1 trials and four
Phase 2 multi-center trials, involving a total of 293 patients. These trials
were conducted by American Cyanamid prior to its merger with American Home
Products ("AHP"), and prior to the subsequent licensing of the technology by
AHP to OraPharma. The Phase 1 trials suggested that the product was well
tolerated, with minocycline concentration levels sufficient to kill bacteria
maintained in treated sites for at least 14 days, with no local or systemic
adverse events. Phase 2 trials were conducted at four U.S. university centers
and demonstrated a benefit in periodontal pocket-depth reduction in the patient
population with no adverse events. We used these Phase 2 trials as a basis to
design the Phase 3 trials.

 Phase 3

   In November 1997, the FDA accepted transfer of the AHP Investigational New
Drug Application ("IND") to OraPharma, and in August 1998, we commenced our
Phase 3 clinical program to study Arestin(TM) as an adjunct to scaling and root
planing ("S/RP") for the treatment of adult periodontitis at 18 university
centers in the U.S. We completed enrollment of 747 patients in January 1999,
and the last patient visit was in October 1999. The design comprised two well-
controlled safety and efficacy trials that compared three arms: S/RP plus
Arestin(TM), S/RP alone, and S/RP plus vehicle (non-drug polymer acting as
placebo). In these trials, the results evaluators were blinded as to which of
the three arms the patient fell into in order to preserve trial integrity. We
conducted an additional open-label safety study in 174 patients at four U.S.
university centers and one private practice. Finally, we added a two-center
pharmacokinetic study of 18 patients to measure Arestin(TM) in blood serum,
saliva and fecol flora in order to observe the drug release profile, and to
assess the development of minocycline resistance. In November 1999, we
announced initial results from these trials:

  . The primary endpoint was a reduction in mean periodontal pocket depth
    from baseline, with the patient as the unit of analysis. Combined data
    from the two pivotal studies of 747 patients showed significant pocket-
    depth reduction in comparing Arestin(TM) plus S/RP to both S/RP alone and
    S/RP plus vehicle. These results were statistically significant at the
    99.9% level, or what is commonly referred to as p(less than or =)0.001.
    This means that, applying standard statistical methods, the chance that
    these results could have occurred by chance is less than or equal to 1 in
    1,000. Each study independently generated statistically significant
    results.

  . A key secondary endpoint was subgroup population analysis for reduced
    mean pocket depth across all subgroups. These results were statistically
    significant at the 99% level, or p(less than or =)0.01, in the subgroups
    relating to smoking, age greater than 50 and prior history of
    cardiovascular disease.

  . An additional key secondary endpoint was responder analysis. This
    analysis demonstrated that the S/RP plus Arestin(TM) group achieved a
    higher percentage of pockets with greater than 2 mm reduction than did
    the other groups.

  . Additional analysis also revealed that pockets with increased severity of
    disease (i.e., deeper pockets) respond to Arestin(TM) treatment with
    increasing pocket depth reduction.

  . There appeared to be no safety issues related to the treatment of
    Arestin(TM) among the 939 patients dosed in these studies. Thirteen
    patients withdrew from the studies due to adverse events; however, we
    believe that these events were not related to Arestin(TM).

  . Trace amounts of minocycline were detectable in serum during the first 18
    hours, and in saliva during the first 14 days after administration,
    providing evidence that Arestin(TM) is a slow-release formulation. We
    found no changes in gastrointestinal microorganisms, indicating no
    evidence of antibiotic resistance.

   We submitted a New Drug Application ("NDA") for Arestin(TM) on February 17,
2000. On April 21, 2000 the FDA accepted our submission as complete for review,
and on February 16, 2001, the FDA issued an approval letter authorizing us to
market Arestin(TM) in the U.S. In December 2000, we submitted a Marketing
Authorization Application, which was accepted as complete for review on January
24, 2001, to obtain approval

                                       5
<PAGE>

to market Arestin(TM) in Sweden. In accordance with the European mutual
recognition procedure, we plan to use Sweden as the sponsor country in order to
gain approval to market Arestin(TM) throughout the European Union. We plan to
sell Arestin(TM) in Europe through one or more distribution partners, though we
have not yet entered into any agreements with potential partners.

Manufacturing and Materials Supply

   We do not currently have any internal manufacturing capabilities. We rely on
two sole-source manufacturers for the production and packaging of Arestin(TM)
and on three sole-source suppliers for other required materials and components.
If we were to change any of our contract manufacturers or material suppliers,
we and they would each need to satisfy regulatory requirements.

 Contract Manufacturers

   aaiPharma, Inc. ("AAI"), manufactures and performs the required testing of
Arestin(TM) microspheres. We designed and own the Arestin(TM) production
equipment used by AAI. We have entered into a long-term manufacture and supply
agreement with this manufacturer.

   Packaging Coordinators, Inc. ("PCI"), a Cardinal Health Company, fills the
dispensers with the microspheres manufactured by AAI, and provides all
packaging services. We developed and own the equipment used by PCI to fill the
dispensers. We have also entered into a long-term supply agreement with this
manufacturer.

 Raw Material Suppliers

   The polymer used in Arestin(TM) is custom-made for us according to
procedures and specifications supplied by us. We believe that alternative
supply sources are available, and that we could stockpile sufficient polymer to
cover demand until an alternate supplier is found, if necessary.

   We purchase the active ingredient, minocycline, from an FDA-inspected
supplier. We are aware of other sources of minocycline, and we believe we could
arrange for another supplier, if necessary.

   An injection molder manufactures the cartridges used to administer
Arestin(TM). We own the molds and certain assembly equipment, and expect that
production could be transferred to another qualified molder, if required.

   The dispenser handle to which the Arestin(TM) cartridge is attached for
administration of the product is also manufactured for us by two manufacturers.
We supplied the handle design. We expect that fabrication of the dispenser
handle could easily be transferred to other manufacturers, if necessary.

Marketing

   In the U.S., we have employed and trained a sales and marketing force that
will target approximately 3,900 periodontists and approximately 25,000 general
dentists whom we believe to be "perio-aware", that is, those who perform the
majority of scaling and root planing procedures. As of December 31, 2001, we
have a customer base of approximately 8,500 practitioners.

   In markets outside the U.S., we intend to sell Arestin(TM) through one or
more distribution partners, rather than establish our own sales force. We are
currently in discussion with a number of potential European distribution
partners, though we have not yet entered into any agreements with potential
partners.

Additional Product Candidates

   We are developing other products to enable us to potentially expand beyond
the oral care pharmaceutical market. These potential markets include oncology,
dental implantation, orthopedics, central nervous system conditions, and pain
management, as well as a second-generation therapeutic for periodontal disease
and a therapeutic to treat traumatic injury to teeth. Our strategy in
developing these additional product candidates is

                                       6
<PAGE>

consistent with our overall product development strategy, in that we are
focusing on well characterized compounds, we are attempting to integrate these
product candidates into our expertise in drug delivery technologies, and we are
targeting relatively accessible markets.

   Our additional product candidate pipeline consists of:

 OC-1012 for the Prophylaxis and Treatment of Mucositis

   We are developing an agent for the prevention and treatment of mucositis.
Mucositis is a serious complication for certain patients receiving chemotherapy
or head and neck radiation therapy for cancer. In healthy patients, the mucosal
lining forms an important barrier, preventing entry of potentially lethal
organisms into the body. Normally, cells of the mucous membranes lining the
mouth and gastrointestinal tract undergo rapid renewal. Both chemotherapy and
head and neck radiation therapy for cancer interfere with this renewal process,
and can result in painful ulcers in the mouth and esophagus. In extreme cases
of mucositis, these ulcers can be an entry point for disease organisms. In many
cases, the mucositis advances to a point where patients can no longer eat and
must be hospitalized to be fed. In the most severe cases, cancer treatment may
be either stopped, delayed, or treatment intensity reduced until the condition
stabilizes. This may compromise the patient's response to cancer treatment.

   The American Cancer Society estimated that approximately 1.2 million cases
of cancer were diagnosed in the U.S. in 1999. A January 1995 Principles and
Practice of Oncology update states that more than 40% of patients receiving
standard chemotherapy, and virtually all patients receiving head and neck
radiation therapy, develop mucositis.

   Our mucositis program is based on intellectual property developed initially
at Brigham and Women's Hospital, of Boston, and licensed by us. We have
identified a compound that was found to be effective in reducing the severity
of mucositis in preclinical studies. On August 27, 2001 we announced the
beginning of Phase 1 human clinical trials that will be administered to
patients undergoing bone marrow transplants at the University of Washington,
Fred Hutchinson Cancer Research Center. We expect to release data from this
trial near the end of the second quarter of 2002.

 OC-1016 for Bone Regeneration

   Our bone regeneration program is based on technology licensed from
Children's Medical Center Corporation, and developed at Children's Hospital in
Boston. The technology is based on a peptide related to the protein
osteopontin, which promotes the attachment of bone forming cells.

   We are conducting work on the bone regeneration program through a sponsored-
research agreement with Children's Hospital, in collaboration with our internal
scientific staff. Recent research findings suggest this product has
applications in the areas of both dental implantation and orthopedics. We
performed pre-clinical studies on OC-1016 and we are currently awaiting
clearance from the FDA to begin Phase 1 clinical trials. We are currently
seeking partners for the development of OC-1016 for both dental implantation
and orthopedics, though we have not entered into any agreements with potential
partners. We believe that a partnership strategy for Phase 1 human clinical
trial development of this compound will enable us to maximize its value.

 Drug Delivery System for Large and Small Molecule Drugs

   We recently began an internal research and development proof-of-concept
initiative, with the ultimate objective of overcoming certain drug capacity and
manufacturing challenges that are important in large-molecule drug delivery,
though we are addressing small-molecule drug delivery as well. Our therapeutic
areas of interest include oncology, central nervous system conditions and pain
management.

                                       7
<PAGE>

 Other Candidates

   We continue to explore other potential product candidates using the
technology on which Arestin(TM) is based. These product candidates include a
second-generation therapeutic for periodontal disease and a therapeutic to
treat traumatic injuries to teeth.

Technology, Licenses and Patents

 Arestin(TM) and Our Core Technology

   In February 1997, we licensed our first product and our core technology from
American Cyanamid, which is now part of AHP. American Cyanamid owns seven
issued U.S. patents that claim the process for producing microspheres,
Arestin(TM) and other compositions produced by this process, the device used
for administering microspheres, the machine for filling this administration
device, and methods for treating dental conditions by the administration of
Arestin(TM) and other compositions produced using our microsphere process. The
AHP patents expire between 2008 and 2010, with the exception of one patent
covering the delivery-system technology that expires in 2010. Corresponding
patents are in effect or pending in other countries including Australia,
Canada, France, Germany, Great Britain, Italy, Japan, Sweden, and Switzerland
where we believe the market potential for Arestin(TM) is significant. In
addition to those mentioned, we also have corresponding patents in eleven
European, eight Asian, one African, and two South American countries.

   Under our agreement with AHP, we have an exclusive, worldwide license under
both the AHP patents and all related AHP technology to commercialize
Arestin(TM) and other products for use in the oral cavity. We also have a non-
exclusive, worldwide license under the AHP patents and technology to
commercialize products for use outside of the oral cavity. Additionally, we
have the right to sublicense this technology. Our agreement with AHP expires
upon expiration of the last to expire of the AHP patents, at which time our
license rights become fully paid-up and non-cancelable.

   Our agreement with AHP required us to make an initial payment to AHP and to
grant AHP an equity position in OraPharma. The agreement further obligated us
to make payments to AHP when two milestones were achieved (FDA acceptance of
our NDA submission and FDA approval of our product) and to pay AHP royalties on
sales of Arestin(TM) and other products that are covered by the AHP patents or
developed using the AHP technology. Our milestone payments to AHP were paid in
April 2000 and March 2001.

   In order to reacquire some of the rights to our core technology previously
out-licensed by AHP, we were required to enter into a license agreement with
Technical Developments and Investments, Est., or TDI, a corporation formed
under the laws of Liechtenstein. Under this agreement, TDI granted us an
exclusive, worldwide sublicense to use the AHP technology in the oral cavity.
This agreement obligates us to pay royalties to TDI on sales of products using
the AHP technology in the oral cavity. Royalties payable to TDI can be fully
credited against up to 50% of the royalties payable under our agreement with
AHP.

   In addition to our agreement with AHP, we have licensed three U.S. patents
from a periodontist and inventor, Gary R. Jernberg, D.D.S. One of these patents
expires in 2004 and covers local delivery of chemotherapeutics to treat
periodontitis by insertion of bioresorbable time-release microspheres into
periodontal pockets. The other two expire in 2010 and cover additional
embodiments of the method for local delivery using periodontal barriers. There
are no corresponding foreign patents. Our agreement with Dr. Jernberg requires
us to make royalty payments to him. In addition, this agreement obligated us to
make milestone payments to Dr. Jernberg upon FDA acceptance of our NDA
submission covering the licensed patents and upon FDA approval and to engage
him as an ongoing consultant and to pay him royalties on sales of licensed
products. Royalties payable to Dr. Jernberg can be fully credited against up to
50% of the royalties payable under our agreement with AHP. Our milestone
payments to Dr. Jernberg were paid in April 2000 and March 2001.

 Mucositis Program

   In December 1998, we entered into an agreement with Mucosal Therapeutics LLC
to license our mucositis technology. Mucosal Therapeutics is a research entity
established to commercially exploit this technology, which was originally
developed at Brigham and Women's Hospital, of Boston. The technology is the
subject of two U.S. patent applications that have been assigned to Mucosal
Therapeutics. These patent applications claim

                                       8
<PAGE>

methods for treating or preventing mucositis by administering various
combinations of inhibitors both alone and in combination with antibiotics and
other compounds. One of these patent applications was filed in 1998 and the
other in 1999. A patent application corresponding to both U.S. patent
applications has been filed under the Patent Cooperation Treaty or PCT. This
PCT application designates certain foreign countries where we believe the
market potential for a product to treat mucositis is significant.

   Our license agreement with Mucosal Therapeutics grants us an exclusive,
worldwide license under the mucosal technology to manufacture and sell
pharmaceutical products. The term of the license agreement is for the longer of
20 years or until expiration of the last to expire of any patents covering this
technology. Shortly after signing the license agreement, we paid Mucosal
Therapeutics an initial license fee and issued it warrants to purchase our
common stock. We have also paid Mucosal Therapeutics cash and issued it
warrants to purchase our common stock upon the achievement of certain
preclinical milestones. We are required to make additional payments to Mucosal
Therapeutics as other clinical milestones are achieved and upon FDA approval of
a pharmaceutical product for the treatment of mucositis. The license agreement
further obligates us to pay Mucosal Therapeutics royalties on sales of
pharmaceutical products covered by or involving use of this technology.
Additionally, we have the right to sublicense this technology.

   We have also entered into a research and consulting agreement with an
affiliate of Mucosal Therapeutics, Biomodels LLC, to perform preclinical
studies on our behalf and to provide us with research and general consulting
services with respect to our development of the Mucosal technology. Our
agreement with Biomodels expires at the end of 2002.

 Bone Regeneration Program

   In December 1998, we entered into an agreement to license our bone and soft-
tissue regeneration technology from Children's Medical Center Corporation,
("CMCC"). This license covers two technologies, one relating to a non-
immunogenic bulking agent and the other to peptides derived from osteopontin
and related uses in bone regeneration. Two issued U.S. patents and one pending
U.S. patent application claim methods for using non-immunogenic cartilage and
bone suspension as bulking agents and expire in 2014 and 2016, respectively. A
corresponding application is pending in the European Patent Offices. Five
additional patent applications claim novel compositions and methods of use for
osteopontin peptides, methods and compositions for programming an organic
matrix for remodeling into a target tissue, and osteopontin peptide-coated
surfaces and methods of use. All of the patent applications were filed in 1997
and 1998. Corresponding PCT applications have been filed. The PCT applications
designate certain foreign countries where we believe the market potential for
bone and soft-tissue regeneration products is significant.

   Our license agreement with CMCC grants us worldwide license rights under the
CMCC patents and know-how to commercialize bone and soft-tissue regeneration
products for use in the oral cavity. Our license rights are exclusive with
respect to the CMCC patents and non-exclusive with respect to the CMCC know-
how. For products that are osseoinductive devices for bone augmentation and
regeneration, our license rights extend beyond the oral cavity to all
orthopedic uses in humans and therapeutic uses in animals. The term of our
license agreement with CMCC ends upon expiration of the last of the CMCC
patents to expire. Additionally, we have the right to sublicense this
technology.

   Shortly after signing the license agreement, we made a payment to CMCC in
the form of shares of our common stock. We are required to make milestone
payments to CMCC upon submission of our first NDA and upon approval of our
first NDA. The license agreement further obligates us to pay CMCC royalties on
sales of products covered by the CMCC patents or which are specified bone and
soft-tissue regeneration products.

   We have also entered into a sponsored-research agreement with Children's
Hospital, a non-profit affiliate of CMCC, to conduct research in the area of
bone and soft-tissue regeneration and perform related preclinical studies. The
sponsored-research agreement expires on October 1, 2002.

                                       9
<PAGE>

Manufacturing

   Our ability to conduct clinical trials on a timely basis, to obtain
regulatory approvals and to commercialize any of our product candidates will
depend in part on our ability to manufacture our product candidates either
directly or through third parties, at a competitive cost and in accordance with
applicable FDA and other regulatory requirements, including Current Good
Manufacturing Practices ("cGMPs").

   We do not currently operate manufacturing facilities for clinical or
commercial production of our proposed product candidates. We have no experience
in manufacturing, and currently lack the resources and capability to
manufacture any of our proposed product candidates on a clinical or commercial
scale. Accordingly, we are, and intend to continue to be, dependent on third
parties for manufacturing our product candidates.

Government Regulation

   The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements on the clinical
development, manufacture and marketing of pharmaceutical product candidates.
These agencies and other federal, state and local entities regulate research
and development activities and the testing, manufacture, quality control,
safety, effectiveness, labeling, storage, record-keeping, approval and
promotion of our product candidates. All of our product candidates will require
regulatory approval before commercialization and regulatory compliance after
commercialization. In particular, therapeutic product candidates for human use
are subject to rigorous preclinical and clinical testing and other requirements
of the Federal Food, Drug, and Cosmetic Act, or FDC Act, implemented by the
FDA, as well as similar statutory and regulatory requirements of foreign
countries. Obtaining these marketing approvals and subsequently complying with
ongoing statutory and regulatory requirements is costly and time-consuming. Any
failure by us or our collaborators, licensors or licensees to obtain, or any
delay in obtaining, regulatory approvals or in complying with other
requirements could adversely affect the commercialization of product candidates
and our ability to receive product or royalty revenues.

   The steps required before a new drug product candidate may be distributed
commercially in the U.S. generally include:

  . conducting appropriate preclinical laboratory evaluations of the product
    candidate's chemistry, formulation and stability, and preclinical studies
    to assess the potential safety and efficacy of the product candidate;

  . submitting the results of these evaluations and tests to the FDA, along
    with manufacturing information and analytical data, in an IND or IDE;

  . making the IND or IDE effective after the resolution of any safety or
    regulatory concerns of the FDA;

  . obtaining approval of Institutional Review Boards, or IRBs, to introduce
    the drug into humans in clinical studies;

  . conducting adequate and well-controlled human clinical trials that
    establish the safety and efficacy of the product candidate for the
    intended use, typically in the following three sequential, or slightly
    overlapping stages:

     Phase 1: The product candidate is initially introduced into healthy
     human subjects or patients and tested for safety, dose tolerance,
     absorption, metabolism, distribution and excretion;

     Phase 2: The product candidate is studied in patients to identify
     possible adverse effects and safety risks, to determine dosage
     tolerance and the optimal dosage, and to collect some efficacy data;
     and

     Phase 3: The product candidate is studied in an expanded patient
     population at multiple clinical study sites, to confirm efficacy and
     safety at the optimized dose, by measuring a primary endpoint
     established at the outset of the study;

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<PAGE>

  . submitting the results of preliminary research, preclinical studies, and
    clinical trials as well as chemistry, manufacturing and control
    information on the product candidate to the FDA in an NDA; and

  . obtaining FDA approval of the NDA prior to any commercial sale or
    shipment of the product candidate.

   This process can take a number of years and require substantial financial
resources. The results of preclinical studies and initial clinical trials are
not necessarily predictive of the results from large-scale clinical trials, and
clinical trials may be subject to additional costs, delays or modifications due
to a number of factors, including the difficulty in obtaining enough patients,
clinical investigators, product candidate supply, or financial support. The FDA
may also require testing and surveillance programs to monitor the effect of
approved product candidates that have been commercialized, and the agency has
the power to prevent or limit further marketing of a product candidate based on
the results of these post-marketing programs. Upon approval, a product
candidate may be marketed only in those dosage forms and for those indications
approved in the NDA. However, pursuant to recent federal court decisions, drug
marketers are in some limited circumstances permitted to distribute materials
concerning indications outside of the FDA labeling for product candidates.

   In addition to obtaining FDA approval for each indication to be treated with
each product candidate, each domestic product candidate manufacturing
establishment must register with the FDA, list its product candidates with the
FDA, comply with cGMPs and permit and pass manufacturing plant inspections by
the FDA. Moreover, the submission of applications for approval may require
additional time to complete manufacturing stability studies.

   Any product candidates that we manufacture or distribute pursuant to FDA
approvals are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the
product candidate. In addition to continued compliance with standard regulatory
requirements, the FDA may also require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product candidate. Adverse
experiences with the product candidate must be reported to the FDA. Product
candidate approvals may be withdrawn if compliance with regulatory requirements
is not maintained or if problems concerning safety or efficacy of the product
candidate are discovered following approval.

   The FDC Act also mandates that product candidates be manufactured consistent
with cGMPs. In complying with the FDA's regulations on cGMPs, manufacturers
must continue to spend time, money and effort in production, record keeping,
quality control, and auditing to ensure that the marketed product candidate
meets applicable specifications and other requirements. The FDA periodically
inspects manufacturing facilities to ensure compliance with cGMPs. Failure to
comply subjects the manufacturer to possible FDA action, such as warning
letters, suspension of manufacturing, seizure of the product, voluntary recall
of a product or injunctive action, as well as possible civil penalties. We
currently rely on, and intend to continue to rely on, third parties to
manufacture our compounds and product candidates. These third parties will be
required to comply with cGMPs.

   Even after FDA approval has been obtained, further studies, including post-
marketing studies, may be required. Results of post-marketing studies may limit
or expand the further marketing of the products. If we propose any
modifications to a product, including changes in indication, manufacturing
process, manufacturing facility or labeling, a supplement to our NDA may be
required to be submitted to the FDA.

   Products manufactured in the United States for distribution abroad will be
subject to FDA regulations regarding export, as well as to the requirements of
the country to which they are shipped. These latter requirements are likely to
cover the conduct of clinical trials, the submission of marketing applications,
and all aspects of manufacturing and marketing. Such requirements can vary
significantly from country to country. The distribution partner or partners
that we intend to engage to sell Arestin(TM) outside of the U.S. may be
responsible for the foreign regulatory approval process of our product
candidates, although we may be legally liable for noncompliance.


                                       11
<PAGE>

   Some of our product candidates may be regulated as medical devices by the
FDA. Under the FDC Act, medical devices are instruments, machines, implants,
in-vitro reagents, or any contrivance that is intended to affect the structure
or function of the body of man or animals, which does not achieve its primary
intended purposes through chemical action within or on the body of man or
animals and which is not dependent upon being metabolized for the achievement
of its primary intended purposes. The FDA's regulation of certain types of
medical devices is similar in many respects to its regulation of drugs,
including requirements for pre-approval testing, manufacture, quality control,
safety, effectiveness, labeling and promotion.

   We are also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances used in connection
with our research work. Although we believe that our safety procedures for
handling and disposing of such materials comply with current federal, state and
local laws, rules, regulations and policies, the risk of accidental injury or
contamination from these materials cannot be entirely eliminated.

   The extent of government regulation which might result from future
legislation or administrative action cannot be accurately predicted. In this
regard, although the Food and Drug Administration Modernization Act of 1997
modified and created requirements and standards under the FDC Act with the
intent of facilitating product candidate development and marketing, the FDA is
still in the process of developing regulations implementing the Food and Drug
Administration Modernization Act of 1997. Consequently, the actual effect of
these developments on our business is uncertain and unpredictable.

Competition

   The specialty pharmaceutical industry, and the oral care pharmaceuticals
business in particular, are intensely competitive and are characterized by
rapid technological changes. Some specialty pharmaceutical and oral care
pharmaceutical companies and academic and research organizations currently
engage in, have engaged in or may engage in efforts related to the discovery
and development of new pharmaceutical products, some of which may be
competitive with Arestin(TM), or our other product candidates. Significant
levels of research also occur in universities and other nonprofit research
institutions. These entities have become increasingly active in seeking patent
protection and licensing revenues for their research results. They also compete
with us in recruiting skilled scientific talent.

   We are currently aware of three FDA-approved products introduced in the U.S.
during 1998 that compete with ArestinTM in treating periodontitis. They are:
Atridox, a product developed by Atrix Laboratories and marketed by CollaGenex;
PerioChip, a product developed and marketed by Dexcel Pharma; and Periostat, a
drug developed and marketed by CollaGenex. Atridox and PerioChip are chair-side
therapies involving the local delivery of drug products into the periodontal
pocket by the oral care professional. Periostat represents a systemic approach
toward treating periodontal disease through enzyme inhibition.

   We are also aware of three products introduced between 1994 and 1998 for the
treatment of periodontitis. Of the three, neither Dentomycin Gel, developed and
marketed by Lederle, nor Elyzol Dental Gel, developed and marketed by Alpharma,
is currently approved for use in the U.S. We believe the third product,
Actisite Fiber, developed by Alza and marketed by Procter & Gamble, while
approved in the U.S., is no longer actively promoted.

   We believe that Arestin's(TM) ability to compete successfully in the
marketplace will be based upon many factors, including:

  . efficacy and safety;

  . speed, ease of use and administration;

  . degree of clinical benefit relative to selling price;

  . product reliability and availability;

                                       12
<PAGE>

  . patent protection;

  . reimbursement coverage from insurance companies; and

  . our ability to attract and retain qualified personnel.

   Our competitive position with respect to our product candidates in
development will depend upon many of the same factors, together with our
ability to obtain patent protection or otherwise develop proprietary products
or processes, and to secure sufficient capital resources for the often
substantial period between technological conception and commercial sales.
Because our product candidates have not been approved by the FDA and are still
under development, our relative competitive position in the future is
difficult to predict.

Employees

   As of December 31, 2001, we had 124 employees. Of these employees, 18 were
engaged in research, development, and medical, clinical and regulatory
affairs, 81 were engaged in marketing and sales activities, and 25 were
engaged in administrative, customer service and finance functions. None of our
employees are covered by collective bargaining agreements. We consider
relations with our employees to be good.

Risks Related to Our Business

 Our revenue for the foreseeable future will be solely derived from, and
 operating results will be substantially dependent on, our ability to market
 Arestin(TM).

   Other than Arestin(TM), all of our product candidates are at an early stage
of product development. The successful commercialization of our other product
candidates will require significant further research, development, testing,
clinical trials, regulatory approvals and investment. We may never
successfully commercialize any of our product candidates. As a result, our
business is substantially dependent on the success of Arestin(TM).

 If we are unable to commercialize another product under our license agreement
 with AHP, AHP would ave the right to license oral care products, other than
 Arestin(TM), and the core technology to competitors.

   We license Arestin(TM) and our core technology on an exclusive basis for
applications in the oral cavity from AHP. AHP has the right to convert our
exclusive license to other oral products to a non-exclusive license if we fail
to commercialize at least one other oral cavity or non-oral cavity product by
August 2007. Any such conversion of our license would make it easier for third
parties to compete with us.

 If our license agreement with AHP is terminated, we would be forced to cease
 our efforts to commercialize Arestin(TM) and our other oral cavity product
 candidates utilizing our core technology.

   AHP has the right to terminate the AHP license agreement if we materially
breach our payment or other obligations under this agreement. Such termination
would prevent us from marketing Arestin(TM).

 Our losses will continue to increase as we expand our product development
 efforts, and our operations may never be profitable.

   For the year ended December 31, 2001, we generated revenue of approximately
$7.7 million from the sale of Arestin(TM). Revenues for the year ended
December 31, 2001 were solely comprised of sales of Arestin(TM). Prior to the
launch of Arestin(TM) on April 2, 2001, we had not generated any revenue. We
are unable to predict how quickly, or to what extent, revenue from the sale of
Arestin(TM) will increase. We have not been profitable and since inception
have incurred cumulative net losses of approximately $60.6 million through
December 31, 2001. These losses have resulted principally from costs incurred
in research and development activities related to Arestin(TM) and our new
product candidates still in development, together with marketing, general and
administrative expenses. We expect to incur additional operating losses until
such time as we generate sufficient revenue to offset expenses. Research and
development costs relating to our new product candidates will continue to
increase and will increase further as human clinical trials begin.
Administrative, manufacturing, sales and marketing costs will increase as we
attempt to increase revenue from the sale of Arestin(TM). We may never be
profitable even if our product candidates are approved and commercialized.

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<PAGE>

 If the manufacturers that we rely on for the production and packaging of
 Arestin(TM) do not provide us with sufficient quantities at an acceptable
 price, our sales of Arestin(TM) will be halted, reduced or less profitable.

   We depend on third parties for the manufacture, testing, filling and
packaging of Arestin(TM). We are solely dependent on one company for the
manufacture and testing of Arestin(TM) microspheres. Additionally, we are
solely dependent on another company for filling and packaging the dispensers.
Any disruption in such companies' businesses or in our relationship with such
companies may have a material adverse effect on our business.

 If the sole-source suppliers that we depend on for the raw materials and
 components for Arestin(TM) fail to provide sufficient quantities, we may not
 be able to obtain an alternate supply on a timely or acceptable basis and this
 could reduce or halt our sales of Arestin(TM).

   We currently rely on sole-source suppliers to provide to the suppliers that
produce and package ArestinTM each of the three separate raw materials and
components for Arestin(TM):

  . the polymer component, which is an inactive ingredient used in the drug
    formulation;

  . minocycline, the active drug ingredient; and

  . the plastic cartridge.

   We have not entered into any agreements that provide us assurance of
continued supply of these components. We may not be able to obtain a sufficient
supply of these raw materials and components from each supplier necessary to
meet market demand for Arestin(TM) at competitive prices or at all. We may not
be able to find alternative suppliers in a timely manner that would provide
these materials and components at acceptable prices or in adequate quantities.
Before replacing any of these suppliers or engaging second-source suppliers, we
would need to satisfy various regulatory requirements.

 Arestin(TM) may not be accepted by oral health care providers or patients.

   Arestin(TM) will not be a commercially successful product unless accepted by
oral health care providers as clinically useful, cost-effective and safe. In
addition, because Arestin(TM) is designed to enhance the existing standard of
care for periodontitis, it increases the initial cost of treatment.
Consequently, patients may not accept Arestin(TM) if they feel it is too
expensive. Patient acceptance of Arestin(TM) may be dependent on the
availability of adequate reimbursement from governmental health administration
authorities, private health insurers and other organizations. Reimbursement for
oral care by third-party payors is traditionally significantly more limited
than reimbursement for other fields of medical care.

 If we cannot compete effectively, our sales will suffer.

   Competition in the pharmaceutical industries, and the market for oral care
pharmaceuticals in particular, is intense. FDA-approved products currently
exist that compete with Arestin(TM) and with most of the product candidates we
are developing. The products that compete with Arestin(TM) include:

  . Atridox, a product developed by Atrix Laboratories and marketed by
    CollaGenex;

  . Perio Chip, a product developed and marketed by Dexcel Pharma; and

  . Periostat, a drug developed and marketed by CollaGenex.

   Certain of our competitors have substantially greater research and
development capabilities and financial, scientific, manufacturing, marketing
and sales resources than we possess. Our competitors may succeed in developing
products earlier and obtaining regulatory approvals from the FDA more rapidly
than us. Our competitors may also develop products that are superior to those
we are developing and render our product candidates or technologies obsolete or
non-competitive. Other potential competitors, not currently known to us, may be
developing products that may compete with Arestin(TM) and/or our other product
candidates.

                                       14
<PAGE>

 If our intellectual property rights are compromised, we may be unable to
 compete effectively.

   Our success depends on our ability and the ability of our third-party
licensors to:

  . obtain and maintain patent protection for Arestin(TM), our other product
    candidates, and our core technology; and

  . preserve our trade secrets.

   Patents may not ultimately be issued from any pending or future patent
applications. In addition, any issued patents may not be sufficient to protect
our product candidates or technologies. Our issued patents may be held to be
invalid if challenged. Potential competitors may also develop similar
technology that circumvents our or our licensors' patents. If we or our third-
party licensors do not obtain and maintain appropriate patent protection, we
may face increased competition in the United States and in foreign countries.

   Our licensors are primarily responsible for prosecuting and maintaining all
patents and patent applications covering Arestin(TM), our core technology, and
our other product candidates. If these licensors do not diligently prosecute
and maintain the patents and patent applications upon which we rely, our
ability to exclude others from competing with us may suffer.

   Patent applications in the United States are maintained in secrecy until a
patent issues. As a result, others may have filed patent applications for
products or technology covered by any pending patent applications we are
relying upon. Other parties may have patents, patent applications and other
intellectual property relevant to our product candidates and technologies,
which are not known to us and that could block or compete with our product
candidates or technologies. Litigation may be necessary to enforce any patents
issued to us or to determine the scope and validity of the intellectual
property rights of other parties. The defense and prosecution of patent and
other intellectual property claims is both costly and time consuming, even if
the eventual outcome is favorable to us.

 If we infringe the intellectual property rights of others, or if we allege
 others infringe our intellectual property rights, we may face significant
 expense and liability.

   If our technologies, product candidates, methods or processes infringe the
intellectual property rights of other parties, we may have to:

  . obtain licenses from the owners of such intellectual property rights;

  . redesign our product candidates or processes to avoid infringement;

  . stop using the subject matter claimed in the patents held by others;

  . pay damages; or

  . defend litigation or administrative proceedings that may be costly
    whether we win or lose.

   We are aware of an issued patent that relates to use of some antibiotics,
including minocycline, to treat periodontal and other diseases, and which has
been exclusively licensed to a competitor. It is possible that a claim could be
asserted that the use of our Arestin(TM) product infringes on this issued
patent. Outside counsel, together with our scientific staff, has reviewed this
patent and does not believe that it covers Arestin(TM). If this patent is found
to contain claims infringed on by the use of our Arestin(TM) product and such
claims are ultimately found to be valid and enforceable, we may not be able to
obtain a license from the competitor at a reasonable cost, if at all, or
develop or obtain alternative technology. If other parties make claims that we
are infringing on patents they hold, we may have to defend ourselves in court
and this could result in substantial cost and diversion of management's
resources, and our defense may not be successful.

   Our success also depends upon the skills, knowledge and experience of our
scientific and technical personnel. The confidentiality agreements required of
our employees may not provide adequate protection for our trade secrets, know-
how or other proprietary information or prevent any unauthorized use or
disclosure or the lawful development of competing products by others. In
addition, many of our scientific and management personnel were previously
employed by other biotechnology and pharmaceutical companies, where they were
conducting research in areas similar to those that we now pursue. As a result,
we could be subject to allegations of trade-secret violations and other claims
relating to the intellectual property rights of these prior employees.

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<PAGE>

 If Arestin(TM) or our product candidates injure people, we may incur
 significant expense and liability.

   Our business exposes us to potential product liability risks. These types
of risks are inherent in the testing, manufacturing, marketing and sale of
pharmaceutical products and candidates. We may not be able to avoid product
liability claims. Product liability insurance for the pharmaceutical industry
is expensive and may not be available in the future. If we are unable to
obtain or maintain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims, our business
will be adversely affected.

 If we need additional financing, and this financing is unavailable, our
 ability to develop and commercialize products and our operations will be
 adversely affected.

   Our current operations and anticipated development projects require
substantial capital. We are likely to need substantial additional funds to
finance our future operations, and to conduct our research activities,
technical studies, clinical trials and other activities relating to the
successful commercialization of our product candidates. However, our access to
capital funding is uncertain. If adequate funds are unavailable, we may be
required to:

  . delay, reduce the scope of, or eliminate one or more of our research or
    development programs;

  . license rights to technologies, product candidates or products on terms
    that are less favorable to us than might otherwise be available; or

  . obtain funds through arrangements that may require us to relinquish
    rights to product candidates or products that we would otherwise seek to
    develop or commercialize ourselves.

   If we raise additional funds by issuing equity securities, our existing
stockholders will own a smaller percentage of OraPharma, and new investors may
pay less on average for their securities than, and could have rights superior
to, existing stockholders.

 If the clinical trials of our product candidates fail, we will not be able to
 market our product candidates.

   To receive the regulatory approvals necessary for the sale of our product
candidates, we must demonstrate through human clinical trials that each
product candidate is safe and effective. The clinical trial process is complex
and expensive, and we cannot be certain that the trials will ever result in
the commercial sale of a product candidate. Positive results from preclinical
studies and early clinical trials do not ensure positive results in clinical
trials designed to permit application for regulatory approval. We may suffer
significant setbacks in clinical trials, even after earlier clinical trials
show promising results. Any of our product candidates may produce undesirable
side effects in humans that could cause us or regulatory authorities to
interrupt, delay or halt clinical trials of a product candidate. We, the FDA
or foreign regulatory authorities may suspend or terminate clinical trials at
any time if we or they believe the trial participants face unacceptable health
risks.

Risks Related to Governmental Approvals

 If we do not obtain regulatory approvals, we will not be able to market our
 product candidates.

   The process of obtaining FDA and other required regulatory approvals,
including foreign approvals, often takes many years and can vary substantially
based upon the type, complexity and novelty of the product candidates
involved. Furthermore, this approval process is extremely expensive and
uncertain. We have limited experience in filing and pursuing applications
necessary to gain regulatory approvals.

 If we fail to comply with extensive FDA regulations or if the FDA withdraws
 its approval, we may be forcedto suspend the sale of Arestin(TM).

   Continued compliance with all FDA requirements, including those concerning
product specifications, manufacturing process, validation, labeling,
promotional material, record-keeping and reporting, is required for the
marketing of Arestin(TM). Failure to comply with these requirements could
result in warning letters, product recall, criminal action or other FDA-
initiated actions, which could halt further marketing until the product is

                                      16
<PAGE>

brought into compliance. Product approval may also be withdrawn if problems
concerning safety, efficacy or quality of the product occur. In addition, if
there are any modifications to Arestin(TM), including any changes in
indication, manufacturing process, labeling delivery devices or manufacturing
facility, an NDA supplement may be required to be submitted to the FDA. The
FDA may also require post-marketing testing and surveillance to monitor the
effects of Arestin(TM).

Certain Risks Related to Legal Proceedings

 If we are unsuccessful in defending ourselves against the class action
 complaint brought against us, it could materially and adversely affect the
 Company's business, financial condition and results of operations.

   As discussed in further detail in Item 3, we were named as defendants in a
class action complaint. Management intends to defend these actions vigorously.
We cannot predict the ultimate outcome of the litigation. An unfavorable
outcome in litigation could materially and adversely affect the Company's
business, financial condition and results of operations

Certain Risks Related to Our Common Stock

 Because our certificate of incorporation and Delaware law contain provisions
 that could discourage a takeover, the value of our common stock may be
 adversely affected.

   Our certificate of incorporation provides for the division of our board of
directors into three classes and provides our board of directors the power to
issue up to five million shares of preferred stock without stockholder
approval. This preferred stock could have voting rights that could be superior
to that of our common stock, and our board of directors has the power to
determine these voting rights. Our certificate of incorporation also requires
supermajority approval for the removal of any member of our board of directors
and prevents our stockholders from acting by written consent. In addition,
Section 203 of the Delaware General Corporation Law contains provisions that
impose restrictions on stockholder action to acquire control of OraPharma. The
effect of these provisions of our certificate of incorporation and Delaware
law would likely discourage third parties from seeking to obtain control of
OraPharma.

 Our stock price may be highly volatile.

   Since our initial public offering on March 9, 2000, our stock has traded at
prices ranging from $2.50 to $36.88. The market price of our common stock may
fluctuate significantly in response to many factors, some of which are beyond
our control, including the following:

  . Arestin's(TM) failure to achieve market acceptance;

  . results of preclinical studies and clinical trials conducted by us or on
    our behalf, or by our competitors;

  . announcements of technological innovations or new commercial products by
    us, or by third parties with respect to strategic relationships
    maintained with us, or our competitors;

  . regulatory developments in both the United States and foreign countries;

  . changes in reimbursement policies;

  . developments or disputes concerning patents or other proprietary rights;

  . fluctuations in our operating results;

  . our liquidity position;

  . changes in financial estimates or recommendations by security analysts;

  . public concern as to the safety and efficacy of products developed by us,
    our collaborators or our competitors;

  . lack of adequate trading liquidity as a public company; or

  . general market conditions.

                                      17
<PAGE>

   In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. We are now involved in this type of
litigation, as outlined in Item 3. Litigation of this type is often extremely
expensive and diverts management's attention and resources.

ITEM 2. PROPERTIES

   We lease our corporate and research and development facilities under an
operating lease expiring on September 30, 2003. We have two 5-year renewal
options subject to the landlord's determination of the fair rental value for
each renewal term. We have also entered into an operating lease for additional
corporate space, which will be expiring on January 31, 2004. We have two 5-year
renewal options subject to the landlord's determination of the fair rental
value for each renewal term. Both facilities are located at 732 Louis Drive,
Warminster, Pennsylvania, and aggregate approximately 17,500 square feet.

ITEM 3. LEGAL PROCEEDINGS

   In November 2001, the Company, certain of the Company's officers and certain
underwriters of the Company's initial public offering were named as defendants
in a class action complaint filed in the United States District Court for the
Southern District of New York. The complaint alleges, among other things,
violations of Sections 11 and 12 of the Securities Act of 1933 and Rule 10b-5
promulgated under the Securities Exchange Act of 1934, based on allegedly
material misstatements and/or omissions in the prospectus for the Company's
initial public offering concerning the commissions received by the underwriters
of such offering, as well as failure to disclose the existence of purported
agreements by the underwriters with some of the purchasers in such offering to
buy additional shares of the Company subsequently in the open market at pre-
determined prices. The plaintiffs seek for themselves and the alleged class
members an award of damages and litigation costs and expenses. The Company
intends to defend these actions vigorously. The Company cannot predict the
ultimate outcome of the litigation. An unfavorable outcome in litigation could
materially and adversely affect the Company's business, financial condition and
results of operations.

   The Company is not a party to any other material legal proceedings.

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

   No matters were submitted to a vote of our stockholders during the fourth
quarter of 2001.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

   The following table presents information about our executive officers.

<TABLE>
<CAPTION>
          Name           Age                             Position
          ----           ---                             --------
<S>                      <C> <C>
Michael D. Kishbauch....  52 President, Chief Executive Officer and Director

Mark B. Carbeau.........  41 Vice President, Corporate Development

J. Ronald Lawter,
 Ph.D. .................  59 Executive Vice President, Chief Scientific and Technical Officer

Jan N. Lessem, M.D.,
 Ph.D. .................  53 Vice President, Chief Medical Officer

James A. Ratigan........  53 Executive Vice President, Chief Financial Officer and Secretary

Joseph E. Zack..........  50 Vice President, Sales and Marketing
</TABLE>

   Mr. Kishbauch has served as our President and Chief Executive Officer and as
a director of OraPharma since September 1996. He served as President and Chief
Operating Officer for two business units of Nelson Communications, Inc., an
integrated healthcare services firm, from February 1995 to August 1996. He
served as President, Chief Operating Officer and director of MedImmune, Inc., a
Maryland-based biotechnology company, from December 1992 to February 1995. From
February 1982 to May 1992, Mr. Kishbauch served

                                       18
<PAGE>

with the Pharmaceuticals Division of Ciba-Geigy Corporation in various sales
and marketing positions, ending as Vice President Product Planning and
Promotion. Mr. Kishbauch worked through positions of increasing responsibility
in brand management with The Procter and Gamble Company from June 1976 to
February 1982. Mr. Kishbauch received a B.A. in biology from Wesleyan
University and an M.B.A. from the Wharton School of the University of
Pennsylvania.

   Mr. Carbeau has served as our Vice President, Corporate Development since
May 1999. From September 1996 to April 1999, he served as General Partner in
The Lucas Group, a Boston-based strategy consulting and mergers and
acquisitions advisory firm, and from January 1995 to September 1996 as a
Principal in North Atlantic Capital, a private equity firm. Prior to that, he
was a consultant and case manager for The Boston Consulting Group, a management
consulting firm, from September 1990 through December 1994. Mr. Carbeau held a
number of cross-functional positions with Eli Lilly and Company, a
pharmaceutical company, from September 1982 to July 1988. He holds a B.S. in
industrial engineering from the Pennsylvania State University and an M.B.A.
from the Wharton School of the University of Pennsylvania.

   Dr. Lawter has served as our Executive Vice President, Chief Scientific and
Technical Officer since April 2000 and as our Vice President, Chief Scientific
and Technical Officer from March 1997 to April 2000. From October 1983 to March
1997, he held scientific and management positions in pharmaceutical product
development at American Cyanamid and at American Home Products after its
acquisition of American Cyanamid in 1994. While at American Cyanamid, he led
the team that developed the drug-delivery technology that is the basis for our
lead product, Arestin(TM). From August 1979 through October 1983, he was a
senior research scientist in the Advanced Drug Delivery Group at Ciba-Geigy.
From 1977 through 1979, he was a research manager in the Biomedical Division of
Abcor, Inc. and from 1972 through 1977, was a consultant with Arthur D. Little,
Inc. He received a B.S. in chemistry from the University of South Carolina and
a Ph.D. in physical chemistry from the Massachusetts Institute of Technology.

   Dr. Lessem has served as our Vice President, Chief Medical Officer since
June 1998. From May 1995 to June 1998, he served as Medical Director and Vice
President of Drug Strategy at Takeda America, a pharmaceutical company. Prior
to that, he was involved in various clinical research and management roles at
several pharmaceutical companies, specifically: SmithKline Beecham from June
1991 to May 1995; Union Chemique Belgique Pharmaceutical in Brussels, Belgium,
from May 1990 to May 1991; Syntex Research from January 1986 to May 1990;
Bristol Myers from August 1983 to December 1985; and Merck Sharp & Dohme from
May 1982 to August 1983. Between 1974 and 1982, he was a Fellow, Instructor and
Associate Professor in Cardiology and Geriatrics, at the University of Lund, in
Sweden. He is a Fellow of the American College of Cardiology, and a member of
the New York Academy of Sciences, as well as The Swedish Medical Association.
Dr. Lessem earned an M.D. from the University of Lund in Sweden in 1974, a
Ph.D. in clinical cardiology from the same university in 1982, and was Board
Certified in Cardiology in Sweden in 1982.

   Mr. Ratigan has served as our Executive Vice President, Chief Financial
Officer since April 2000 and as our Vice President, Chief Financial Officer
from June 1997 to April 2000. Mr. Ratigan was named Secretary in December 1999.
From February 1997 to June 1997, Mr. Ratigan served as the Chief Financial
Officer of TL Ventures, one of the initial investors in OraPharma. From
September 1996 to February 1997, Mr. Ratigan served as the Vice President-
Finance of Robotic Vision Systems, Inc., a publicly-held company widely engaged
in machine vision and electronic imaging. From October 1993 to August 1996, Mr.
Ratigan served as the Executive Vice President, Chief Operating Officer and
Chief Financial Officer and a director of Perceptron, Inc., a publicly-held
company that provides three dimensional machine vision technologies to the
automotive, forestry products and aerospace industries. From March 1983 to
October 1992, Mr. Ratigan was with the Adler Group, a venture capital fund,
where he served in a number of positions including venture manager, Chief
Financial Officer, and Chief Executive Officer of a machine vision company
controlled by the Adler Group. Earlier, Mr. Ratigan spent eight years with
Arthur Andersen LLP, where, as a manager, he focused on entrepreneurial
clients. Mr. Ratigan received his B.S. in finance and accounting from LaSalle
University, Philadelphia, Pennsylvania and is a CPA.

                                       19
<PAGE>

   Mr. Zack has served as our Vice President, Sales and Marketing since March
1998. From June 1993 to March 1998, Mr. Zack held senior management positions
of General Manager and Executive Director Marketing with Advanced Tissue
Sciences, a biotechnology company focused on tissue engineering. Prior to that,
he was Executive Director Marketing for Ciba-Geigy from January 1987 to June
1993, and Product Director from September 1983 to January 1987, where he was
responsible for a number of successful product launches. From November 1973 to
September 1983, he held positions in sales and new product development with
Ciba-Geigy. Mr. Zack obtained a B.A. in biology from Colgate University, and an
M.B.A. from St. John's University in New York.

                                       20
<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   Prior to March 9, 2000, there was no established market for the Company's
common stock. Since March 9, 2000, the common stock has traded on the Nasdaq
National Market ("NNM") under the symbol "OPHM."

   The following table sets forth the high and low bid information for the
common stock for each of the quarters in the period beginning March 9, 2000
through December 31, 2001 as reported on NNM.

<TABLE>
<CAPTION>
   Quarter Ended                                                  High     Low
   -------------                                                 ------- -------
   <S>                                                           <C>     <C>
   March 31, 2000............................................... $36.875 $17.000
   June 30, 2000................................................ $20.125 $ 5.000
   September 30, 2000........................................... $13.500 $ 6.875
   December 31, 2000............................................ $15.750 $ 7.375
   March 31, 2001............................................... $13.250 $ 5.750
   June 30, 2001................................................ $ 8.250 $ 5.050
   September 30, 2001........................................... $ 6.000 $ 3.500
   December 31, 2001............................................ $ 5.750 $ 2.500
</TABLE>

   As of March 12, 2002, the approximate number of holders of record of the
common stock was 142 and the approximate number of beneficial holders of the
common stock was 2,944.

Dividend Policy

   We have never paid cash dividends on our common stock. We do not anticipate
paying any cash dividends in the foreseeable future, as we currently intend to
retain future earnings, if any, to fund the continued development and growth of
our business.

Use of Proceeds of Initial Public Offering

   On March 9, 2000, the Company consummated its initial public offering (the
"Offering") of its common stock, par value $0.001 per share (the "Common
Stock") using the registration statement on Form S-1 (File No. 333-93881) that
was declared effective on that date.

   The net offering proceeds to the Company from the Offering, after deducting
discounts, commissions, fees and expenses, were $75,983,746. During the period
March 9, 2000 through December 31, 2000, we had used cash on hand prior to the
Offering plus $728,575 of the Offering proceeds. For the year ended December
31, 2001, we used $31,133,511 of the Offering proceeds and have applied it as
follows:

<TABLE>
   <S>                                                               <C>
   To finance our net loss for the year ended December 31, 2001,
    net of non-cash charges......................................... $23,928,116
   Working capital requirements.....................................     940,862
   Purchase of fixed assets.........................................   3,664,533
   Additional cost of intangible assets.............................   2,600,000
</TABLE>

   As of December 31, 2001, we have $44,121,660 of the Offering proceeds
remaining, all of which is invested in a money market fund.

Unregistered Securities

   There were no sales of unregistered securities during the year ended
December 31, 2001.

                                       21
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data of OraPharma should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 22 and the consolidated financial
statements and related notes beginning on page F-1. The selected financial data
for the years ended December 31, 1997, 1998, 1999, 2000 and 2001 are derived
from audited financial statements of OraPharma.

<TABLE>
<CAPTION>
                                             Years Ended December 31,
                          -------------------------------------------------------------------
                             1997          1998          1999          2000          2001
                          -----------  ------------  ------------  ------------  ------------
<S>                       <C>          <C>           <C>           <C>           <C>
Statement of Operations
 Data:
Revenue.................  $       --   $        --   $        --   $        --   $  7,748,405
Operating expenses:
 Cost of revenue........          --            --            --            --      1,957,497
 Research and
  development...........    1,706,393     7,589,000     9,693,413     8,205,573    10,466,790
 Marketing, general and
  administrative........      939,469     1,604,579     2,189,577     8,350,336    23,488,753
                          -----------  ------------  ------------  ------------  ------------
 Operating loss.........   (2,645,862)   (9,193,579)  (11,882,990)  (16,555,909)  (28,164,635)
Interest income, net....      504,123       424,488       636,957     4,239,397     2,478,975
                          -----------  ------------  ------------  ------------  ------------
Net loss................   (2,141,739)   (8,769,091)  (11,246,003)  (12,316,512)  (25,685,660)
Non-cash preferred stock
 charge.................          --            --      1,729,651           --            --
Net loss to common
 stockholders...........  $(2,141,739) $ (8,769,091) $(12,975,684) $(12,316,512) $(25,685,660)
                          ===========  ============  ============  ============  ============
Basic and diluted net
 loss per share.........  $     (5.05) $     (13.72) $     (16.74) $      (1.13) $      (1.91)
                          ===========  ============  ============  ============  ============
Shares used in computing
 basic and diluted net
loss per share..........      424,054       639,339       775,116    10,921,573    13,440,517
                          ===========  ============  ============  ============  ============
Pro forma basic and
 diluted net loss
 per share..............                             $      (1.67) $      (1.00)
                                                     ============  ============
Shares used in computing
 pro forma basic and
 diluted net loss per
 share..................                                7,792,759    12,325,624
                                                     ============  ============
<CAPTION>
                                                As of December 31,
                          -------------------------------------------------------------------
                             1997          1998          1999          2000          2001
                          -----------  ------------  ------------  ------------  ------------
<S>                       <C>          <C>           <C>           <C>           <C>
Balance Sheet Data:
Cash and cash
 equivalents............  $10,136,747  $ 19,236,084  $ 13,073,803  $ 75,255,171  $ 44,121,660
Total assets............   10,859,584    20,480,402    14,711,739    80,431,518    57,749,896
Long-term debt..........          --        480,978       288,043           --            --
Redeemable convertible
 preferred stock........   12,822,767    28,771,713    32,974,359           --            --
Accumulated deficit.....   (2,576,969)  (11,346,060)  (22,592,093)  (34,908,605)  (60,594,265)
Total stockholders'
 equity (deficit).......  $(2,446,806) $(11,080,451) $(20,616,829) $ 76,472,394  $ 51,081,201
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Forward Looking Statements

   The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as information contained elsewhere in this
Report, contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements include statements about the following:

  . our ability to successfully market ArestinTM in the United States;

  . our ability to predict future sales levels of ArestinTM;

  . our ability to obtain approval to sell ArestinTM in Europe;

  . our intentions regarding European distribution partners;

                                       22
<PAGE>

  . anticipated operating losses and capital expenditures;

  . the adequacy of our liquidity position; and

  . our new product candidate development efforts, and estimated costs
    related thereto.

   When used in this Report, we intend the words "may", "believe",
"anticipate", "plan", "expect", "predict", "estimate", "require", "intend" and
similar words to identify "forward-looking statements". These forward-looking
statements involve risks, uncertainties and other factors that may cause our
actual results, performance or achievements, to be far different from that
suggested by our forward-looking statements. Such risks and uncertainties
include the possible failure of research and development efforts or clinical
trials for our product candidates; our ability to successfully market product
candidates; our ability to successfully market Arestin(TM) in the United States
and our intentions to market Arestin(TM) in Europe; our ability to obtain
approval to market Arestin(TM) in Europe; our ability to achieve milestones on
which licensed rights to Arestin(TM) and our other product candidates are
dependent; the prospect of continued losses by us; our dependence on sole-
source suppliers for the production of Arestin(TM); and the other risks and
factors identified from time to time in reports we file with the Securities and
Exchange Commission, including the risks set forth on pages 13-18, or in public
statements issued by us. You should not place undue reliance on our forward-
looking statements. We disclaim any obligation to update any of these factors
or to publicly announce the results of any revisions to any of these forward-
looking statements, and we claim the protection of the safe harbor for forward-
looking statements contained in the Private Securities Litigation Reform Act of
1995.

Overview of Our Financial Performance

Background

   We have devoted substantially all of our resources since we began operations
in August 1996 to the research and development of specialty pharmaceutical
products, with an initial focus on oral health care. Our initial research and
development program was based on our core drug delivery technology that we
license from American Home Products ("AHP"), for the development of our first
product, Arestin(TM) that focuses on periodontal disease. In December 1998, we
licensed a technology for an indication in oncology. On August 27, 2001, we
announced the start of Phase 1 human clinical trials for our product candidate
(OC-1012) that focuses on mucositis, a condition secondary to certain cancer
treatments. In December 1998, we also licensed a technology for bone
regeneration. We continue to make progress on our bone regeneration product
candidate (OC-1016). We performed pre-clinical studies on OC-1016 and we are
currently awaiting clearance from the FDA to begin Phase I clinical trials. We
are currently seeking partners for the OC-1016 compound for both dental
implantation and orthopedics, though we have not entered into any agreement
with potential partners. We believe that beginning Phase I human clinical
trials with partners will enable us to maximize the value of the OC-1016
compound. We cannot accurately estimate either the cost of the development
activities or clinical trials for either the OC-1012 or the OC-1016 compounds,
nor can we accurately estimate the time when these costs will be incurred, and
we are unable to predict with any certainty if either of these product
candidates will become commercial products. Likewise, we are unable to estimate
either the costs or the time when such costs will be incurred in connection
with our product candidate development initiatives in the areas of our drug
delivery system for large and small molecule drugs, our second-generation
therapeutic for periodontal disease, or our therapeutic to treat traumatic
injuries to teeth.

   On February 16, 2001, we obtained approval from the United States Food and
Drug Administration ("FDA") to begin marketing our first product, Arestin(TM),
for the adjunct treatment of adult periodontal disease. On April 2, 2001, we
began selling Arestin(TM) in the United States to periodontists and dentists
through our direct sales force. In December 2000, we applied to have
Arestin(TM) approved for sale in Sweden. If Arestin(TM) is approved, we intend
to use Sweden as the sponsor country to enable us to obtain approval for
Arestin(TM) in all countries in the European Union. We plan to sell Arestin(TM)
in Europe through one or more distribution partners, though we have not yet
entered into any agreements with potential partners.

                                       23
<PAGE>

   Prior to April 2, 2001, we operated as a development-stage company and did
not generate any revenue. For the year ended December 31, 2001, we generated
revenue of approximately $7.7 million from the sale of Arestin(TM). We are
unable to predict how quickly, or to what extent, revenue from the sale of
Arestin(TM) will increase. We have not been profitable and since inception have
incurred cumulative net losses of approximately $60.6 million through December
31, 2001. These losses have resulted principally from costs incurred in
research and development activities related to Arestin(TM) and our new product
candidates still in development for mucositis and bone regeneration, together
with marketing, general and administrative expenses, and to a lesser extent
from costs incurred in connection with development initiatives in the areas of
our drug delivery system for large and small molecule drugs, our second-
generation therapeutic for periodontal disease, and our therapeutic to treat
traumatic injuries to teeth.

   We expect to incur additional operating losses until such time as we
generate sufficient revenue to offset expenses. Research and development costs
relating to each of our product candidate development initiatives will continue
to increase, and will increase to a larger extent as human clinical trials
begin. Administrative, manufacturing, sales and marketing costs will increase
as we attempt to increase revenue from the sale of Arestin(TM).

   Nearly all of our revenue for the foreseeable future will depend on our
ability to successfully market Arestin(TM) in the United States. We began
selling Arestin(TM) in the United States on April 2, 2001, by deploying a
direct sales and marketing force initially comprised of 63 persons. During the
fourth quarter of 2001, we expanded our direct sales and marketing force by
adding an additional 18 sales and marketing individuals to provide further
penetration into the market. In the international markets, we intend to rely on
one or more distribution partners to sell Arestin(TM), though we have not yet
entered into any agreements with potential partners.

Equity Financings

   On March 9, 2000, we sold 4,000,000 shares of common stock in connection
with our initial public offering and received net proceeds of approximately
$66.0 million. On April 7, 2000, we sold an additional 600,000 shares to cover
underwriters' over-allotments and received net proceeds of approximately
$10.0 million.

   At the effective date of the initial public offering on March 9, 2000, all
outstanding shares of redeemable convertible preferred stock automatically
converted into an aggregate of 7,557,100 shares of common stock.

Milestone Payments, Royalties and License Fees

   In April 2000, we paid AHP a milestone payment of $500,000 based on the FDA
acceptance of our New Drug Application for Arestin(TM) ("NDA") for review. A
second milestone payment of $2.5 million was paid to AHP on March 16, 2001 as a
result of the FDA approval of Arestin(TM) for the adjunct treatment of adult
periodontitis. We also paid AHP $250,000 and issued AHP 110,000 shares of our
common stock at the time we entered into our license agreement in February
1997. Our license agreement with AHP also requires us to pay royalties on sales
of Arestin(TM) and other products that are covered by the AHP patents or
developed using the AHP technology.

   In April 2000, we paid Gary R. Jernberg, D.D.S. a milestone payment of
$50,000 based on the FDA acceptance of our NDA for review. A second milestone
payment of $100,000 was paid to Dr. Jernberg on March 16, 2001 as a result of
the FDA approval of Arestin(TM) for the adjunct treatment of adult
periodontitis. We also issued Dr. Jernberg a warrant to purchase 20,000 shares
of common stock at an exercise price of $0.10 per share, which warrant was
exercised in April 1997, and engaged Dr. Jernberg as an advisor, for an annual
retainer fee of $30,000. We are required to pay royalties on sales of
Arestin(TM) to Dr. Jernberg, a holder of three U.S. patents, and to Technical
Development and Investments, Est. ("TDI"), relating to technology previously
licensed by AHP to this third party. The cumulative amount of any retainers
paid to Dr. Jernberg will reduce any royalties payable to Dr. Jernberg, and any
royalties payable to either of these parties can be fully credited against up
to 50% of the royalties payable under our agreement with AHP.

                                       24
<PAGE>

   We paid Mucosal Therapeutics LLC $200,000 and issued Mucosal Therapeutics a
warrant to purchase 27,500 shares of our common stock in December 1998. In
December 1999, we completed our first milestone and, in accordance with our
license agreement, paid Mucosal Therapeutics $100,000 and issued them a warrant
to purchase 41,152 shares of our common stock. During 1999, we recorded the
$100,000 payment and the $346,108 deemed fair value of the warrant as research
and development expense. We are required to make payments totaling $2.0 million
to Mucosal Therapeutics in cash, or $1.0 million in cash and $1.25 million in
common stock, as other milestones are achieved, and upon FDA approval of a
pharmaceutical product for the treatment of mucositis. The license agreement
further obligates us to pay Mucosal Therapeutics royalties on sales of any
other pharmaceutical products covered by or involving use of this technology.

   We have also entered into a research and consulting agreement with Biomodels
LLC, an affiliate of Mucosal Therapeutics LLC, to perform preclinical studies
on our behalf and to provide us with research and general consulting services
regarding our development of the mucositis technology. At December 31, 2001,
all remaining payments due to this third party total $105,000 through 2002.

   We issued 82,500 shares of common stock in June 1999, valued at $400,950, to
Children's Medical Center Corporation ("CMCC"). We are also required to make
milestone payments totaling $1.0 million to CMCC, payable in the form of cash
or shares of our common stock, upon submission of our first NDA relating to a
bone regeneration product candidate and upon approval of our first such NDA. We
are also obligated to pay CMCC royalties on sales of products covered by the
CMCC patents, or which are specified bone and soft-tissue regeneration
products. We have also entered into a sponsored research agreement with
Children's Hospital, a non-profit affiliate of CMCC, to conduct research in the
area of bone and soft-tissue regeneration and perform related preclinical
studies. At December 31, 2001, all remaining payments due under the sponsored
research agreement total $140,000 through 2002.

Results of Operations

 Years Ended December 31, 2001 and 2000.

   Revenues. The Company reported approximately $7.7 million in revenues during
the year ended December 31, 2001. Revenues for the year ended December 31, 2001
were solely comprised of sales of Arestin(TM). Prior to the launch of
Arestin(TM) on April 2, 2001, the Company had reported no revenue.

   Cost of Revenues. Cost of revenues for Arestin(TM) was approximately $2.0
million, or 25% of revenues, for the year ended December 31, 2001.

   Research and Development Expenses. Research and development totaled
approximately $10.5 million for the year ended December 31, 2001 compared to
approximately $8.2 million for the same period in 2000, an increase of 27.6%.
This increase of approximately $2.3 million was primarily due to costs related
to production scale-up and clinical support of Arestin(TM), the costs
associated with developing new dispenser handles for Arestin(TM), the
initiation of the Phase I trial of our OC-1012 mucositis product candidate, and
development costs related to other product candidates.

   Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses totaled approximately $23.5 million for the year ended
December 31, 2001 compared to approximately $8.4 million in the same period in
2000, an increase of 181.3%. This increase of approximately $15.1 million was
primarily due to increased spending for sales and marketing activities
associated with the market launch of Arestin(TM) and higher personnel costs and
professional expenses.

   Interest Income, net. Interest income totaled approximately $2.5 million for
the year ended December 31, 2001 compared to approximately $4.2 million in the
same period in 2000, a decrease of 41.5%. This decrease of approximately $1.7
million is attributable to lower levels of cash and cash equivalents available
for investment in 2001, together with lower interest rates in 2001. The lower
levels of cash and cash equivalents were due to cash required to finance the
net loss in 2001, together with working capital requirements and

                                       25
<PAGE>

investing activities in 2001. Interest expense for the same periods was $0 and
$9,000 respectively, and represented interest paid on an equipment financing
credit facility. The equipment financing facility expired on June 30, 2000 and
was not renewed.

   Net Loss. Net loss totaled approximately $25.7 million for the year ended
December 31, 2001 compared to approximately $12.3 million in the same period in
2000, an increase of 108.6%. This increase of approximately $13.4 million was
primarily due to increases in research and development, and marketing, general
and administrative expenses, and decreased interest income, offset by the gross
profit realized on revenues generated by the sale of Arestin(TM).

 Years Ended December 31, 2000 and 1999.

   Research and Development Expenses. Research and development totaled
approximately $8.2 million for the year ended December 31, 2000 compared to
approximately $9.7 million for the same period in 1999, a decrease of 15.4%.
This decrease of approximately $1.5 million was primarily due to reduced
spending for Phase 3 clinical trials for Arestin(TM), that was partially offset
by increased spending for new product development, together with increased
scale-up activities associated with the production of Arestin(TM).

   Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses totaled approximately $8.4 million for the year ended
December 31, 2000 compared to approximately $2.2 million in the same period in
1999, an increase of 281.4%. This increase of approximately $6.2 million is
primarily due to increased spending for sales and marketing activities
associated with the planned market launch of Arestin(TM) in 2001, and to a
lesser extent, higher personnel costs and professional expenses.

   Interest Income, net. Interest income totaled approximately $4.2 million for
the year ended December 31, 2000 compared to $689,000 in the same period in
1999, an increase of 516.6%. This increase of approximately $3.5 million is
attributable to higher levels of cash and cash equivalents available for
investment in 2000, and higher interest rates. The higher levels of cash and
cash equivalents were due to the initial public offering of our common stock on
March 9, 2000 and the over-allotment sale on April 7, 2000. Interest expense
for the same periods was $9,000 and $52,000, respectively, and represented
interest paid on an equipment financing credit facility.

   Net Loss. Net loss totaled approximately $12.3 million for the year ended
December 31, 2000 compared to approximately $11.2 million in the same period in
1999, an increase of 10.0%. This increase of approximately $1.1 million was due
to increased spending for marketing activities, the production scale-up of
Arestin(TM), and new product development costs. These increases were partially
offset by reduced spending for Phase 3 clinical trials and increased interest
income.

   Net Loss to Common Stockholders. Included in the 1999 net loss to common
stockholders is a non-cash preferred stock charge of approximately $1.7
million. See Note 9 in Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

   As of December 31, 2001, we had cash and cash equivalents of approximately
$44.1 million, a decrease of approximately $31.1 million from December 31,
2000. The decrease in cash was primarily the result of the net loss we incurred
for the year ended December 31, 2001, together with cash required for milestone
payments, capital equipment, inventory, and accounts receivable, offset by
increased accounts payable and accrued expenses.

   During the year ended December 31, 2001, net cash used in operating
activities was approximately $24.9 million. This represents the net loss for
the year, adjusted for certain non-cash charges, and changes in operating
assets and liabilities, principally increases in accounts receivable and
inventories offset by increases in accounts payable and accrued expenses.

                                       26
<PAGE>

   Net cash used in investing activities for the year ended December 31, 2001
was approximately $6.3 million. Capitalized milestone payments under our
licensing agreements with AHP and Dr. Jernberg aggregated $2.6 million.
Approximately $1.8 million was used for the purchase of production equipment
and ArestinTM dispenser handles, $992,000 was used to purchase computer
hardware and software, telephone equipment, leasehold improvements, laboratory
equipment, office equipment and furniture, and $875,000 was used for leasehold
improvements at the facility of a contract-manufacturer who produces
Arestin(TM).

   We lease our corporate and research and development facilities under two
operating leases that expire on September 30, 2003 and January 31, 2004. Each
lease has two 5-year renewal options subject to the landlord's determination of
the fair rental value for each renewal term. We have also entered into
operating lease agreements for various office equipment. The terms of these
lease agreements range from 12 to 24 months. Minimum annual payments for both
the real and personal property leases total $274,000 per year.

   We anticipate that our capital expenditures will be approximately $1.6
million in 2002, though no commitments to spend such amount exist. Of this
amount, approximately $600,000 will be used to purchase production equipment
and Arestin(TM) dispenser handles, and approximately $1 million will be used to
purchase computer hardware and software, telephone equipment, leasehold
improvements, laboratory equipment, office equipment and furniture. We expect
that our 2002 working capital requirements to finance growth in accounts
receivables, inventories and prepaid expenses, offset by increased accounts
payable and accrued expenses, will aggregate approximately $4.2 million.

   We believe that our current cash position and expected interest income will
be sufficient to fund our operations, capital expenditures, and working capital
requirements through at least the first half of 2003. Market demand for
Arestin(TM), together with any future acquisitions, licensing agreements, or
similar transactions may cause us to require additional capital in 2003 and
beyond. A principal variable that could cause us to either need to raise
capital prior to the first half of 2003 or could cause us not to have to raise
capital at all is the amount of revenue generated by sales of Arestin(TM)
between now and then. Other events could arise which could cause us to need to
raise capital such as the legal proceedings noted in Item 3 on page 18 or from
contingencies or other events that we are not currently aware of. Our
marketing, general and administrative expenses, working capital requirements
and capital expenditures will increase due to the manufacturing scale-up and
marketing of Arestin(TM). Research and development expenditures, including
clinical studies for new product candidates, will continue at high levels as we
attempt to both advance the development and potential commercialization of our
new product candidates and to obtain approval to sell Arestin(TM) in Europe.
Due to the need for higher volume manufacturing capability, we are incurring
expenditures for the purchase of additional production equipment. Sales and
marketing activities are expected to increase to support the sale of
Arestin(TM) in the United States and to begin sales efforts internationally,
initially in Europe if European approval is obtained and one or more
distribution partners are engaged.

Critical Accounting Policies

   Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation
of financial statements. Note 2 in Notes to Consolidated Financial Statements
includes a summary of the significant accounting policies and methods used in
the preparation of our Consolidated Financial Statements. The following is a
brief discussion of the more significant accounting policies and methods used
by us. In addition, Financial Reporting Release No. 61 was recently released by
the SEC to require all companies to include a discussion to address, among
other things, liquidity, off-balance sheet arrangements, contractual
obligations and commercial commitments.

Revenue Recognition

   We recognize revenue from the sale of Arestin(TM) upon shipment. We do not
grant price protection or product return rights to customers. The Securities
and Exchange Commission's Staff Accounting Bulletin

                                       27
<PAGE>

(SAB) No. 101, "Revenue Recognition" provides guidance on the application of
generally accepted accounting principles to selected revenue recognition
issues. We have concluded that our revenue recognition policy is appropriate
and in accordance with generally accepted accounting principles and SAB No.
101. In accordance with Emerging Issues Task Force ("EITF") 00-10, we record
shipping and handling charges billed to customers as revenue and the related
cost as cost of revenue.

Accounts Receivable

   At December 31, 2001, accounts receivable totaled approximately $1.2 million
and were net of an allowance for doubtful accounts of $63,000, which represents
the charge to expense for a provision for bad debts. We had no balances written
off during the year. We launched our initial product on April 2, 2001 and
despite our limited sales history, believe our estimate to be appropriate. As
we establish more history with the sale of Arestin(TM), we may find it
necessary to refine the method used for determining our allowance for doubtful
accounts.

Inventories

   Inventories totaled approximately $2.6 million and are stated at the lower
of cost or market, as determined using the first-in, first-out method, which
most closely reflects the physical flow of our inventories. Inventories are net
of a reserve of $100, 000 for obsolescence. While we have a limited history, we
believe this reserve to be appropriate at this time. Our product is subject to
a shelf life and is not saleable following the expiration of that shelf life.
The component with the shortest shelf life after production must be packaged
within twelve months. Finished product must be sold within twenty-four months
of packaging. Although we had no expiration of inventory during the year, less
than anticipated future sales could result in excess inventory, which could
become obsolete. To the extent that we have excess inventory in the future, we
would be required to thoroughly evaluate, and potentially increase our reserve
for obsolescence.

Intangibles

   Certain acquired technologies, together with acquired patent license rights,
have been recorded at cost and are being amortized on a straight-line basis
over the ten year estimated useful life of the technology. In accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of," if indicators of impairment exist, we assess
the recoverability of the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, we will measure the amount of
such impairment by comparing the carrying value of the assets to the present
value of the expected future cash flows associated with the use of the asset.
While our current and historical operating and cash flow losses are indicators
of impairment, we believe the future cash flows to be received from the sale of
Arestin(TM) will exceed the long-lived assets' carrying value, and,
accordingly, we have not recognized any impairment losses through December 31,
2001. If in the future we determine indications of impairment exist, we will be
required to write off the value of the impairment assessed at that time.

Commitments

   As outlined in Note 7 in Notes to Consolidated Financial Statements, we have
entered into various contractual obligations and commercial commitments. These
commitments include the following:

  . facility leases;
  . equipment leases;
  . license agreements;
  . royalty contracts; and
  . outside manufacturing contracts.


                                       28
<PAGE>

 Facility Leases

   We lease our corporate and research and development facilities under two
separate operating leases. The first lease is scheduled to expire on September
30, 2003 and the second lease is scheduled to expire on January 31, 2004. We
have two 5-year renewal options on each of the leases. The following is a
summary, as of December 31, 2001, of the future minimum annual lease payments
required under these leases.

<TABLE>
      <S>                                                              <C>
      2002............................................................ $268,782
      2003............................................................  228,940
      2004............................................................    7,442
                                                                       --------
      Total minimum lease payments.................................... $505,164
                                                                       ========
</TABLE>

 Equipment Operating Leases

   We have also entered into operating lease agreements for various office
equipment. The terms of these lease agreements range from 12 to 24 months.
Current minimum annual payments under these leases aggregate to $5,475 per
year. We believe we will enter into additional operating leases for office
equipment as the current leases expire or as additional office equipment is
required.

 License Agreements

   We have entered into research and consulting agreement with Biomodels LLC,
an affiliate of Mucosal Therapeutics LLC, and Children's Medical Center
Corporation ("CMCC"). These agreements are to perform research on our behalf
and to provide general consulting services regarding our development of certain
new product technologies. As of December 31, 2001, future sponsored research
and consulting payments required under these agreements total $244,000, all of
which is due in 2002. We may elect to enter into additional sponsored research
agreements with one or both of these entities.

   In addition, we are also required to make payments to Mucosal Therapeutics
totaling $2.0 million in cash, or $1.0 million in cash and $1.25 million in
common stock, and to CMCC, totaling $1.0 million, payable in the form of cash
or shares of our common stock, as preclinical and clinical milestones are
achieved, and upon FDA approval of any pharmaceutical products covered by the
license agreements. These license agreements further obligate us to pay
royalties on sales of pharmaceutical products covered by the licenses or
involving use of the technologies.

 Royalty Contracts on Sales of Arestin(TM)

   We have license agreements with three separate entities that require us to
pay royalties on sales of Arestin(TM) and other products that are covered by
their patents or developed using their technology. We are required to pay
royalties on sales of Arestin(TM) to AHP, Dr. Jernberg and to Technical
Development and Investments, Est. ("TDI"), relating to technology previously
licensed by AHP to TDI. In addition we have engaged Dr. Jernberg as an advisor,
for an annual retainer fee of $30,000. The cumulative amount of any retainers
paid to Dr. Jernberg will reduce any royalties payable to Dr. Jernberg, and any
royalties payable to either to Dr. Jernberg or TDI can be fully credited
against up to 50% of the royalties payable under the agreement with AHP.

 Outside Manufacturing Commitments

   We have entered into agreements with third party manufacturers for the
production of various components for our Arestin(TM) product. The minimum
annual commitments for 2002 to purchase components will cost approximately $1.9
million. Commitments for the years 2003 through 2010 are approximately $1.6
million per year, though this amount is subject to adjustment for a number of
reasons specified in the agreements.

 Off-Balance Sheet Arrangements

   We have not entered into any off-balance sheet arrangements through December
31, 2001.

                                       29
<PAGE>

Income Taxes

   As of December 31, 2001, we had approximately $57.0 million and
approximately $1.2 million of net operating loss and research and development
credit carryforwards, respectively, for federal income tax purposes, which
expire on various dates beginning in 2011. These amounts reflect differences in
the treatment of expenses for tax reporting and financial reporting. The Tax
Reform Act of 1986, as amended, contains certain provisions that may limit our
ability to utilize net operating loss and tax credit carryforwards in any given
year or if there is an ownership change. Any future ownership change, such as
described in Section 382 of the Internal Revenue Code, may limit the
utilization of net operating loss and tax credit carryforwards.

Impact of Inflation

   We are unable to predict the impact, if any, that inflation may have on our
future operating costs and potential product revenues.

Recent Accounting Pronouncements

   In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" that
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. While SFAS No. 144 supercedes SFAS No. 121, it removes
goodwill from its scope and retains the requirements of SFAS No. 121 regarding
the recognition of impairment losses on long-lived assets held for use. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The adoption of this pronouncement
is not expected to have any impact on the Company's financial position or
results of operations.

ITEM 7A . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

   Our cash and cash equivalents total approximately $44.1 million at December
31, 2001. These assets are invested in a money market fund that invests in
short-term government and investment-grade, interest-bearing securities on
which we were earning 2.20% at December 31, 2001. The reduction of interest
rates in the year 2001 had, and any future decline in interest rates will have,
a negative impact on the interest income we will earn on these assets.

   We do not currently have any interest bearing debt, nor do we utilize any
hedging or derivative instruments. Accordingly, interest rate or foreign
currency fluctuations will not have any impact on our results of operations
unless, and until, we enter into loan agreements or hedging transactions. If we
begin generating revenue in the international markets, the Company may enter
into hedging transactions.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

   None.

                                       30
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

   The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors",
"Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" in
the Company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders is incorporated herein by reference to such proxy statement.

ITEM 11. EXECUTIVE COMPENSATION

   The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 2002 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 2002
Annual Meeting of Stockholders is incorporated herein by reference to such
proxy statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 2002 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.

                                       31
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

   (a) (1) Financial Statements.

      Reference is made to the Index to Consolidated Financial Statements
      on Page F-1.

    (2) Financial Statement Schedule.

      No schedules are included because the required information is
      inapplicable or is presented in the Consolidated Financial
      Statements or the notes thereto.

    (3) Exhibits.

      Reference is made to the Exhibit Index on Page 35.

   (b)Reports on Form 8-K.

      No Reports on Form 8-K were filed during the last quarter of 2001.

                                       32
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15 (d) 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.

                                          Orapharma, Inc.

                                                  /s/ Michael D. Kishbauch

Date: March 22, 2002                      By: _________________________________
                                                    Michael D. Kishbauch
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each director whose signature
appears below constitutes and appoints Michael D. Kishbauch and James A.
Ratigan, jointly and severally, as his or her attorney-in-fact, each with full
power of substitution, for him or her, in any and all capacities, to sign each
amendment to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his or her substitute or substitutes may lawfully do or
cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
               Signature                           Title                   Date
               ---------                           -----                   ----

 <C>                                    <S>                         <C>
      /s/ Michael D. Kishbauch          President and Chief           March 22, 2002
 ______________________________________  Executive Officer
          Michael D. Kishbauch           (Principal Executive
                                         Officer)

       /s/  James A. Ratigan            Executive Vice President,     March 22, 2002
 ______________________________________  Chief Financial Officer
            James A. Ratigan             and Secretary (Principal
                                         Financial Officer)

        /s/ Robert D. Haddow            Controller (Principal         March 22, 2002
 ______________________________________  Accounting Officer)
            Robert D. Haddow

        /s/ James J. Mauzey             Director                      March 22, 2002
 ______________________________________
            James J. Mauzey

         /s/ Eileen M. More             Director                       March 22 2002
 ______________________________________
             Eileen M. More

</TABLE>


                                       33
<PAGE>

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
        /s/ Harry T. Rein              Director                     March 22, 2002
______________________________________
            Harry T. Rein
</TABLE>

<TABLE>
<S>                                    <C>                        <C>
       /s/ David I. Scheer             Director                     March 22, 2002
______________________________________
           David I. Scheer

        /s/ Jesse I. Treu              Director                     March 22, 2002
______________________________________
         Jesse I. Treu, Ph.D.
</TABLE>

                                       34
<PAGE>

Exhibit Index

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
 3.1     Fourth Amended and Restated Certificate of Incorporation of the
         Company. (a)

 3.2     Amended and Restated Bylaws of the Company. (a)

 3.2a    Amendment to Amended and Restated Bylaws. (c)

 4.1     Second Amended and Restated Stockholders Agreement among OraPharma,
         Inc. and the parties set forth therein, dated December 23, 1999. (a)

 4.2     Warrant issued to Oak Investment Partners VI, Limited Partnership. (a)

 4.3     Warrant issued to Oak V Affiliates Fund, Limited Partnership. (a)

 4.4     Warrant issued to Canaan S.B.I.C., L.P. (a)

 4.5     Warrant issued to Canaan Capital Limited Partnership. (a)

 4.6     Warrant issued to Canaan Capital Offshore Limited Partnership. (a)

 4.7     Series A Preferred and Series B Preferred Stock Purchase Agreement
         among OraPharma and the parties named therein, dated February 26,
         1997. (a)

 4.8     Series C Preferred Stock Purchase Agreement among OraPharma, Inc. and
         the parties named therein, dated December 1, 1998. (a)

 4.9     Series D Preferred Stock Purchase Agreement among OraPharma, Inc. and
         the parties named therein, dated December 23, 1999. (a)

 4.10    Restricted Stock Purchase Agreement between BioMorphics Group, Inc.
         and OraPharma dated December 31, 1998. (a)

 4.11    Restricted Stock Purchase Agreement between Children's Medical Center
         Corporation and OraPharma dated December 31, 1998. (a)

 4.12    Warrant issued to Mucosal Therapeutics. (a)

 4.13    Restricted Stock Purchase Agreement between American Cyanamid Company
         and OraPharma, dated February 26, 1997. (a)

 4.14    Restricted Stock Purchase Agreement between Scheer Investment Holdings
         1, L.L.C. and OraPharma dated February 24, 1997. (a)

 4.15    Restricted Stock Purchase Agreement between Oak V1 Affiliates Fund,
         Limited Partnership and OraPharma, dated February 26, 1997. (a)

 4.16    Restricted Stock Purchase Agreement between Oak Investment Partners
         VI, Limited Partnership and OraPharma, dated February 26, 1997. (a)

 4.17    Restricted Stock Purchase Agreement between Michael D. Kishbauch and
         OraPharma, dated March 6, 1997. (a)

 4.18    Restricted Stock Purchase Agreement between J. Ronald Lawter and
         OraPharma, dated March 19, 1997. (a)

 4.19    Warrant issued to Canaan Equity L.P. (a)

 4.20    Warrant issued to Domain Partners IV, L.P. (a)

 4.21    Warrant issued to DP IV Associates, L.P. (a)

 4.22    Warrant issued to Old Court Limited. (a)
</TABLE>


                                       35
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
 4.23    Warrant issued to Frazier Healthcare 11. L.P. (a)

 4.24    Warrant issued to HealthCap KB. (a)

 4.25    Warrant issued to HealthCap CoInvest KB. (a)

 4.26    Warrant issued to Oak Investment Partners VI, Limited Partnership. (a)

 4.27    Warrant issued to Oak V1 Affiliates Fund, Limited Partnership. (a)

 4.28    Warrant issued to Sentron Medical, Inc. (a)

 4.29    Warrant issued to TL Ventures III L.P. (a)

 4.30    Warrant issued to TL Ventures III Interfund L.P. (a)

 4.31    Warrant issued to TL Ventures III Offshore L.P. (a)

 4.32    Warrant issued to Mucosal Therapeutics LLC. (a)

 4.33    First Amendment to Warrant issued to Oak Investment Partners VI,
         Limited Partnership. (a)

 4.34    First Amendment to Warrant issued to Oak Affiliates Fund, Limited
         Partnership. (a)

 4.35    First Amendment to Warrant issued to Canaan S.B.I.C., L.P. (a)

 4.36    First Amendment to Warrant issued to Canaan Capital Limited
         Partnership. (a)

 4.37    First Amendment to Warrant issued to Canaan Capital Offshore Limited
         Partnership C.V. (a)

 10.1    OraPharma, Inc. 1996 Stock Option Plan. (a)

 10.2    OraPharma, Inc. 1999 Equity Compensation Plan. (a)

 10.2a   Amendment No. 1 to OraPharma, Inc. 1999 Equity Compensation Plan. (d)

 10.3    Office Space Lease for 732 Louis Drive, Warminster, Pennsylvania,
         between Equivest Management Corporation and OraPharma, Inc. dated July
         31, 1998. (a)

 10.3a   First Amendment to office lease for 732 Louis Drive, Warminster,
         Pennsylvania, between Equivest Management Corporation and OraPharma,
         Inc. dated December 19, 2000. (b)

 10.4    Loan and Security Agreement between Silicon Valley Bank and OraPharma
         dated October 10, 1997. (a)

 10.5    Children's Hospital Sponsored Research Agreement, between Children's
         Hospital and OraPharma dated December 31. 1998. (a) #

 10.6    License Agreement between Children's Medical Center Corporation and
         OraPharma, dated December 31, 1998. (a) #

 10.7    License Agreement between Mucosal Therapeutics LLC and OraPharma,
         dated December 14. 1998. (a) #

 10.8    Research and Consulting Agreement between Biomodels LLC and OraPharma
         dated December 14, 1998. (a) #

 10.9    License Agreement between American Cyanamid Company and OraPharma,
         Inc. dated February 26, 1997. (a) #

 10.10   License Agreement between Gary R. Jernberg and OraPharma, dated
         December 19, 1996. (a) #

 10.11   License Agreement between Technical Developments and Investments, Est.
         and OraPharma dated February 13, 1997. (a) #

 10.12   Amendment to the OraPharma. Inc. 1996 Stock Option Plan. (a)
</TABLE>


                                       36
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                              Description
 -------                             -----------
 <C>     <S>
 10.13   Packaging Agreement dated November 9, 2000 between Packaging
         Corporation Inc. and OraPharma. (b) #

 10.14   Manufacture and Supply Agreement between aaiPharma, Inc. and
         OraPharma, Inc. dated as of February 16, 2001. (c) #

 10.15   Distribution Agreement between OraPharma, Inc. and CORD Logistics,
         Inc. dated March 28, 2001. (c) #

 21.1    Subsidiaries of the Registrant.

 23.1    Consent of Arthur Andersen LLP.

 24.1    Power of Attorney. (Included on signature pages hereto)

 99.1    Letter Regarding Arthur Andersen LLP.
</TABLE>
--------
#  Confidential Treatment Granted
(a) Incorporated by reference to the Company's registration statement on Form
    S-1 (Reg. No. 333-93881).
(b) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 2000.
(c) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
    for the quarter ended March 31, 2001.
(d) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
    for the quarter ended June 30, 2001.

                                       37
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Public Accountants................................... F-2

Consolidated Balance Sheets................................................ F-3

Consolidated Statements of Operations...................................... F-4

Consolidated Statements of Stockholders' Equity (Deficit).................. F-5

Consolidated Statements of Cash Flows...................................... F-6

Notes to Consolidated Financial Statements................................. F-7
</TABLE>


                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To OraPharma, Inc.:

We have audited the accompanying consolidated balance sheets of OraPharma, Inc.
(a Delaware corporation) and Subsidiary as of December 31, 2000 and 2001, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of OraPharma, Inc.
and Subsidiary as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

                                          /s/ Arthur Andersen LLP

Philadelphia, Pennsylvania
January 28, 2002


                                      F-2
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                          December 31,
                                                    --------------------------
                                                        2000          2001
                                                    ------------  ------------
<S>                                                 <C>           <C>
                      ASSETS
CURRENT ASSETS
  Cash and cash equivalents........................ $ 75,255,171  $ 44,121,660
  Accounts receivable, net.........................          --      1,203,432
  Inventories......................................          --      2,551,879
  Prepaid expenses and other.......................      434,562       399,897
                                                    ------------  ------------
    Total current assets...........................   75,689,733    48,276,868
FIXED ASSETS, net..................................    4,079,422     6,685,335
INTANGIBLE ASSETS, net.............................      662,363     2,787,693
                                                    ------------  ------------
    Total assets................................... $ 80,431,518  $ 57,749,896
                                                    ============  ============
       LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable................................. $  2,216,719  $  4,500,131
  Accrued expenses.................................    1,742,405     2,168,564
                                                    ------------  ------------
    Total current liabilities......................    3,959,124     6,668,695
                                                    ------------  ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
  Preferred stock, par value $.001 per share,
   5,000,000 authorized, none issued...............          --            --
  Common stock, par value $.001 per share,
   50,000,000 shares authorized, 13,421,224, and
   13,538,411 issued and outstanding at December
   31, 2000 and 2001, respectively.................       13,421        13,538
  Additional paid-in capital.......................  111,969,930   112,060,026
  Deferred compensation............................     (602,352)     (398,098)
  Accumulated deficit..............................  (34,908,605)  (60,594,265)
                                                    ------------  ------------
    Total stockholders' equity.....................   76,472,394    51,081,201
                                                    ------------  ------------
    Total liabilities and stockholders' equity..... $ 80,431,518  $ 57,749,896
                                                    ============  ============
</TABLE>




   The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                      ----------------------------------------
                                          1999          2000          2001
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
REVENUE.............................. $        --   $        --   $  7,748,405
OPERATING EXPENSES
  Cost of revenue....................          --            --      1,957,497
  Research and development...........    9,693,413     8,205,573    10,466,790
  Marketing, general and
   administrative....................    2,189,577     8,350,336    23,488,753
                                      ------------  ------------  ------------
  Operating loss.....................  (11,882,990)  (16,555,909)  (28,164,635)
INTEREST INCOME, net.................      636,957     4,239,397     2,478,975
                                      ------------  ------------  ------------
NET LOSS.............................  (11,246,033)  (12,316,512)  (25,685,660)
NON-CASH PREFERRED STOCK CHARGE......    1,729,651           --            --
                                      ------------  ------------  ------------
NET LOSS TO COMMON STOCKHOLDERS...... $(12,975,684) $(12,316,512) $(25,685,660)
                                      ============  ============  ============
BASIC AND DILUTED NET LOSS PER
 SHARE............................... $     (16.74) $      (1.13) $      (1.91)
                                      ============  ============  ============
SHARES USED IN COMPUTING BASIC
 AND DILUTED NET LOSS PER SHARE......      775,116    10,921,573    13,440,517
                                      ============  ============  ============
PRO FORMA BASIC AND DILUTED
 NET LOSS PER SHARE (UNAUDITED)...... $      (1.67) $      (1.00)
                                      ============  ============
SHARES USED IN COMPUTING PRO
 FORMA BASIC AND DILUTED NET LOSS
 PER SHARE (UNAUDITED)...............    7,792,759    12,325,624
                                      ============  ============
</TABLE>






   The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                            Common Stock      Additional
                                               Paid-in       Deferred   Accumulated
                           Shares    Amount    Capital     Compensation   Deficit        Total
                         ----------  ------- ------------  ------------ ------------  ------------
<S>                      <C>         <C>     <C>           <C>          <C>           <C>
Balance, December 31,
 1998...................    957,038  $   957 $    485,915   $(221,263)  $(11,346,060) $(11,080,451)
 Issuance of common
  stock in connection
  with acquistion of
  technology............     82,500       83      400,867         --             --        400,950
 Issuance of warrant to
  purchase common stock
  in connection with
  acquisition of
  technology............        --       --       346,108         --             --        346,108
 Exercise of stock
  options to purchase
  common stock..........        100      --            36         --             --             36
 Deferred compensation
  related to stock
  options...............        --       --       800,519    (766,542)           --         33,977
 Amortization of
  deferred stock-based
  compensation..........        --       --           --      172,412            --        174,412
 Issuance of warrant to
  purchase common stock
  in connection with
  sale of Series D
  preferred stock.......        --       --       756,204         --             --        756,204
 Adjustment related to
  stock split...........         (3)     --           (32)        --             --            (32)
 Net loss...............        --       --           --          --     (11,246,033)  (11,246,033)
                         ----------  ------- ------------   ---------   ------------  ------------
Balance, December 31,
 1999...................  1,039,635    1,040    2,789,617    (815,393)   (22,592,093)  (20,616,829)
 Sale of common stock in
  connection with
  initial public
  offering..............  4,600,000    4,600   75,979,143         --             --     75,983,743
 Conversion of preferred
  stock into common
  stock.................  7,557,100    7,557   33,027,965         --             --     33,035,522
 Exercise of stock
  options to purchase
  common stock..........    224,489      224       64,156         --             --         64,380
 Stock-based
  compensation expense..        --       --       109,049         --             --        109,049
 Amortization of
  deferred stock-based
  compensation..........        --       --           --      213,041            --        213,041
 Net loss...............        --       --           --          --     (12,316,512)  (12,316,512)
                         ----------  ------- ------------   ---------   ------------  ------------
Balance, December 31,
 2000................... 13,421,224   13,421  111,969,930    (602,352)   (34,908,605)   76,472,394
 Exercise of stock
  options to purchase
  common stock..........     92,187       92       38,871         --             --         38,963
 Exercise of warrants to
  purchase common
  stock.................     25,000       25       31,225         --             --         31,250
 Stock-based
  compensation expense..        --       --        20,000         --             --         20,000
 Amortization of
  deferred stock-based
  compensation..........        --       --           --      204,254            --        204,254
 Net loss...............        --       --           --          --     (25,685,660)  (25,685,660)
                         ----------  ------- ------------   ---------   ------------  ------------
Balance, December 31,
 2001................... 13,538,411  $13,538 $112,060,026   $(398,098)  $(60,594,265) $ 51,081,201
                         ==========  ======= ============   =========   ============  ============
</TABLE>

    The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                      ----------------------------------------
                                          1999          2000          2001
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net loss............................ $(11,246,033) $(12,316,512) $(25,685,660)
 Adjustments to reconcile net loss to
  net cash used in operating
  activities
   Depreciation and amortization.....      282,842       488,880     1,533,290
   Stock-based compensation expense..      206,389       322,090       224,254
   Common stock and warrants issued
    in connection with acquisition
    of technology....................      346,108           --            --
  Changes in operating assets and
   liabilities
   Accounts receivable...............          --            --     (1,203,432)
   Inventories.......................          --            --     (2,551,879)
   Prepaid expenses and other........     (217,503)     (170,618)       34,665
   Accounts payable..................     (369,168)    1,763,956     2,283,412
   Accrued expenses..................      106,078       471,937       426,159
                                      ------------  ------------  ------------
    Net cash used in operating
     activities......................  (10,891,287)   (9,440,267)  (24,939,191)
                                      ------------  ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures...............     (236,945)   (3,528,685)   (3,664,533)
  Expenditures for intangible
   assets............................          --       (550,000)   (2,600,000)
                                      ------------  ------------  ------------
    Net cash used in investing
     activities......................     (236,945)   (4,078,685)   (6,264,533)
                                      ------------  ------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Proceeds from sale of preferred
  stock, net of expenses.............    4,958,850           --            --
 Proceeds from initial public
  offering...........................          --     76,116,918           --
 Proceed from the exercise of stock
  options and warrants to purchase
  common stock.......................           36        64,380        70,213
 Proceeds from PA Opportunity Grant..      200,000           --            --
 Repayment of notes payable..........     (192,935)     (480,978)          --
                                      ------------  ------------  ------------
    Net cash provided by financing
     activities......................    4,965,951    75,700,320        70,213
                                      ------------  ------------  ------------
NET INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS....................   (6,162,281)   62,181,368   (31,133,511)
CASH AND CASH EQUIVALENTS, beginning
 of year.............................   19,236,084    13,073,803    75,255,171
                                      ------------  ------------  ------------
CASH AND CASH EQUIVALENTS, end of
 year................................ $ 13,073,803  $ 75,255,171  $ 44,121,660
                                      ============  ============  ============
Supplemental Disclosure of Cash Flow
 Information:
 Cash paid for interest expense...... $     48,039  $     13,346  $        --
                                      ============  ============  ============
</TABLE>

    The accompanying notes are an integral part of these financial statements.

                                      F-6
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BACKGROUND

   OraPharma, Inc. (the "Company") was incorporated on August 1, 1996. In
February 1997, the Company acquired certain technologies and other assets
relating to drug delivery technologies, together with certain exclusive patent
license rights to apply the acquired technologies to the research and
development of specialty pharmaceutical products, with an initial focus on oral
health care, as well as certain nonexclusive patent license rights for other
potential applications of the acquired technologies.

   On February 16, 2001, the Company obtained approval from the United States
Food and Drug Administration ("FDA") to begin marketing its first product,
Arestin(TM), for the adjunct treatment of adult periodontal disease. On April
2, 2001, the Company began selling Arestin(TM) in the United States to
periodontists and dentists through its direct sales force. In December 2000,
the Company applied to have Arestin(TM) approved for sale in Sweden. If
Arestin(TM) is approved in Sweden, the Company intends to use Sweden as the
sponsor country to facilitate obtaining approval for Arestin(TM) in all
countries in the European Union. The Company plans to sell Arestin(TM) in
Europe through one or more distribution partners, though no agreements have
been entered into with potential partners.

   Prior to April 2, 2001, the Company operated as a development-stage company
and did not generate any revenue. During 2001, the Company generated revenue of
approximately $7.7 million from the sale of Arestin(TM). Management is unable
to predict how quickly, or to what extent, revenue from the sale of Arestin(TM)
will increase. The Company has not been profitable and since inception has
incurred cumulative net losses of approximately $60.6 million through December
31, 2001. These losses have resulted principally from costs incurred in
research and development activities related to Arestin(TM) and new product
candidates, together with marketing, general and administrative expenses. The
Company expects to incur additional operating losses until such time as the
Company generates sufficient revenue to offset expenses. Research and
development costs relating to new product candidates will continue to increase,
and will increase further as human clinical trials begin. Marketing, general
and administrative costs will increase as the Company attempts to increase
revenue from the sale of Arestin(TM). Nearly all of the Company's revenue for
the foreseeable future will depend on the sales of Arestin(TM).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

   The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Use of Estimates

   The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of expenses incurred during
the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

   The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Fair value
approximates carrying value because of the short maturity of the cash
equivalents. As of December 31, 2001, cash and cash equivalents were invested
with one institution in a money market fund that invests in short-term
government and investment-grade securities.

                                      F-7
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Accounts Receivable

   As of December 31, 2001, accounts receivable were net of an allowance for
doubtful accounts of $63,000, which represents the charge to expense for a
provision for bad debts, as the Company had no balances written off during the
year.

Inventories

   Inventories are stated at the lower of cost or market, as determined using
the first-in, first-out method. The Company does not currently have any
internal manufacturing capabilities and currently relies on two sole-source
manufacturers for production and packaging of Arestin(TM) and three sole-source
suppliers for other materials and components.

Fixed Assets

   Fixed assets are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets or lease term for leasehold improvements, whichever is shorter.
The Company uses lives of three to ten years.

Intangible Assets

   Certain acquired technologies, together with acquired patent license rights,
have been recorded at cost and are being amortized on a straight-line basis
over the remaining estimated useful life of the Arestin(TM) technology. The
Arestin(TM) technology's useful life was estimated at ten years starting at its
initial acquisition date.

Revenue Recognition

   The Company recognizes revenue from the sale of Arestin(TM) upon shipment.
The Company does not grant price protection or product return rights to its
customers. In accordance with Emerging Issues Task Force ("EITF") 00-10, the
Company records shipping and handling charges billed to customers as revenue
and the related cost as cost of revenue.

Research and Development

   Research and development costs are charged to expense as incurred.

Fair Value of Financial Instruments

   The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses.
Management believes the carrying value of these assets and liabilities are
considered to be representative of their fair market value.

Stock-Based Compensation

   The Company accounts for stock-based compensation to employees using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
recognized deferred stock compensation related to certain stock option grants
(see Note 9). The Company accounts for stock-based compensation to non-
employees using the fair value method in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and EITF 96-18, "Accounting for Equity Instruments that are
Issued to other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services".

                                      F-8
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Impairment of Long-Lived Assets

   In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," if indicators of
impairment exist, Management assesses the recoverability of the affected long-
lived assets by determining whether the carrying value of such assets can be
recovered through undiscounted future operating cash flows. If impairment is
indicated, Management measures the amount of such impairment by comparing the
carrying value of the assets to the present value of the expected future cash
flows associated with the use of the asset. While the Company's current and
historical operating and cash flow losses are indicators of impairment,
Management believes the future cash flows to be received from the sale of
Arestin(TM) will exceed the long-lived assets' carrying value, and,
accordingly, the Company has not recognized any impairment losses through
December 31, 2001.

Net Interest Income (Expense)

   For the years ended December 31, 1999, 2000 and 2001, the Company received
interest and dividend income of $689,453, $4,248,286 and $2,478,975,
respectively. During the years ended December 31, 1999 and 2000, the Company
incurred interest expense of $52,496 and $8,889, respectively. The interest
income was the result of investments in a money market account and the interest
expense was paid to a bank for an equipment financing facility. The equipment
financing facility expired on June 30, 2000 and was not renewed.

Net Loss per Common Share

   The Company has presented basic and diluted net loss per share pursuant to
SFAS No. 128, "Earnings per Share," and the Securities and Exchange Commission
Staff Accounting Bulletin No. 98, "Computations of Earnings per Share". In
accordance with SFAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per common share, as presented in the statements of
operations, has been computed for the years ended December 31, 1999 and 2000 as
described above, and also gives effect to the conversion of the redeemable
convertible preferred stock, which automatically converted to common stock on
March 9, 2000 upon the closing of the Company's initial public offering, from
the original date of issuance.

                                      F-9
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per share:

<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                      ----------------------------------------
                                          1999          2000          2001
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Net loss to common stockholders...... $(12,975,684) $(12,316,512) $(25,685,660)
                                      ============  ============  ============
Basic and diluted:
 Weighted-average shares of common
  stock outstanding..................      999,089    11,052,184    13,488,950
 Less: weighted-average shares
  subject to repurchase..............     (223,973)     (130,611)      (48,433)
                                      ------------  ------------  ------------
 Weighted-average shares used in
  computing basic and diluted net
  loss per share.....................      775,116    10,921,573    13,440,517
                                      ============  ============  ============
Basic and diluted net loss per
 share............................... $     (16.74) $      (1.13) $      (1.91)
                                      ============  ============  ============
Pro forma:
 Net loss to common stockholders..... $(12,975,684) $(12,316,512)
                                      ============  ============
 Shares used above...................      775,116    10,921,573
 Pro forma adjustment to reflect the
  weighted-average effect of assumed
  conversion of convertible preferred
  stock (unaudited)..................    7,017,643     1,404,051
                                      ============  ============
 Shares used in computing pro forma
  basic and diluted net loss per
  share (unaudited)..................    7,792,759    12,325,624
                                      ============  ============
 Pro forma basic and diluted net loss
  per share (unaudited).............. $      (1.67) $      (1.00)
                                      ============  ============
</TABLE>

   The Company has excluded all redeemable convertible preferred stock,
outstanding stock options and warrants, and shares subject to repurchase from
the calculation of basic and diluted loss per common share because all such
securities are antidilutive for all applicable periods presented. The pro forma
calculations exclude outstanding stock options and warrants, and shares subject
to repurchase, as they are antidilutive.

Recent Accounting Pronouncements

   In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" that
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. While SFAS No. 144 supercedes SFAS No. 121, it removes
goodwill from its scope and retains the requirements of SFAS No. 121 regarding
the recognition of impairment losses on long-lived assets held for use. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The adoption of this pronouncement
is not expected to have any impact on the Company's financial position or
results of operations.

                                      F-10
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Reclassifications

   Certain amounts for prior periods have been reclassified to conform to the
current period presentation.

3. Inventories

   Inventories as of December 31, 2001 consisted of:

<TABLE>
         <S>                               <C>
         Raw materials.................... $   542,215
         Finished goods...................   2,009,664
                                           -----------
                                           $ 2,551,879
                                           ===========
</TABLE>

4. FIXED ASSETS

<TABLE>
<CAPTION>
                                                             December 31,
                                                         ----------------------
                                                            2000        2001
                                                         ----------  ----------
<S>                                                      <C>         <C>
Laboratory and production equipment..................... $2,233,589  $4,083,927
Leasehold improvements..................................  1,651,464   2,563,155
Furniture and fixtures and office equipment.............  1,045,960   1,948,464
                                                         ----------  ----------
                                                          4,931,013   8,595,546
Less--Accumulated depreciation and amortization.........   (851,591) (1,910,211)
                                                         ----------  ----------
                                                         $4,079,422  $6,685,335
                                                         ==========  ==========
</TABLE>

   Depreciation and amortization expense was $252,705, $407,160 and $1,058,620
in 1999, 2000 and 2001, respectively.

5. INTANGIBLE ASSETS

<TABLE>
<CAPTION>
                                                              December 31,
                                                          ---------------------
                                                            2000        2001
                                                          ---------  ----------
<S>                                                       <C>        <C>
Technology acquisition costs--AHP........................ $ 774,000  $3,274,000
Technology acquisition costs--Jernberg, D.D.S............    50,000     150,000
Other....................................................     9,639       9,639
                                                          ---------  ----------
                                                            833,639   3,433,639
Less--Accumulated amortization...........................  (171,276)   (645,946)
                                                          ---------  ----------
                                                          $ 662,363  $2,787,693
                                                          =========  ==========
</TABLE>

   Amortization expense was $30,137, $81,720 and $474,670 in 1999, 2000 and
2001, respectively.

   In April 2000, the Company paid American Home Products ("AHP") a milestone
payment of $500,000 based on the FDA acceptance of the New Drug Application for
Arestin(TM) ("NDA") for review. A second milestone payment of $2.5 million was
paid to AHP on March 16, 2001 as a result of the FDA approval of Arestin(TM)
for the adjunct treatment of adult periodontitis. The Company also paid AHP
$250,000 and issued AHP 110,000 shares of common stock at the time the Company
entered into a license agreement in February 1997. The license agreement with
AHP also requires the Company to pay royalties on sales of Arestin(TM) and
other products that are covered by the AHP patents or developed using the AHP
technology.

                                      F-11
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   In April 2000, the Company paid Gary R. Jernberg, D.D.S. a milestone payment
of $50,000 based on the FDA acceptance of the NDA for review. A second
milestone payment of $100,000 was paid to Dr. Jernberg on March 16, 2001 as a
result of the FDA approval of Arestin(TM) for the adjunct treatment of adult
periodontitis. The Company also issued Dr. Jernberg a warrant to purchase
20,000 shares of common stock at an exercise price of $0.10 per share, which
warrant was exercised in April 1997, and engaged Dr. Jernberg as an advisor,
for an annual retainer fee of $30,000. The Company is required to pay royalties
on sales of Arestin(TM) to Dr. Jernberg, a holder of three U.S. patents, and to
Technical Development and Investments, Est., relating to technology previously
licensed by AHP to this third party. The cumulative amount of any retainers
paid to Dr. Jernberg will reduce any royalties payable to Dr. Jernberg, and any
royalties payable to either of these parties can be fully credited against up
to 50% of the royalties payable under the agreement with AHP.

6. ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                              December 31,
                                                          ---------------------
                                                             2000       2001
                                                          ---------- ----------
<S>                                                       <C>        <C>
Accrued compensation..................................... $  543,056 $  914,670
Accrued research and development.........................    233,773    250,360
Accrued royalties........................................        --     262,527
Accrued professional.....................................    291,167    274,548
Accrued other............................................    474,409    266,459
Deferred revenue.........................................    200,000    200,000
                                                          ---------- ----------
                                                          $1,742,405 $2,168,564
                                                          ========== ==========
</TABLE>

   During 1999, the Company received $200,000 under a Commonwealth of
Pennsylvania Opportunity Grant. Under the terms of the grant, amounts received
are subject to certain performance criteria. The Company has deferred the
$200,000, and will recognize this amount as income upon attaining the
performance criteria.

7. COMMITMENTS AND CONTINGENCIES

Operating Leases

   On October 1, 1998, the Company entered into a five-year operating lease for
the facility that it currently occupies. On February 1, 2001, a three-year
amendment was executed for additional space in the same facility. The following
is a summary, as of December 31, 2001, of the future minimum annual lease
payments required under these leases.

<TABLE>
         <S>                             <C>
         2002                            $268,782
         2003                             228,940
         2004                               7,442
                                         --------
           Total minimum lease payments  $505,164
                                         ========
</TABLE>

   The Company also entered into operating lease agreements for various office
equipment. The terms of these lease agreements range from 12 to 24 months.
Current minimum annual payments under these leases aggregate $5,475 per year.

   Rental expense for all operating leases in 1999, 2000 and 2001 was $183,881,
$189,538 and $258,757, respectively.


                                      F-12
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
License Agreements

   In December 1998, the Company entered into agreements to acquire certain
rights to technologies from two entities. Under the terms of these agreements,
the Company received exclusive licenses and patent rights for certain product
applications based on these preclinical development-stage technologies. The
Company also entered into sponsored research and consulting agreements to
continue the development of these technologies on behalf of the Company.

   In connection with these agreements, during 1998 the Company incurred a
charge of $689,789, inclusive of $200,000 paid in cash and 82,500 shares of the
Company's common stock valued at $400,950 and a five-year warrant to purchase
27,500 shares of common stock, at an exercise price of $3.64 per share, valued
at $88,839. The Company issued the common stock during 1999 and, accordingly,
these shares were not included in shares outstanding as of December 31, 1998.
The Company charged the $689,789 to research and development expense, given the
preclinical development-stage nature of the technology.

   During 1999, upon the completion of a milestone achievement, the Company
paid $100,000 in cash and issued a five-year warrant to purchase 41,152 shares
of common stock, at an exercise price of $4.86 per share. The Company recorded
$346,108 of expense in connection with the issuance of this warrant. Together
with the $100,000 cash payment and the warrant value, the Company recorded a
$446,108 charge to research and development expense, given the preclinical
development stage nature of the technology.

   The Company is also required to make payments totaling $2.0 million in cash,
or $1.0 million in cash and $1.25 million in common stock, as preclinical and
clinical milestones are achieved, and upon FDA approval of a pharmaceutical
product. The license agreement further obligates the Company to pay royalties
on sales of pharmaceutical products covered by or involving use of the
technology.

   During 1999, 2000 and 2001, the Company also incurred sponsored research and
consulting expenses in connection with these agreements of $870,000, $833,000
and $575,000, respectively. As of December 31, 2001, future sponsored research
and consulting minimum commitments total $244,000.

   As discussed in Note 5, the Company has entered into license agreements and
is obligated to make future royalty payments on any revenues realized from the
sale of Arestin(TM).

Outside Manufacturing Commitments

   The Company has entered into agreements with third-party manufacturers for
the production of various components for its Arestin(TM) product. The minimum
annual commitment for 2002 is approximately $1.9 million. Commitments for the
years 2003 through 2010 are approximately $1.6 million per year, though this
amount is subject to adjustment for a number of reasons specified in the
agreements.

Litigation

   In November 2001, the Company, certain of the Company's officers and certain
underwriters of the Company's initial public offering were named as defendants
in a class action complaint filed in the United States District Court for the
Southern District of New York. The complaint alleges, among other things,
violations of Sections 11 and 12 of the Securities Act of 1933 and Rule 10b-5
promulgated under the Securities Exchange Act of 1934, based on allegedly
material misstatements and/or omissions in the prospectus for the Company's
initial public offering concerning the commissions received by the underwriters
of such offering, as well as failure to disclose the existence of purported
agreements by the underwriters with some of the

                                      F-13
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchasers in such offering to buy additional shares of the Company
subsequently in the open market at pre-determined prices. The plaintiffs seek
for themselves and the alleged class members an award of damages and litigation
costs and expenses. The Company intends to defend these actions vigorously. The
Company cannot predict the ultimate outcome of the litigation. An unfavorable
outcome in litigation could materially and adversely affect the Company's
business, financial condition and results of operations.

8. 401(K) PLAN

   On July 1, 1998, the Company adopted a tax-qualified employee savings and
retirement plan, a 401(k) plan, for eligible employees. At the discretion of
the board of directors, the Company may make matching contributions on behalf
of all participants who have elected to make deferrals to the 401(k) plan. The
Company made a matching contribution of $21,055 and $48,671 in 2000 and 2001,
respectively, but did not make any matching contribution in 1999. Contributions
to the 401(k) plan by the Company or by participants are paid to a trustee. The
401(k) plan, and the accompanying trust, are intended to qualify under Section
401(k) of the Internal Revenue Code, as amended, so that contributions and
income earned, if any, are not taxable to employees until withdrawn.
Contributions made by the Company vest in increments according to a vesting
schedule.

9. STOCKHOLDERS' EQUITY

Initial Public Offering

   On March 9, 2000, the Company sold 4,000,000 shares of common stock in
connection with its initial public offering at $18.00 per share and received
net proceeds of approximately $66.0 million. On April 7, 2000, an additional
600,000 shares were sold to cover underwriters' over-allotments and the Company
received net proceeds of approximately $10.0 million.

Preferred Stock

   The Company sold 400,000 shares of Series A Convertible Preferred stock
("Series A"), 3,311,828 shares of Series B Convertible Preferred stock ("Series
B"), 3,292,177 shares of Series C Convertible Preferred stock ("Series C") and
553,095 shares of Series D Convertible Preferred stock ("Series D") in February
1997, March 1997, December 1998 and December 1999, at $2.00, $3.64, $4.86 and
$9.04 per share, respectively. In connection with the sale of Series D shares,
warrants to purchase 110,617 shares of common stock were issued, which were
valued at $756,204. Upon the completion of the initial public offering of the
Company's common stock in March 2000, all of the outstanding shares of Series
A, B, C and D preferred stock were converted into common stock.

   In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Feature or Contingently Adjustable Conversion Rates", the
Company recorded a deemed dividend on the Series D preferred stock, which
represents the excess of the fair market value of the underlying common stock
issued to the Series D holders over the adjusted price of the Series D after
deducting the fair value ascribed to the warrants issued. Such charge was
recorded in 1999 since the Series D were immediately convertible on the date of
issuance.

                                      F-14
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock Option Plans

   The Company adopted the 1996 Stock Option Plan and the 1999 Equity
Compensation Plan (the "Plans"), which provide for the granting of options to
all full-time employees, directors, key consultants and advisors to the
Company. The Plans are administered by the Compensation Committee of the Board
of Directors.

   Options under the Plans generally become exercisable as follows: 20% at the
first anniversary of the option grant date and 5% at each subsequent quarterly
anniversary date. All options expire ten years after the grant date, and no
option may be granted for less than the fair market value of the common stock
on the date the option is granted.

   The Company applies APB No. 25, and the related interpretations in
accounting for its stock option plans. The Company follows the disclosure
requirement of SFAS No. 123, "Accounting for Stock-Based Compensation." The
weighted average fair value of the options granted during 1999, 2000 and 2001
is estimated at $1.98 , $6.79 and $4.24 per share, respectively, on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: dividend yield of zero; volatility of zero in 1999, 70% in 2000
and 2001; weighted average risk-free interest rate of 5.22% in 1999, 5.91% in
2000, and 4.83% in 2001 and an expected life of 6 years. Had compensation cost
for the Company's common stock option plans been determined based upon the fair
value of the options at the date of grant, as prescribed under SFAS No. 123,
the Company's net loss for the years ended December 31, 1999, 2000 and 2001
would have been as follows:


<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                      ----------------------------------------
                                          1999          2000          2001
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Net loss to common stockholders--as
 reported...........................  $(12,975,684) $(12,316,512) $(25,685,660)
                                      ============  ============  ============
Net loss to common stockholders--pro
 forma..............................  $(12,985,654) $(12,464,639) $(25,951,531)
                                      ============  ============  ============
Basic and diluted net loss per
 share--as reported.................  $     (16.74) $      (1.13) $      (1.91)
                                      ============  ============  ============
Basic and diluted net loss per
 share--pro forma...................  $     (16.75) $      (1.14) $      (1.93)
                                      ============  ============  ============
</TABLE>

   Activity under the Plans is shown in the following table:

<TABLE>
<CAPTION>
                                                                     Aggregate
                                                          Exercise    Exercise
                                              Shares       Price       Price
                                             ---------  ------------ ----------
<S>                                          <C>        <C>          <C>
Outstanding, December 31, 1998..............   414,702   $.02--$.36  $  102,942
  Granted...................................   172,270      .60         103,362
  Exercised.................................      (100)     .36             (36)
  Forfeited.................................      (400)     .36            (144)
                                             ---------               ----------
Outstanding, December 31, 1999..............   586,472    .02--.60      206,124
  Granted...................................   460,375  7.00--18.00   5,310,178
  Exercised.................................  (224,489)   .02--.60      (64,380)
                                             ---------               ----------
Outstanding, December 31, 2000..............   822,358   .02--18.00   5,451,922
  Granted...................................   449,180  3.20--10.00   2,844,503
  Forfeited.................................  (109,676)  .20--18.00  (1,081,901)
  Exercised.................................   (92,187)   .02--.60      (38,963)
                                             ---------               ----------
Outstanding, December 31, 2001.............. 1,069,675  $.02--$18.00 $7,175,561
                                             =========               ==========
</TABLE>


                                      F-15
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
   The following table summarizes information regarding stock options as of
December 31, 2001:

<TABLE>
<CAPTION>


                                      Weighted
  Outstanding Stock Options            Average           Exercisable Stock Options
  -------------------------           Remaining          --------------------------
   Exercise                          Contractual                           Exercise
    Price           Shares              Life             Shares              Price
   --------        ---------         -----------         -------           --------
 <S>               <C>               <C>                 <C>             <C>
    $0.02             55,906          4.9 years           55,906             $0.02
     0.36            110,894          6.1 years           56,975             0.36
     0.60             97,770          7.3 years           18,299             0.60
  3.00--6.93         289,250          9.6 years              --               --
 7.00--10.63         279,155          8.7 years           59,290          7.00--10.63
 11.00--13.25        190,000          8.9 years           38,000         11.00--13.25
    $18.00            46,700          8.3 years           14,010             18.00
                   ---------                             -------
                   1,069,675                             242,480         $0.02--$18.00
                   =========                             =======
</TABLE>

   Under the 1996 Stock Option Plan, as of December 31, 2001, options to
purchase 581,547 shares had been granted, net of forfeitures, of which 316,977
were exercised, and 264,570 remain outstanding. No options are available for
future grants under this plan. The weighted average remaining exercise period
relating to the outstanding options was approximately 6.3 years.

   Under the 1999 Equity Compensation Plan, as of December 31, 2001, options to
purchase 805,105 shares had been granted, net of forfeitures, and none were
exercised. Options to purchase 1,114,895 remain available for future grants
under this plan. The weighted average remaining exercise period relating to the
outstanding options was approximately 9.0 years.

   During the years ended December 31, 1999 and 1998, in connection with the
grant of options to employees, the Company recorded deferred stock compensation
of $766,542 and $181,040, respectively, representing the difference between the
exercise price and the deemed fair value of the Company's common stock on the
date such stock options were granted. Deferred compensation is included as a
component of stockholders' equity and is being amortized to expense ratably
over the five-year vesting period of the options. For the years ended December
31, 2001 and 2000, no deferred stock compensation was recorded because all
stock options were granted at the fair market value, as determined by the
closing price reported by The Nasdaq National Market, on the date such stock
options were granted.

   During 1999, 2000, and 2001, the Company recorded $33,977, $109,049 and
$20,000, respectively, of expense in connection with the vesting of stock
options granted to three consultants, based on the fair value of the options
using the Black-Scholes option pricing model.

Warrants

   During 2001, the Company issued 25,000 shares of common stock upon the
exercise of warrants issued in 1996, in connection with the issuance of
convertible notes.

                                      F-16
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   In connection with the acquisition of certain technology in December 1998,
the Company issued a warrant to purchase 27,500 shares of common stock at $3.64
per share and in December 1999, issued a warrant to purchase 41,152 shares of
common stock at $4.86 per share. The fair value of these warrants, using the
Black-Scholes option pricing model, were $88,839 and $346,108, respectively,
and has been recorded as research and development expense. These warrants
expire in January 2004 and December 2004, respectively.

   In December 1999, the Company issued warrants to purchase 110,617 shares of
common stock at $12.92 per share. These warrants, which were issued to the
purchasers of the Company's Series D preferred stock, expire in December 2006.
The fair value of these warrants, using the Black-Scholes option pricing model,
of $756,204 has been recorded as a credit to additional paid-in capital and was
accreted to preferred stock.

Common Stock Subject to Repurchase

   During 1997, the Company sold 467,087 shares of common stock to certain
members of management at $.002 per share. These shares were subject to
repurchase by the Company, at $.002 per share, in the event that their
employment was terminated. The number of shares repurchasable by the Company
decreased upon the individuals' first anniversary of employment, and further
reduced upon subsequent quarterly anniversary dates. As of December 31, 2001,
none of these shares are subject to repurchase by the Company.

10. INCOME TAXES

   The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The Company has net operating loss carryforwards
for tax reporting purposes that will begin to expire in 2011. In addition,
pursuant to income tax regulations, the annual utilization of these losses may
be limited. Management believes that any such limitation will not have a
material impact on the utilization of these carryforwards.

   As of December 31, 2001, the Company had approximately $57.0 million and
approximately $1.2 million of net operating loss and research and development
credit carryforwards, respectively, for federal income tax purposes, which
expire on various dates beginning in 2011.

   Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Based upon the Company's
loss history, a valuation allowance for deferred tax assets has been provided
as it is more likely than not that the deferred tax assets will not be
realized:
<TABLE>
<CAPTION>
                                                            December 31,
                                                       ------------------------
                                                          2000         2001
                                                       -----------  -----------
<S>                                                    <C>          <C>
Deferred tax assets:
  Net operating loss carryforwards.................... $11,024,000  $19,370,000
  Capitalized research and development expenses.......     348,000      290,000
  Research and development credit carryforwards.......     945,000    1,244,000
  Capitalized patent rights...........................     276,000      352,000
  Accruals and other reserves.........................     203,000      484,000
                                                       -----------  -----------
    Total deferred tax assets.........................  12,796,000   21,740,000
Valuation allowance for deferred tax assets........... (12,796,000) (21,740,000)
                                                       -----------  -----------
    Net deferred tax assets........................... $       --   $       --
                                                       ===========  ===========
</TABLE>

                                      F-17
<PAGE>

                         ORAPHARMA, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. QUARTERLY FINANCIAL DATA (UNAUDITED)

   Summarized quarterly financial data for the years ended December 31, 2001
and 2000 is as follows:

<TABLE>
<CAPTION>
                                                 2001
                          ----------------------------------------------------
                           March 31,    June 30,    September 30, December 31,
                          -----------  -----------  ------------- ------------
<S>                       <C>          <C>          <C>           <C>
REVENUE.................. $       --   $ 2,012,786   $ 2,211,664  $ 3,523,955
OPERATING EXPENSES
  Cost of revenue........         --       485,947       612,841      858,709
  Research and
   development...........   2,545,619    2,939,863     2,789,208    2,192,100
  Marketing, general and
   administrative........   5,148,999    6,050,935     5,768,512    6,520,307
                          -----------  -----------   -----------  -----------
    Operating loss.......  (7,694,618)  (7,463,959)   (6,958,897)  (6,047,161)
INTEREST INCOME, net.....   1,007,565      689,292       474,407      307,711
                          -----------  -----------   -----------  -----------
NET LOSS TO COMMON
 STOCKHOLDERS...          $(6,687,053) $(6,774,667)  $(6,484,490) $(5,739,450)
                          ===========  ===========   ===========  ===========
BASIC AND DILUTED NET
 LOSS PER SHARE.......... $     (0.50) $     (0.50)  $     (0.48) $     (0.42)
                          ===========  ===========   ===========  ===========
<CAPTION>
                                                 2000
                          ----------------------------------------------------
                           March 31,    June 30,    September 30, December 31,
                          -----------  -----------  ------------- ------------
<S>                       <C>          <C>          <C>           <C>
OPERATING EXPENSES
  Research and
   development........... $ 2,045,751  $ 1,704,106   $ 1,787,621  $ 2,668,096
  Marketing, general and
   administrative........     962,452    1,230,742     1,789,420    4,367,722
                          -----------  -----------   -----------  -----------
    Operating loss.......  (3,008,203)  (2,934,848)   (3,577,041)  (7,035,818)
INTEREST INCOME, net.....     338,373    1,280,606     1,339,263    1,281,156
                          -----------  -----------   -----------  -----------
NET LOSS TO COMMON
 STOCKHOLDERS..           $(2,669,830) $(1,654,242)  $(2,237,778) $(5,754,662)
                          ===========  ===========   ===========  ===========
BASIC AND DILUTED NET
 LOSS PER SHARE.......... $     (0.68) $     (0.13)  $     (0.17) $     (0.43)
                          ===========  ===========   ===========  ===========
PRO FORMA BASIC AND
 DILUTED NET LOSS PER
 SHARE................... $     (0.28)
                          ===========
</TABLE>

                                      F-18