<PAGE>

                                 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, 2000

                                      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
                                   --------
                         (State or other jurisdiction
                       of incorporation or organization)

                                  22-3473777
                                  ----------
                               (I.R.S. Employer
                              Identification No.)

                                732 Louis Drive
                           Warminster, Pennsylvania
                                     18974
                                     -----
                   (Address of principal executive offices)

                                 215/956-2200
                                 ------------
             (Registrant's telephone number, including area code)

       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 6, 2001, as reported by The Nasdaq Stock Market, was
approximately $80,134,031 (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 6, 2000, was 13,460,766.

     Documents incorporated by reference:

     Part III, Items 10, 11, 12 and 13 of this report are incorporated by
reference to the registrant's definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders scheduled to be held on June 14, 2001.
<PAGE>

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
             Item                                                                                      Page
             ----                                                                                      ----
<S>                                                                                                    <C>
PART I       1. Business                                                                                  3

             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                   19

             6. Selected Consolidated Financial Data                                                     20

             7. Management's Discussion and Analysis of Financial Condition and Results of Operations    21

             7A. Quantitative and Qualitative Disclosures About Market Risk                              25

             8. Financial Statement and Supplementary Data                                               25

             9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure      25

PART III     10. Director and Executive Officers of the Company                                          26

             11. Executive Compensation                                                                  26

             12. Security Ownership of Certain Beneficial Owners and Management                          26

             13. Certain Relationships and Related Transactions                                          26

PART IV      14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                        27

SIGNATURES                                                                                               28

EXHIBIT INDEX                                                                                            30

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                              F-1
</TABLE>

                                       2
<PAGE>

                                    PART I

ITEM 1.        BUSINESS

Introduction

         OraPharma is a specialty pharmaceutical company that is engaged in
discovering, developing, and commercializing pharmaceutical products for oral
health care. In February 2001, we received approval from the U.S. Food and Drug
Administration ("FDA") to market our first product Arestin(TM). 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. Our Phase 3 clinical trials demonstrated that Arestin(TM) significantly
reduced the depth of periodontal pockets compared to scaling and root planning
alone. We intend to begin marketing Arestin(TM) in the United States ("U.S.") in
April 2001, using our sales force, which we have hired and trained. Our sales
force will be selling Arestin(TM) directly to periodontists and dentists. 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 rapporteur country in order
to gain approval to market Arestin(TM) throughout the European Union.

         Our other product candidates, which are in earlier stages of
development, include a compound for the treatment of oral mucositis, a
complication of cancer therapy; an agent for bone and tissue regeneration; a
second treatment approach for periodontitis as a follow-on to Arestin(TM); and a
dental trauma treatment using Arestin(TM). We are directing our research and
development programs at further establishing a presence in oral health care
pharmaceuticals and expanding the use of our core technology.

Oral Care Pharmaceuticals Market

         We have targeted our oral care pharmaceutical development program to
include dental and other oral conditions. The Health Care Financing
Administration projects that dental services became an industry of approximately
$60 billion in the year 2000, growing from $13 billion in 1980. Other oral
conditions, including soft-tissue and non-dental diseases, further expand the
market. Oral care pharmaceuticals comprise what we believe is a rapidly emerging
segment of this overall market.

         There are a number of important factors driving the emergence of oral
care pharmaceuticals, including:

            .  Increased demand for oral health services. The number of oral
               exams in the U.S. has nearly doubled from 131 million in 1979 to
               256 million in 1997 according to the American Dental Association
               ("ADA"). We believe this increase in patient visits was driven by
               factors such as an aging population, heightened awareness about
               the benefits of good oral health, increased desire for new
               services, including cosmetic services, and improved
               reimbursement. We believe that oral care pharmaceuticals are
               likely to benefit from the rapid growth of the overall oral
               health care industry.

            .  Opportunities for locally delivered oral care pharmaceuticals.
               Many pharmaceutical compounds already exist to treat the rising
               number of oral conditions that oral health care professionals
               must address. However, many of these drugs are in the form of
               pills, injections, creams or ointments that are not optimal for
               delivery into the oral cavity. As these compounds are
               reformulated, we believe the demand for oral care pharmaceuticals
               will increase.

            .  Changing treatment approaches. Dentists and other oral health
               care professionals are treating an aging patient base with
               increasingly complicated medical histories. This complexity is
               forcing oral health care professionals to move beyond mechanical
               interventions and become better informed about physiological
               causes and medical treatments for oral conditions. Further, this
               emphasis on understanding disease processes is extending to oral
               conditions beyond tooth decay and periodontal disease, such as
               oral cancer diagnosis, treatment of pre-cancerous lesions,
               xerostomia (severe "dry mouth conditions") and oral mucositis.

            .  Oral conditions complicating treatment of other diseases. Oral
               diseases such as xerostomia and oral mucositis are serious
               complications for cancer patients receiving chemotherapy and head
               and neck radiation therapy. As more potent chemotherapeutic
               agents have emerged, these conditions are increasingly limiting
               tolerable doses and, ultimately, a patient's response to
               treatment. We believe oral care pharmaceuticals may be able to
               help treat or prevent some of these conditions.

            .  Suspected links between oral health and systemic health. Many
               researchers are actively studying relationships between oral
               health and medical problems elsewhere in the human body. For
               example, recent studies suggest that patients with periodontal
               disease are at higher risk for cardiovascular disease and
               diabetes. These same studies suggest that periodontitis may
               contribute to low infant birth weight. In addition, the National
               Institutes of Health made oral health an area of focus in 2000.

            .  Increased focus on time-efficient treatments. While the demand
               for oral health care services is increasing, the supply of
               professionals has not kept pace. An important implication of this
               supply and demand imbalance is the growing need to minimize
               patient time in offices, which places a premium on more
               time-efficient chair-side treatments. An increasing number of
               pharmaceuticals, such as Arestin(TM), are being developed to
               offer oral health care professionals faster solutions for
               treating patients.

                                       3
<PAGE>

Business Strategy

         We believe that oral care 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 and
disorders. Key elements of our business strategy to achieve this objective
include:

         Focusing initially on the commercialization of Arestin(TM).

         Using our own direct sales and marketing organization. We have built an
internal field sales and marketing organization consisting of 63 professionals
as of March 6, 2001, who will sell and promote Arestin(TM) in the U.S directly
to periodontists and dentists who treat adult periodontitis. We believe we can
effectively sell Arestin(TM) within the United States by targeting a
concentrated group of oral care specialists. Outside of the United States, and
for product candidates targeted at markets with larger practitioner populations,
we intend to pursue strategic relationships to market and sell our product
candidates.

         Identifying and capitalizing on promising product candidate categories.
We select pharmaceutical product categories that we believe can improve
treatment by providing enhanced therapeutic and economic benefits, and improved
convenience to patients, professionals and payors. As an outgrowth of this
approach, we focus primarily on product candidates and formulations that are
administered chair-side. The chair-side approach allows the professional to
retain control of the patient's treatment, thereby avoiding concerns about
compliance, in contrast to pharmacy-dispensed drugs. The chair-side approach
also provides the professional a revenue incentive.

         Focusing on product candidates with known pharmaceutical and clinical
activity and low technical risk. We emphasize product candidates that treat
serious diseases or conditions of the oral cavity where the compound is well
characterized and the biological and pharmaceutical role of the drug substance
is well understood. For example, minocycline, the active ingredient in
Arestin(TM), is an FDA-approved drug that has been available for over twenty
years. To reduce the high cost and risks associated with conducting basic
research on new chemical entities, we evaluate readily available compounds that
can be reformulated for application in the oral cavity and generally have a
known safety and efficacy profile. We believe this approach will result in
faster drug development.

         Leveraging our core technology. Our initial focus is to identify
product opportunities and product candidates directed at oral care that can
leverage our core technology. Our core technology is compatible with a wide
variety of drug types, from simple compounds to proteins. We believe that our
core technology has broad application both inside and outside the oral cavity.

         Leveraging product development expertise. We believe that we can
leverage our significant formulation development and clinical trial management
expertise by in-licensing or acquiring new product candidates and technologies,
which we will develop to further establish a presence in oral care
pharmaceuticals, and possibly expand into non-oral health applications,
primarily through out-licensing agreements.

Product and Product Candidates Summary

         The following chart contains information regarding our product
candidates:


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

Oral Mucositis                     OC-1012                       Preclinical                   Brigham and Women's Hospital/
                                                                                               Mucosal Therapeutics

Bone Regeneration                  OC-1016                       Preclinical                   Children's Medical Center Corporation

Periodontitis/Anti-inflammatory        -                         Preclinical                   University of North Carolina -
                                                                                               Chapel Hill

Traumatic Tooth Injury             Arestin(TM)                   Preclinical                   University of North Carolina -
                                                                                               Chapel Hill
</TABLE>

                                       4
<PAGE>

Arestin(TM) for the Treatment of Periodontitis

Periodontitis and 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 routine dental procedures,
such as checkups and cleanings. Beyond a depth of 4mm, brushing and bacterial
mouth rinses, which may be effective in treating gingivitis, cannot reach the
base of the pocket and the bacteria 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 will continue at
the base of the pocket in spite of the continuing use of effective 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 20% of that population
are currently receiving treatment. Along with this widespread prevalence, the
ADA estimated that in 1990, oral care professionals completed approximately 14
million treatment procedures for 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 drug 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 refrigerated 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.

         .  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 refrigerated before use. 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 capsule 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.

         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.

                                       5
<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

            .  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 tip that attaches to a specially designed autoclaveable
handle. To administer Arestin(TM), the oral care professional removes the
disposable tip from its package and simply connects the tip to the handle, and
then dispenses the microspheres directly into the periodontal pocket. Each tip
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 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 the
other recently introduced treatments.

         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 drug 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.

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
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.

                                       6
<PAGE>

         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) used 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 equal to) 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 equal
            to) = 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 to market Arestin(TM) in Sweden. In accordance with
the European mutual recognition procedure, we plan to use Sweden as the
rapporteur country in order to gain approval to market Arestin(TM) throughout
the European Union.

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 four 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 need to satisfy regulatory requirements.

         Contract Manufacturers

         aaiPharma, Inc. ("AAI"), Wilmington, NC, 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"), Philadelphia, PA, 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
rapidly arrange for another supplier, if necessary.

                                       7
<PAGE>

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

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

Marketing

         In the U.S., we have employed and trained a sales and marketing force
that will target approximately 3,700 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 March 6, 2001, this
sales and marketing team consists of 63 professionals. We intend to begin
actively marketing Arestin(TM) in the U.S. in April 2001.

         In markets outside the U.S., we intend to market and sell Arestin(TM)
through arrangements with other parties, rather than establish our own sales
force. We are currently holding discussions with a number of potential
distributors.

Additional Product Candidates

         We are developing multiple compounds to further establish a presence in
the oral care pharmaceutical market. Some programs are based on our core
microsphere technology, while additional programs are based on other technology
licensed to us. In connection with these product candidates, in certain cases we
have formed relationships to capitalize on our core technology, and in all cases
to exploit our expertise in formulation and development. We believe these
relationships will contribute to the development and commercialization of our
product candidates.

         OC-1012 for the Prophylaxis and Treatment of Oral Mucositis

         We are developing an agent for the prevention and treatment of oral
mucositis. Oral mucositis is a serious complication for 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 oral 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 who receive head and neck
radiation therapy, develop oral mucositis.

         Our oral 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 oral mucositis in preclinical studies. We are currently applying our
drug delivery expertise to develop a formulation optimized for delivery of this
compound. We expect to file an IND during the first half of 2001 for an oral
mucositis treatment product candidate and begin clinical trials shortly
thereafter.

         OC-1016 for Bone Regeneration

         Our bone regeneration program is based on technology licensed from
Children's Medical Center Corporation, of Boston. The technology is based on a
peptide related to the protein osteopontin, which promotes the attachment of
bone forming cells. In preclinical studies, we are directing our program at two
oral health applications--dental implants and bone augmentation. Our technology
may also have application outside the oral cavity, for example in orthopedics,
which we believe may present potential out-licensing opportunities.

         We are currently developing two formulations as product candidates. One
formulation is a solution for coating dental implants to be applied prior to
installation. Dental implants are used to replace teeth that are lost due to
injury or tooth decay, or as a consequence of periodontitis. An implant
procedure normally involves an initial step of installing a post into the
jawbone, and a second step of attaching an artificial tooth to the post. After
the implant post is installed, a patient must typically wait for three to four
months for the post to integrate securely into the bone before it is loaded with
a new tooth. This waiting period is uncomfortable and aesthetically displeasing,
as patients do not have use of the missing teeth. To the practitioner, it poses
a risk of stressing the implant before it properly integrates into the bone.
According to the National Institute of Dental Research, this premature stressing
is the leading cause of implant failure. Our program is directed at developing
an implant coating that would accelerate and strengthen integration of the
implant into the bone, thus reducing loading time and reducing early implant
failures. The ADA estimated in 1990 that approximately 640,000 implant
procedures were performed in the U.S.

         We are conducting work on the bone regeneration program through a
sponsored-research agreement with Children's Hospital of Boston, in
collaboration with our internal scientific staff. We expect product candidates
from this program to be regulated by the FDA as devices, rather than as drug
product candidates. Our goal is to file an Investigational Device Exemption
("IDE") in mid-2001 and begin clinical trials shortly thereafter.

                                       8
<PAGE>

         Our primary interests in non-oral health care applications include
orthopedic implants and spinal fusion. Other potential orthopedic applications
include wrist fractures, poor-healing fractures, and osteonecrosis, or
conditions of bone degeneration. Our current plan is to seek partners to develop
and commercialize the orthopedic and any other non-oral health applications.

         Research and Development for the Treatment of Periodontitis

         As part of a cooperative research agreement with the University of
North Carolina--Chapel Hill, we have begun work on a second treatment approach
for periodontitis as a follow-up to Arestin(TM). This effort is aimed at
identifying new compounds to be administered via our core drug-delivery system.
Studies reveal that much of the tissue destruction associated with periodontal
disease is ultimately caused by the body's response to inflammation, and we are
testing various compounds to affect this response. We believe that modifying the
body's response may augment our current antimicrobial approach.

         Arestin(TM) for the Treatment of Traumatic Tooth Injury

         We are engaged in a research and development effort jointly with the
University of North Carolina--Chapel Hill that targets traumatic tooth injury as
a potential line extension for Arestin(TM). Our program is directed at improving
the viability of teeth that have been loosened or dislodged due to traumatic
injury. Recent studies suggest that topical application of antibiotics to the
tooth prior to reinstallation may improve the chance of recovery.

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, 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 2014. Corresponding patents are in
effect or pending in other countries including Australia, Canada, France,
Germany, Italy, Japan, and Sweden where we believe the market potential for
Arestin(TM) is significant.

         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 licensed out 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, DDS. 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 obligates 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.

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<PAGE>

         Oral Mucositis Program

         In December 1998, we entered into an agreement with Mucosal
Therapeutics LLC to license our oral 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 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
foreign countries where we believe the market potential for a product to treat
oral mucositis is significant.

         Our license agreement with Mucosal Therapeutics affords 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 completion of certain preclinical
milestones. We are required to make additional payments to Mucosal Therapeutics,
in the form of cash and warrants to purchase our common stock, as other clinical
milestones are achieved and upon FDA approval of a pharmaceutical product for
the treatment of oral 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.

         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
foreign countries where we believe the market potential for bone and soft-tissue
regeneration products is significant.

         Our license agreement with CMCC provides us with worldwide license
rights under the CMCC patents in our field of use 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.

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.

                                       10
<PAGE>

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;

         .  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. Foreign companies
that manufacture product candidates for distribution in the United States also
must list their product candidates with the FDA and comply with cGMPs. They are
also subject to periodic inspection by the FDA or by local authorities under
agreement with the FDA.

         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.

                                       11
<PAGE>

         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. As part of our strategic
relationships, our collaborators may be responsible for the foreign regulatory
approval process of our product candidates, although we may be legally liable
for noncompliance.

         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 pharmaceutical industry, and the oral care pharmaceuticals business
in particular, are intensely competitive and are characterized by rapid
technological changes. Some 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 oral care pharmaceuticals, 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 Arestin(TM) in treating periodontitis. They
are: Atridox, a product developed by Atrix Laboratories and marketed by Block
Drug; PerioChip, a product developed and marketed by Perio Products; and
Periostat, a drug developed and marketed by CollaGenex. Atridox and PerioChip
are chair-side therapies involving the locally 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 sold 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:

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<PAGE>
          .    efficacy and safety;

          .    speed, ease of use and administration;

          .    degree of clinical benefit relative to selling price;

          .    product reliability and availability;

          .    marketing and sales capability;

          .    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, 2000, we had 82 employees. Of these employees, 13
were engaged in research, development, and medical, clinical and regulatory
affairs, 57 were engaged in marketing and sales activities, and 12 were engaged
in administrative and finance functions. At March 6, 2001 we had 100 employees
of which 17 were in research, development and medical, clinical and regulatory;
63 in marketing and sales and 20 in administration and finance. None of our
employees is 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 achieve product development milestones under our
         license agreement with AHP, AHP would have the right to license
         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 commercialize Arestin(TM) to a non-exclusive license if we
fail to commercialize Arestin(TM) by August 2003. AHP also 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 products 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.

         As of December 31, 2000, we had a cumulative net loss of approximately
$34.9 million. Our losses have resulted principally from costs incurred in our
research and development programs, including clinical trials, and from our
marketing, general and administrative costs. We have not derived revenues from
product sales or royalty revenue, and we do not expect to achieve revenue from
product sales until we begin marketing Arestin(TM). We may never be profitable
even if our product candidates are approved and commercialized.

         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 commercialization of Arestin(TM) will be halted,
         delayed 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.

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<PAGE>

         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 delay or halt our commercialization of
         Arestin(TM).

         We currently rely on sole-source suppliers to provide to the parties
that produce and package Arestin(TM) each of the four 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;

           .   the plastic dispenser; and

           .   the autoclaveable dispenser handle.

         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 at competitive
prices, if at all, necessary to meet market demand for Arestin(TM). 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 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 will 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 Block Drug;

           .   Perio Chip, a product developed and marketed by Perio Products;
               and

           .   Periostat, a drug developed and marketed by CollaGenex.

Many 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.

         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. Third parties 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 third-party 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 third parties 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. There may

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<PAGE>

be third-party patents, patent applications and other intellectual property
relevant to our product candidates and technologies, which are not known to us
and that 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 third 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 this issued
patent. Our scientific staff have reviewed this patent and do not believe that
it covers Arestin(TM). If this patent is found to contain claims infringed 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 a third-party makes a claim for infringement, 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 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 companies.

         If our product or 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, we may be unable to
commercialize our product candidates.

         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 and anticipated development projects require substantial
capital. We are likely to need substantial additional funds 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

                                       15
<PAGE>

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.

         We have not performed any human clinical studies for any of our product
candidates, and have recently completed preclinical, or animal, studies for our
product candidate that addresses oral mucositis and are in the process of
completing preclinical studies for our bone regeneration product candidate. We
are conducting early research on our other product candidates. To date, none of
our product candidates has been determined to be safe or effective.

         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
only limited experience in filing and pursuing applications necessary to gain
regulatory approvals.

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

         Continued compliance with all FDA requirements and the conditions in an
approved NDA, 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 delay further marketing until
the product is 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 Our Common Stock

         Because our certificate of incorporation and Delaware law contain
         provisions that could discourage a takeover, our common stock may trade
         at a discount.

         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 $5.00 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, 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;

           .   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;

                                       16
<PAGE>

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

           .   general market conditions.

         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 the company. We may become involved in this type of
litigation in the future. Litigation of this type is often extremely expensive
and diverts management's attention and resources.

                                       17
<PAGE>

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 beginning
February 1, 2001 for additional corporate space, which expires 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

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

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

         No matters were submitted to a vote of security holders since our
initial public offering on March 9, 2000.

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...........    51  President, Chief Executive Officer and Director


Mark B. Carbeau................    40  Vice President, Corporate Development


J. Ronald Lawter, Ph.D.........    58  Executive Vice President, Chief Scientific and
                                       Technical Officer


Jan N. Lessem, M.D., Ph.D......    52  Vice President, Chief Medical Officer


James A. Ratigan...............    52  Executive Vice President, Chief Financial
                                       Officer and Secretary


Joseph E. Zack.................    49  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
also 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 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 which
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.

         Mr. Zack has served as our Vice President, Sales and Marketing since
March 1998. From 1993 to 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 1987 to 1993, and Product
Director from 1982 to 1987, where he was responsible for a number of successful
product launches. From 1973 to 1982, 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.

                                       18
<PAGE>

                                    PART II

ITEM 5.        MARKET FOR THE REGISTRANT'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, 2000 as reported on NNM.

  Quarter Ended                   High          Low
  -------------                   ----          ---

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

          As of March 6, 2001, the approximate number of holders of record of
the common stock was 77 and the approximate number of beneficial holders of the
common stock was 2,971.

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 (including
the sale of shares to cover underwriters' over-allotments), after deducting the
discounts, commissions, fees and expenses, were approximately $76.0 million.
During the period March 9, 2000 through December 31, 2000 we have used cash on
hand prior to the IPO plus $728,575 of the offering proceeds. We have applied
the net proceeds raised as follows:

Construction of plant, building and facilities                       $         -
Purchase and installation of machinery and equipment                           -
Purchases of real estate                                                       -
Acquisition of other businesses                                                -
Repayment of indebtedness                                                      -
Working capital                                                      $   728,575
Temporary investments (money market account)                         $75,255,171

UNREGISTERED SECURITIES

          There were no sales of unregistered securities during the year ended
December 31, 2000.

                                       19
<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 21 and the consolidated financial
statements and related notes beginning on page F-1. The selected financial data
for the period from inception (August 1, 1996) through December 31, 1996, the
years ended December 31, 1997, 1998, 1999 and 2000 and the period from inception
through December 31, 2000 are derived from the audited financial statements.

<TABLE>
<CAPTION>
                                     Period from                                                                   Period from
                                      Inception                                                                     Inception
                                     (August 1,                                                                     (August 1,
                                        1996)                                                                         1996)
                                       Through                            Year Ended                                 Through
                                     December 31,                         December 31,                             December 31,
                                                     ----------------------------------------------------------
                                         1996            1997          1998            1999            2000           2000
                                         ----        ------------  ------------    ------------    ------------   ------------
<S>                                  <C>             <C>           <C>             <C>             <C>            <C>
Statement of Operations Data:
Operating expenses:
  Research and development             $   26,294    $  1,706,393  $   7,589,000   $  9,693,413    $  8,205,573   $ 27,220,673
  Marketing, general and
    administrative                        408,295         939,469      1,604,579      2,189,577       8,350,336     13,492,256
                                       ----------    ------------  -------------   ------------    ------------   ------------
     Operating loss                      (434,589)     (2,645,862)    (9,193,579)   (11,882,990)    (16,555,909)   (40,712,929)
Interest income, net                         (641)        504,123        424,488        636,957       4,239,397      5,804,324
                                       ----------    ------------  -------------   ------------    ------------   ------------
Net loss                                 (435,230)     (2,141,739)    (8,769,091)   (11,246,033)    (12,316,512)   (34,908,605)
Non-cash preferred stock charge                 -               -              -      1,729,651               -      1,729,651
                                       ----------    ------------  -------------   ------------    ------------   ------------
Net loss to common stockholders        $ (435,230)   $ (2,141,739) $  (8,769,091)  $(12,975,684)   $(12,316,512)  $(36,638,256)
                                       ==========    ============  =============   ============    ============   ============
Basic and diluted net loss per share                 $      (5.05) $      (13.72)  $     (16.74)   $      (1.13)
                                                     ============  =============   ============    ============
Shares used in computing basic
  and diluted net loss per share                          424,054        639,339        775,116      10,921,573
                                                     ============  =============   ============    ============
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
                                                                                   ============    ============
</TABLE>

<TABLE>
<CAPTION>
                                                                              As of December 31,
                                                   ---------------------------------------------------------------------------
                                                      1996           1997             1998            1999            2000
                                                      ----           ----             ----            ----            ----
<S>                                                <C>           <C>              <C>             <C>             <C>
Balance Sheet Data:
Cash and cash equivalents                          $    37,704   $ 10,136,747     $ 19,236,084    $ 13,073,803    $ 75,255,171
Total assets                                            61,479     10,859,584       20,480,402      14,711,739      80,431,518
Long-term debt                                               -              -          480,978         288,043               -
Redeemable convertible preferred stock                       -     12,822,767       28,771,713      32,974,359               -

Deficit accumulated during the development stage      (435,230)    (2,576,969)      (11,346,060)   (22,592,093)    (34,908,605)
Total stockholders' equity (deficit)                  (359,071)    (2,446,806)      (11,080,451)   (20,616,829)     76,472,394
</TABLE>

                                       20
<PAGE>

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

FORWARD LOOKING STATEMENTS

     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, but are not limited to, the following:

          . the anticipated market launch date for Arestin(TM);

          . deploying a sales and marketing force for Arestin(TM), including
            related training activities;

          . the success of our sales and marketing efforts for Arestin(TM);

          . our intentions regarding international collaborations to distribute
            Arestin(TM) outside of the United States;

          . the status of the regulatory approval process for
            Arestin(TM) outside of the United States;

          . the status of our product development efforts for our oral mucositis
            and bone regeneration products, and the prospects of advancing these
            products into human clinical trials, as well as the status of our
            other new product development initiatives;

          . anticipated operating losses and capital expenditures; and

          . the adequacy of our liquidity position.

     When used in this Report, we intend the words "may", "believe",
"anticipate", "plan", "project", "expect", "require", "intend", "assume" 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 possible events that may prevent or cause a delay in the market launch
of Arestin(TM) in the United States; our ability to successfully market
Arestin(TM) in the United States; the possible failure of clinical trials for
our product candidates; our ability to successfully market product candidates;
our ability to achieve milestones on which licensed rights to commercialize
Arestin(TM) are dependent; the prospect of continued losses; our dependence on
sole-source suppliers for the production and distribution of Arestin(TM); our
ability to attract one or more partners to distribute Arestin(TM) outside of
the United States, on terms that are acceptable to us; our ability to obtain
regulatory approval for Arestin(TM) outside of the United States; and other
risks and factors identified from time to time in reports we file with the
Securities and Exchange Commission, 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 forward-looking statement, 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 locally delivered
pharmaceutical products for oral healthcare. Some programs are based on our core
technology that we licensed from American Home Products ("AHP"). Additional
programs are based on technology that we license from others. With respect to
our new product candidates, other than Arestin(TM), we have formed
relationships to capitalize on our core technology and expand our expertise in
drug formulation and development. We cannot accurately estimate either the cost
of these development activities or the time when the costs will be incurred, and
we are unable to predict with any certainty if product candidates will become
commercial products.

     We are a development-stage pharmaceutical company and have not generated
revenues from product sales. We have not been profitable and since inception
have incurred a cumulative net loss of approximately $34.9 million through
December 31, 2000. These losses have resulted principally from costs incurred in
research and development activities, including Phase 3 clinical trials of our
lead product, Arestin(TM), and 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 new product candidates will continue to increase. We also expect
manufacturing, sales and marketing costs to increase as we prepare for, and
initiate, the launch of Arestin(TM).

     In October 1999, we completed Phase 3 clinical trials for Arestin(TM) for
the adjunct treatment of adult periodontitis. We filed a New Drug Application
("NDA") for Arestin(TM) with the United States Food and Drug Administration
("FDA") on February 17, 2000. The FDA accepted the NDA for review on April 21,
2000 and we received final approval from the FDA to market Arestin(TM) in the
United States on February 16, 2001. Most of our revenue for the foreseeable
future will depend on our ability to successfully market Arestin(TM). We
intend to sell Arestin(TM) in the United States by deploying a sales and
marketing force initially comprised of 63 persons, which are all on staff as of
March 6, 2001. In the international markets, we intend to rely on one or more
independent distributors to market and sell Arestin(TM). We intend to
establish an international infrastructure to support these distributors, and may
selectively establish our own sales force, if necessary, to augment these
relationships.

                                       21
<PAGE>

Equity Financings

         We have financed our operations primarily with the net proceeds
generated from the issuance of common and redeemable convertible preferred
stock. From our inception in August 1996 through December 31, 1999, we received
net proceeds of approximately $33.7 million from the sale of redeemable
convertible preferred stock.

         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 American Home Products ("AHP") a milestone
payment of $500,000 based on the FDA acceptance of our 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, DDS 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). 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., 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.

         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 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
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
oral 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.

         We have also entered into a research and consulting agreement with
Biomodels LLC, an affiliate of Mucosal Therapeutics, to perform preclinical
studies on our behalf and to provide us with research and general consulting
services regarding our development of the oral mucositis technology. At December
31, 2000, the remaining payments due to this third party are expected to total
$285,000 through 2002.

         We issued 82,500 shares of common stock to Children's Medical Center
Corporation ("CMCC") in December 1998. 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 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, 2000, the remaining payments due under the sponsored-research agreement are
expected to total $416,667 through 2002.

Results of Operations

         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 15.3%.
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 and scale-up activities
associated with the production of Arestin(TM).

                                       22
<PAGE>

         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%. 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), 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%. 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 9.5%. 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. 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 Financial Statements.

         Years Ended December 31, 1999 and 1998.

         Research and Development Expenses. Research and development expenses
totaled approximately $9.7 million for the year ended December 31, 1999 compared
to approximately $7.6 million in the same period in 1998, an increase of 27.7%.
This increase of approximately $2.1 million was primarily due to costs
associated with Phase 3 clinical trials of Arestin(TM), and to a lesser
extent, increased spending to develop new product candidates.

         Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses totaled approximately $2.2 million for the year ended
December 31, 1999 compared to approximately $1.6 million in the same period in
1998, an increase of 36.5%. This increase of $585,000 is primarily due to higher
personnel costs, together with higher facility costs and the costs associated
with the preliminary marketing efforts for Arestin(TM) and the pursuit of
corporate collaborations.

         Interest Income, net. Interest income for the years ended December 31,
1999 and 1998 was $689,000 and $463,000, respectively. The increase of $226,000
is attributable to higher levels of cash and cash equivalents available for
investment in 1999 from the proceeds of the sale of our preferred stock in
December 1998 and December 1999, respectively. Interest expense for the same
periods was $52,000 and $38,000, and represents interest incurred on an
equipment financing credit facility.

         Net Loss. The net loss was approximately $11.2 million for the year
ended December 31, 1999 compared to approximately $8.8 million in the same
period in 1998, an increase of 28.2%. This increase of approximately $2.4
million reflects increases in research and development, and marketing, general
and administrative expenses, offset by the increase in 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 Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 2000, we had cash and cash equivalents of
approximately $75.3 million, an increase of approximately $62.2 million from
December 31, 1999. On March 9, 2000, we sold 4,000,000 shares of common stock in
our initial public offering, and raised net proceeds of approximately $66.0
million. On April 7, 2000, we sold an additional 600,000 shares of common stock
to cover underwriters' over-allotments, and received net proceeds of
approximately $10.0 million. As of December 31, 2000, the approximately $75.3
million remaining from the sale of these shares was invested in a money market
fund that invests in short-term government and investment-grade,
interest-bearing securities.

         During the year ended December 31, 2000, net cash used in operating
activities was approximately $9.4 million. This represents the net loss for the
period, adjusted for certain non-cash expenses, and changes in other operating
assets and liabilities, principally increases in accounts payable and accrued
expenses, as set forth in the statements of cash flows.

         Net cash used in investing activities for the year ended December 31,
2000 was approximately $4.1 million. Approximately $1.3 million was used for the
purchase of leasehold improvements at the facility of the contract manufacturer
who will produce Arestin(TM). Production equipment was purchased for
approximately $1.3 million, computer hardware and software for $640,000,
milestone payments on our licensing agreements were $550,000, and payments for
laboratory, telephone and office equipment, together with leasehold improvements
at our corporate headquarters were $300,000.

         We anticipate that our capital expenditures will be approximately $7.2
million for the year ending December 31, 2001. Of this amount, approximately
$2.6 million will be for milestone payments on our licensing agreements,
approximately $3.0 million will be for production equipment and Arestin(TM)
dispenser handles, and approximately $1.1 million will be for equipment,
software, leasehold improvements, office equipment and furniture. We have also
committed to expenditures of approximately $500,000 for leasehold improvements
at the facility of the contract manufacturer who will produce Arestin(TM).

                                       23
<PAGE>

         Net cash proceeds from financing activities for the year ended December
31, 2000 totaled approximately $76.0 million from the sale of 4,600,000 shares
of common stock in our initial public offering.

         In June 1999, we increased our credit facility with a bank from
$750,000 to $1,750,000. The facility was used to finance leasehold improvements
and purchases of equipment and software through June 30, 2000. Borrowings under
this facility bore interest at the prime rate plus 0.75%. On March 29, 2000, we
repaid the outstanding balance of $480,978. This credit facility expired on June
30, 2000 and was not renewed.

         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 18 to 65 months. Current minimum annual
payments for both the real and personal property leases total $258,787 per year.

         We believe that our current cash position and expected interest income
will be sufficient to fund our operations and capital expenditures through at
least the year 2001. Market demand for Arestin(TM), together with any
acquisition, licensing agreements, or similar transactions may cause us to
require additional capital in 2002 and beyond. Our operating expenses and
capital expenditures will increase due to the manufacturing scale-up and planned
market launch of Arestin(TM) in the second quarter of 2001. Research and
development expenditures, including clinical studies, will continue at high
levels as we develop and advance new product candidates. The initiation of
commercial manufacturing will require expenditures for the completion of a
leasehold improvement at a contract manufacture's facility, the purchase of
production equipment and the hiring of additional staff to coordinate raw
material suppliers and manage contract manufacturing services at multiple
locations. Sales and marketing activities are underway for the planned launch of
Arestin(TM). We intend to hire additional research and development, clinical
research and administrative staff to support the planned Arestin(TM) launch
and the planned new product development activities in 2001.

INCOME TAXES

         As of December 31, 2000, we had approximately $34.2 million and
$945,000 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 June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement No. 133", which was adopted by us on January 1,
2001, provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. As we do not currently hold
derivative instruments or engage in hedging activities, the adoption of this
pronouncement is not expected to have any impact on our financial position or
results of operations for the year 2001.

         In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 draws on existing accounting rules and provides specific guidance
on revenue recognition of up-front non-refundable license fees. Because we have
not had any license fee revenue, the adoption of SAB 101 did not have any impact
on our financial position or results of operations.

                                       24
<PAGE>

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         Our cash and cash equivalents total approximately $75.3 million at
December 31, 2000. These assets are invested in a money market fund that invests
in short-term government and investment-grade securities, on which we were
earning 6.15% at December 31, 2000. The reduction of interest rates in January
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 have not entered into
any arrangements to offset such risk.

         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 a direct impact on our results of operations
unless, and until, we enter into loan agreements or 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

                                       25
<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" and "Compliance with Section 16(a) of the Exchange Act" in the
Company's definitive proxy statement for the 2001 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 2001 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 2001 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 2001 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.

                                       26
<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

           None.

     (3) Exhibits.

           Reference is made to the Index to Exhibits on Page 30.

(b)      Reports on Form 8-K.

           No Reports on Form 8-K were filed during the last quarter of 2000.

                                       27
<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.


Date:      March  27, 2001                 /s/  Michael D. Kishbauch
-----      ---------------                 -------------------------

                                           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.


Date:      March 27, 2001            /s/  Michael D. Kishbauch
-----      --------------           -------------------------------------
                                    Michael D. Kishbauch
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)



Date:      March 27, 2001            /s/  James A. Ratigan
-----      ---------------          -------------------------------------
                                    James A. Ratigan
                                    Executive Vice President, Chief Financial
                                    Officer and Secretary (Principal Financial
                                    Officer)



Date:      March 27, 2001            /s/  Robert D. Haddow
-----      ---------------          -------------------------------------
                                    Robert D. Haddow
                                    Controller (Principal Accounting Officer)



Date:      March 27, 2001            /s/  James J. Mauzey
-----      ---------------          -------------------------------------
                                    James J. Mauzey
                                    Director



Date:      March 27, 2001            /s/  Christopher Moller
-----      --------------           -------------------------------------
                                    Christopher Moller, Ph.D.
                                    Director



Date:      March 27, 2001            /s/  Eileen M. More
-----      --------------           -------------------------------------
                                    Eileen M. More
                                    Director

                                       28
<PAGE>

Date:      March 27, 2001            /s/  Harry T. Rein
-----      --------------           -------------------------------------
                                    Harry T. Rein
                                    Director

Date:      March 27, 2001            /s/  Seth A. Rudnick
-----      --------------           --------------------------------------
                                    Seth A. Rudnick, M.D.
                                    Director

Date:      March 27, 2001            /s/  David I. Scheer
-----      --------------           --------------------------------------
                                    David I. Scheer
                                    Director

Date:      March 27, 2001            /s/  Jesse I. Treu
-----      --------------           --------------------------------------
                                    Jesse I. Treu, Ph.D.
                                    Director

                                       29
<PAGE>

EXHIBIT INDEX

Exhibit
Number    Description
------    -----------

3.1       Fourth Amended and Restated Certificate of Incorporation of the
          Company. 1

3.2       Amended and Restated Bylaws of the Company. 1

4.1       Second Amended and Restated Stockholders Agreement among OraPharma,
          Inc. and the parties set forth therein, dated December 23, 1999. 1

4.2       Warrant issued to Oak Investment Partners VI, Limited Partnership. 1

4.3       Warrant issued to Oak V Affiliates Fund, Limited Partnership. 1

4.4       Warrant issued to Canaan S.B.I.C., L.P. 1

4.5       Warrant issued to Canaan Capital Limited Partnership. 1

4.6       Warrant issued to Canaan Capital Offshore Limited Partnership. 1

4.7       Series A Preferred and Series B Preferred Stock Purchase Agreement
          among OraPharma and the parties named therein, dated February 26,
          1997. 1

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

4.9       Series D Preferred Stock Purchase Agreement among OraPharma, Inc. and
          the parties named therein, dated December 23, 1999. 1

4.10      Restricted Stock Purchase Agreement between BioMorphics Group, Inc.
          and OraPharma dated December 31, 1998. 1

4.11      Restricted Stock Purchase Agreement between Children's Medical Center
          Corporation and OraPharma dated December 31, 1998. 1

4.12      Warrant issued to Mucosal Therapeutics. 1

4.13      Restricted Stock Purchase Agreement between American Cyanamid Company
          and OraPharma, dated February 26, 1997. 1

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

4.15      Restricted Stock Purchase Agreement between Oak V1 Affiliates Fund,
          Limited Partnership and OraPharma, dated February 26, 1997. 1

4.16      Restricted Stock Purchase Agreement between Oak Investment Partners
          VI, Limited Partnership and OraPharma, dated February 26, 1997. 1

4.17      Restricted Stock Purchase Agreement between Michael D. Kishbauch and
          OraPharma, dated March 6, 1997. 1 *

4.18      Restricted Stock Purchase Agreement between J. Ronald Lawter and
          OraPharma, dated March 19, 1997. 1 *

4.19      Warrant issued to Canaan Equity L.P. 1

4.20      Warrant issued to Domain Partners IV, L.P 1

4.21      Warrant issued to DP IV Associates, L.P. 1

4.22      Warrant issued to Old Court Limited 1

4.23      Warrant issued to Frazier Healthcare 11. L.P. 1

4.24      Warrant issued to HealthCap KB. 1

4.25      Warrant issued to HealthCap CoInvest KB. 1

                                      30

<PAGE>

4.26      Warrant issued to Oak Investment Partners VI, Limited Partnership. 1

4.27      Warrant issued to Oak V1 Affiliates Fund, Limited Partnership. 1

4.28      Warrant issued to Sentron Medical, Inc. 1

4.29      Warrant issued to TL Ventures III L.P. 1

4.30      Warrant issued to TL Ventures III Interfund L.P. 1

4.31      Warrant issued to TL Ventures III Offshore L.P. 1

4.32      Warrant issued to Mucosal Therapeutics LLC. 1

4.33      First Amendment to Warrant issued to Oak Investment Partners VI,
          Limited Partnership. 1

4.34      First Amendment to Warrant issued to Oak Affiliates Fund, Limited
          Partnership. 1

4.35      First Amendment to Warrant issued to Canaan S.B.I.C., L.P. 1

4.36      First Amendment to Warrant issued to Canaan Capital Limited
          Partnership. 1

4.37      First Amendment to Warrant issued to Canaan Capital Offshore Limited
          Partnership C.V. 1

10.1      OraPharma, Inc. 1996 Stock Option Plan. 1 *

10.2      OraPharma, Inc. 1999 Equity Compensation Plan. 1 *

10.3      Office Space Lease for 732 Louis Drive, Warminster, Pennsylvania,
          between Equivest Management Corporation and OraPharma, Inc. dated
          July 31, 1998. 1

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

10.4      Loan and Security Agreement between Silicon Valley Bank and OraPharma
          dated October 10, 1997. 1

10.5      Children's Hospital Sponsored Research Agreement, between Children's
          Hospital and OraPharma dated December 31. 1998. 1 #

10.6      License Agreement between Children's Medical Center Corporation and
          OraPharma, dated December 31, 1998. 1 #

10.7      License Agreement between Mucosal Therapeutics LLC and OraPharma,
          dated December 14. 1998. 1 #

10.8      Research and Consulting Agreement between Biomodels LLC and OraPharma
          dated December 14, 1998. 1 #

10.9      License Agreement between American Cyanamid Company and OraPharma,
          Inc. dated February 26, 1997. 1 #

10.10     License Agreement between Gary R. Jernberg and OraPharma, dated
          December 19, 1996. 1 #

10.11     License Agreement between Technical Developments and Investments, Est.
          and OraPharma dated February 13, 1997. 1 #

10.12     Amendment to the OraPharma. Inc. 1996 Stock Option Plan. 1 *

10.13     Packaging Agreement dated November 9, 2000 between Packaging
          Corporation Inc. and OraPharma. @

10.14     Manufacture and Supply Agreement between aaiPharma, Inc. and
          OraPharma, Inc. dated as of February 16, 2001. @

21.1      Subsidiaries of the Registrant.

23.1      Consent of Arthur Andersen LLP.

24.1      Power of Attorney. (Included on signature pages hereto)
____________________
1 Incorporated by reference to the Company's registration statement on Form S-1
(Reg. No. 333-93881).
@ Confidential Treatment Requested.
# Confidential Treatment Granted.
* Represents a management contract or compensatory plan or arrangement.

                                       31




<PAGE>

                        ORAPHARMA, INC. AND SUBSIDIARY
                        (a development - stage company)

                  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 in the development stage) and Subsidiary
as of December 31, 1999 and 2000, 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, 2000 and for the period from inception
(August 1, 1996) through December 31, 2000. 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of OraPharma, Inc. and Subsidiary as of December 31, 1999 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 and for the period from inception (August
1, 1996) to December 31, 2000 in conformity with accounting principles generally
accepted in the United States.


                                               /s/ ARTHUR ANDERSEN LLP

Philadelphia, Pennsylvania
    February 16, 2001

                                      F-2
<PAGE>

                        ORAPHARMA, INC. AND SUBSIDIARY
                        (a development - stage company)
                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                    December 31,

                                                                             1999               2000
                                                                         ------------       -------------
<S>                                                                      <C>                <C>
ASSETS
CURRENT ASSETS
         Cash and cash equivalents                                       $ 13,073,803       $  75,255,171
         Prepaid expenses and other                                           263,944             434,562
         Deferred offering costs                                              222,012                   -
                                                                         ------------       -------------
             Total current assets                                          13,559,759          75,689,733
FIXED ASSETS, net                                                             957,897           4,079,422
INTANGIBLE ASSETS, net                                                        194,083             662,363
                                                                         ------------       -------------
             Total assets                                                $ 14,711,739       $  80,431,518
                                                                         ============       =============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
         Current portion of long-term debt                               $    192,935       $           -
         Accounts payable                                                     452,763           2,216,719
         Accrued expenses                                                   1,420,468           1,742,405
                                                                         ------------       -------------
             Total current liabilities                                      2,066,166           3,959,124
                                                                         ------------       -------------

LONG-TERM DEBT                                                                288,043                   -
                                                                         ------------       -------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK                                     32,974,359                   -
                                                                         ------------       -------------
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT)

      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, 1,039,635, and
         13,421,224 issued and outstanding at December 31, 1999
         and 2000, respectively                                                 1,040              13,421
      Additional paid-in capital                                            2,789,617         111,969,930
      Deferred compensation                                                  (815,393)           (602,352)
      Deficit accumulated during the development stage                    (22,592,093)        (34,908,605)
                                                                         ------------       -------------
             Total stockholders' equity (deficit)                         (20,616,829)         76,472,394
                                                                         ------------       -------------
             Total liabilities and stockholders' equity                  $ 14,711,739       $  80,431,518
                                                                         ============       =============
</TABLE>

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

                                      F-3
<PAGE>

                        ORAPHARMA, INC. AND SUBSIDIARY
                        (a development - stage company)

                    Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                                                                Period from
                                                                                                                 Inception
                                                                                                             (August 1, 1996)
                                                                                                                 Through
                                                                     Year Ended December 31,                   December 31,
                                                        -------------------------------------------------
                                                             1998               1999             2000               2000
                                                        --------------    --------------    -------------    ----------------
<S>                                                     <C>               <C>               <C>              <C>
OPERATING EXPENSES
   Research and development                             $    7,589,000    $    9,693,413    $   8,205,573    $     27,220,673
   Marketing, general and administrative                     1,604,579         2,189,577        8,350,336          13,492,256
                                                        --------------    --------------    -------------    ----------------
        Operating loss                                      (9,193,579)     (11,882,990)      (16,555,909)        (40,712,929)
INTEREST INCOME , net                                          424,488           636,957        4,239,397           5,804,324
                                                        --------------    --------------    -------------    ----------------
NET LOSS                                                    (8,769,091)      (11,246,033)     (12,316,512)        (34,908,605)

NON-CASH PREFERRED STOCK  CHARGE                                     -         1,729,651                -           1,729,651
                                                        --------------    --------------    -------------    ----------------
NET LOSS TO COMMON STOCKHOLDERS                         $   (8,769,091)   $  (12,975,684)   $ (12,316,512)   $    (36,638,256)
                                                        ==============    ==============    =============    ================
BASIC AND DILUTED NET LOSS PER SHARE                    $       (13.72)   $       (16.74)   $       (1.13)
                                                        ==============    ==============    =============
SHARES USED IN COMPUTING BASIC
  AND DILUTED NET LOSS PER SHARE                               639,339           775,116       10,921,573
                                                        ==============    ==============    =============
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
                        (a development - stage company)

            Consolidated Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                                                                          Deficit
                                                                                                        Accumulated
                                                                              Additional                During the
                                                            Common Stock        Paid-in    Deferred     Development
                                                          Shares     Amount     Capital  Compensation      Stage        Total
                                                          ------     ------     -------  ------------      -----        -----
<S>                                                       <C>       <C>        <C>        <C>           <C>            <C>
Balance at Inception, August 1, 1996                            --  $    --    $      --  $       --    $        --    $        --
  Deferred compensation related to stock options                --       --      189,210    (189,210)            --             --
  Amortization of deferred stock-based compensation             --       --           --      76,159             --         76,159
  Net loss                                                      --       --           --          --       (435,230)      (435,230)
                                                        ----------  -------  -----------   ---------   ------------   ------------
Balance, December 31, 1996                                      --       --      189,210    (113,051)      (435,230)      (359,071)
  Sale of common stock and restricted common stock
     to founders                                           823,088      823          913          --             --          1,736
  Issuance of common stock and warrant as partial
     payment for intangible assets                         110,000      110       23,890          --             --         24,000
  Exercise of warrant to purchase common stock              20,000       20        1,980          --             --          2,000
  Amortization of deferred stock-based compensation             --       --           --      26,268             --         26,268
  Net loss                                                      --       --           --          --     (2,141,739)    (2,141,739)
                                                        ----------  -------  -----------   ---------   ------------   ------------
Balance, December 31, 1997                                 953,088      953      215,993     (86,783)    (2,576,969)    (2,446,806)
  Sale of restricted common stock to a founder and
     exercise of employee stock options                      3,950        4           43          --             --             47
  Deferred compensation related to stock options                --       --      181,040    (181,040)            --             --
   Issuance of warrant to purchase common stock in
     connection with acquisition of technology                  --       --       88,839          --             --         88,839
  Amortization of deferred stock-based compensation             --       --           --      46,560             --         46,560
  Net loss                                                      --       --           --          --     (8,769,091)    (8,769,091)
                                                        ----------  -------  -----------   ---------   ------------   ------------
Balance, December 31, 1998                                 957,038      957      485,915    (221,263)   (11,346,060)   (11,080,451)
  Issuance of common stock in connection with
     acquisition 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 employee stock options                           100       --           36          --             --             36
  Deferred compensation related to stock options                --       --      800,519    (766,542)            --         33,977
  Amortization of deferred stock-based compensation             --       --          --      172,412             --        172,412
  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                                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
                                                        ==========  ======= ============   =========   ============   ============

</TABLE>

   The accompanying notes are an integral part of these financial statements

                                      F-5
<PAGE>

                        ORAPHARMA, INC. AND SUBSIDIARY
                       ( a development - stage company )
                     Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                                   Period from
                                                                                                                    Inception
                                                                                                                 (August 1, 1996)
                                                                                                                      Through
                                                                           Years Ended December 31,                 December 31,
                                                             ---------------------------------------------------
                                                                   1998             1999               2000             2000
                                                             ----------------  --------------     --------------  ----------------
<S>                                                          <C>               <C>                <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net Loss                                                    $(8,769,091)      $(11,246,033)   $(12,316,512)   $(34,908,605)
    Adjustments to reconcile net loss to net cash used in
    operating activities-
         Depreciation and amortization                              188,956            282,842         488,880       1,022,867
         Stock based compensation expense                            46,560            206,389         322,090         677,466
         Common stock and warrants issued in connection
            with acquisition of technology                          489,789            346,108               -         835,897
    Changes in operating assets and liabilities -
         Prepaid expenses and other                                 (10,382)          (217,503)       (170,618)       (434,562)
         Accounts payable                                           583,043           (369,168)      1,763,956       2,216,719
         Accrued expenses                                           647,613            106,078         471,937       1,470,361
                                                                -----------       ------------    ------------    ------------
                 Net cash used in operating activities           (6,823,512)       (10,891,287)     (9,440,267)    (29,119,857)
                                                                -----------       ------------    ------------    ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
    Capital expenditures                                           (700,055)          (236,945)     (3,528,685)     (4,931,013)
    Expenditures for intangible assets                                    -                  -        (550,000)       (809,639)
                                                                -----------       ------------    ------------    ------------
                 Net cash used in investing activities             (700,055)          (236,945)     (4,078,685)     (5,740,652)
                                                                -----------       ------------    ------------    ------------

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
    Proceeds from issuance of notes payable                         750,000                  -               -         915,000
    Proceeds from sale of preferred stock, net of expenses       15,948,944          4,958,850               -      33,730,563
    Proceeds from initial public offering                                 -                  -      76,116,918      76,116,918

    Proceed from the exercise of stock options and warrants              47                 36          64,380          68,199
    Proceeds from PA Opportunity Grant                                    -            200,000               -         200,000
    Repayment of notes payable                                      (76,087)          (192,935)       (480,978)       (915,000)
                                                                -----------       ------------    ------------    ------------
                 Net cash provided by financing activities       16,622,904          4,965,951      75,700,320     110,115,680
                                                                -----------       ------------    ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              9,099,337         (6,162,281)     62,181,368      75,255,171
CASH AND CASH EQUIVALENTS, beginning of period                   10,136,747         19,236,084      13,073,803               -
                                                                -----------       ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, end of period                        $19,236,084       $ 13,073,803    $ 75,255,171    $ 75,255,171
                                                                ===========       ============    ============    ============

Supplemental Disclosure of Cash Flow Information:
    Cash paid for interest                                      $    37,631       $     48,039    $     13,346    $     95,965
                                                                ===========       ============    ============    ============
    Non-cash financing activities-
    Issuance of common stock and warrants for
       acquisition of intangible assets                         $         -       $          -    $          -    $     24,000
                                                                ===========       ============    ============    ============
</TABLE>

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

                                      F-6
<PAGE>

                        ORAPHARMA, INC. AND SUBSIDIARY
                         (a development-stage company)

                  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 oral health care, as well as
certain nonexclusive patent license rights for other potential applications of
the acquired technologies.

Since February 1997, the Company has focused its efforts on research and
development activities related to the completion of its lead product candidate,
Arestin(TM), which is based on the acquired technologies. During 1998, the
Company initiated Phase 3 clinical trials in order to obtain the approval of the
United States Food and Drug Administration ("FDA") for this oral healthcare
product. These trials were completed in October 1999. The Company filed a new
drug application ("NDA") with the FDA on February 17, 2000. The FDA accepted the
NDA for review on April 21, 2000 and the Company received final approval from
the FDA to market Arestin(TM) on February 16, 2001.

During 1998, the Company acquired license rights to certain other technologies
that it intends to develop into future product candidates.

The Company has not generated any revenues from product sales and has incurred
substantial losses since inception. The Company anticipates incurring additional
losses, and the losses may increase as the Company begins to market and sell
Arestin(TM) and expands its research and development activities. Operations of
the Company are subject to certain additional risks and uncertainties including,
among others, dependence on Arestin(TM) and its exclusive licenses, uncertainty
of product development, supplier and manufacturing dependence, sales and
marketing inexperience, competition, reimbursement availability, dependence on
other exclusive licenses and relationships, uncertainties regarding patents and
proprietary rights, dependence on key personnel and other risks related to
governmental regulations and approvals.

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 generally accepted
accounting principles 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, 2000 cash and cash equivalents were invested
with one institution in a money market fund that invests in short-term
government and investment-grade securities.

Fixed Assets

Depreciation and amortization are provided using the straight-line method of
accounting over the estimated useful lives of the related assets or lease term,
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
estimated useful life of ten years.

Research and Development

Research and development costs are charged to expense as incurred.

                                      F-7
<PAGE>

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
Emerging Issues Task Force (EITF) 96-18.

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, the Company 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,
the Company 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, the Company
believes the future cash flows to be received from the long-lived assets will
exceed the assets' carrying value, and, accordingly, the Company has not
recognized any impairment losses through December 31, 2000.

Net Interest Income (Expense).

For the years ended December 31, 2000 and 1999, the Company received interest
and dividend income of $4,248,286 and $689,453, respectively. During the same
periods, the Company incurred interest expense of $8,889 and $52,496. The
interest income was the result of the investments in a money market account and
the interest expense was paid to a bank for an equipment financing facility.

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. 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.

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

<TABLE>
<CAPTION>
                                                                                                   Year Ended
                                                                                                   ----------
                                                                                                   December 31,
                                                                                                   ------------
                                                                                       1998            1999            2000
                                                                                   -----------     ------------   ------------
            <S>                                                                    <C>             <C>             <C>
            Net loss to common stockholders.....................................   $(8,769,091)    $(12,975,684)  $(12,316,512)
                                                                                   ===========     ============   ============
            Basic and diluted:
                Weighted-average shares of common stock
                    outstanding.................................................       956,719          999,089     11,052,184
                Less: weighted-average shares subject to
                    repurchase..................................................      (317,380)        (223,973)      (130,611)
                                                                                   -----------     ------------   ------------
                Weighted-average shares used in computing
                    basic and diluted net loss per share........................       639,339          775,116     10,921,573
                                                                                   ===========     ============   ============
            Basic and diluted net loss per share................................   $    (13.72)    $     (16.74)  $      (1.13)
                                                                                   ===========     ============   ============
            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.

                                      F-8
<PAGE>

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
amendment of FASB Statement No. 133," which was adopted by the Company on
January 1, 2001, provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. As the
Company does not currently hold derivative instruments or engage in hedging
activities, the adoption of this pronouncement is not expected to have any
impact on the Company's financial position or results of operations for the year
2001.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 draws on existing accounting rules and provides specific guidance on revenue
recognition of up-front non-refundable license fees. As the Company has not had
any license fee revenue, the adoption of SAB 101 did not have any impact on the
Company's financial position or results of operations.

Recapitalization

In February 2000, the Company effected a 1-for-2 reverse stock split of all
outstanding Common and Preferred stock and increased the number of authorized
shares of common stock to 50,000,000. All references in the accompanying
financial statements to the number of shares and per share amounts have been
retroactively restated to reflect the reverse stock split.

Reclassifications

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

3.   Fixed Assets

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                           ------------
                                                                      1999             2000
                                                                   ----------       ----------
            <S>                                                    <C>              <C>
            Laboratory and production equipment..................  $  811,995       $2,233,589

            Leasehold improvements...............................     293,776        1,651,464
            Furniture and fixtures and office equipment..........     296,557        1,045,960
                                                                   ----------       ----------
                                                                    1,402,328        4,931,013
            Less--Accumulated depreciation.......................    (444,431)        (851,591)
                                                                   ----------       ----------
                                                                   $  957,897       $4,079,422
                                                                   ==========       ==========
</TABLE>

4.   Intangible Assets

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                           ------------
                                                                      1999             2000
                                                                   ----------       ----------
            <S>                                                    <C>              <C>
            Technology acquisition costs - AHP...................   $ 274,000        $ 774,000

            Technology acquisition costs - Jernberg, D.D.S.......           -           50,000
            Other................................................       9,639            9,639
                                                                   ----------        ---------
                                                                      283,639          833,639
            Less--Accumulated amortization.......................     (89,556)        (171,276)
                                                                   ----------        ---------
                                                                    $ 194,083        $ 662,363
                                                                   ==========        =========
</TABLE>

In April 2000, the Company paid American Home Products ("AHP") a milestone
payment of $500,000 based on the FDA acceptance of the NDA for review. A second
milestone payment of $2.5 million is due to AHP on March 17, 2001 based on the
FDA's approval of Arestin(TM) for the adjunct treatment of adult periodontitis
on February 16, 2001. The Company also paid AHP $250,000 and issued it 110,000
shares of common stock at the time the Company entered into a license agreement
with AHP 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.

In April 2000, the Company paid Gary R. Jernberg, DDS a milestone payment of
$50,000 based on the FDA acceptance of the NDA for review. A second milestone
payment of $100,000 is due to Dr. Jernberg on March 17, 2001 based on the FDA's
approval of Arestin(TM) for the adjunct treatment of adult periodontitis on
February 16, 2001. The Company is also 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. Royalties payable to these parties can be fully
credited against up to 50% of the royalties payable under the agreement with
AHP.

                                      F-9
<PAGE>

5.   Accrued Expenses

<TABLE>
<CAPTION>
                                                         December 31,
                                                         ------------
                                                      1999         2000
                                                  ----------   ----------
          <S>                                     <C>          <C>
          Accrued compensation..................  $  351,898   $  543,056
          Accrued research and development......     537,625      233,773
          Accrued offering costs................     150,000            -
          Accrued other.........................     180,945      765,576
          Deferred revenue......................     200,000      200,000
                                                  ----------   ----------
                                                  $1,420,468   $1,742,405
                                                  ==========   ==========
</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 upon attaining the performance criteria.

6.   Long-Term Debt

As of December 31, 1999, the Company had a total of $480,978 in bank debt
outstanding on a $1,750,000 equipment credit facility with a bank. In March
2000, the then outstanding balance was paid in full. The credit facility expired
in June 2000 and was not renewed.

7.   Commitments

Facility Lease

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, 2000, of the future minimum annual lease payments
required under this lease.

            2001                                    $253,312
            2002                                     268,782
            2003                                     228,940
            2004                                       7,442
                                                    --------
                Total minimum lease payments        $758,476
                                                    ========


The Company also entered into operating lease agreements for various office
equipment. The terms of these lease agreements range from 36 to 65 months.
Current minimum annual payments under these leases aggregate $5,475 per year.

Rental expense for all operating leases in 1998, 1999 and 2000 was $176,170,
$183,881 and $189,538, respectively.

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 with
these entities 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.

                                      F-10
<PAGE>

During 1999 and 2000, the Company also incurred sponsored research and
consulting expenses in connection with these agreements of $869,956 and
$833,005, respectively. As of December 31, 2000, future sponsored research and
consulting payments are scheduled to be an aggregate of $761,780, payable as
follows:

            2001             $ 517,892
            2002               243,888

In April 2000, the Company made milestone payments of $550,000 based on the FDA
acceptance of the NDA for review. Additional milestone payments of $2,600,000
are due on March 17, 2001 based on the FDA's approval of Arestin(TM) for the
adjunct treatment of adult periodontitis on February 16, 2001. As discussed in
Note 4, the Company is obligated to make future royalty payments on any revenues
realized from the sale of Arestin(TM).

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 in 2000, but did not make any matching
contribution in 1999 or 1998. 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. 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, 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.

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 and 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, "Accounting for Stock Issued to Employees," 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 1998, 1999 and 2000 is estimated at $0.12, $1.98 and $6.79 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 1998 and 1999, and 70% in 2000; weighted average risk-free interest rate of
5.81% in 1998, 5.22% in 1999 and 5.91% in 2000, 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, 1998, 1999 and 2000 would have been as follows:


                                      F-11
<PAGE>

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                                     ------------
                                                                                     1998               1999              2000
                                                                                 -----------        ------------      ------------
            <S>                                                                  <C>                <C>               <C>
            Net loss to common stockholders--as
                Reported............................................             $(8,769,091)       $(12,975,684)     $(12,316,512)
                                                                                 ===========        ============      ============
            Net loss to common stockholders--pro
                forma...............................................             $(8,774,181)       $(12,985,654)     $(12,464,639)
                                                                                 ===========        ============      ============
            Basic and diluted net loss per share--as
                Reported............................................             $    (13.72)       $     (16.74)     $      (1.13)
                                                                                 ===========        ============      ============
            Basic and diluted net loss per share--
                pro forma...........................................             $    (13.72)       $     (16.75)     $      (1.14)
                                                                                 ===========        ============      ============

            Activity under the Plans is shown in the following table:
</TABLE>

<TABLE>
<CAPTION>
                                                                                                                   Aggregate
                                                                                                 Exercise           Exercise
                                                                                  Shares           Price              Price
                                                                                  ------           -----              -----
            <S>                                                                  <C>           <C>                 <C>
            Outstanding, Date of Inception.....................                        --      $          --       $       --
                Granted........................................                   136,827          .02 - .20            2,827
                                                                                 --------                          ----------
            Outstanding, December 31, 1996.                                       136,827          .02 - .20            2,827
                Granted........................................                   147,500                .36           53,100
                                                                                 --------                          ----------
            Outstanding, December 31, 1997.                                       284,327          .02 - .36           55,927
                Granted........................................                   130,875                .36           47,115
                Exercised......................................                      (200)               .20              (40)
                Forfeited......................................                      (300)               .20              (60)
                                                                                 --------                          ----------
            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........................................                   439,645       7.00 - 18.00        4,454,175
                Exercised......................................                  (224,489)         .02 - .60          (64,380)
                                                                                 --------                          ----------
            Outstanding, December 31, 2000.                                       801,628      $ .02 - 18.00       $4,595,919
                                                                                 ========                          ==========
</TABLE>

            The following table summarizes information about stock options at
December 31, 2000:

                                                      Exercisable Stock
            Outstanding Stock Options                      Options
            -------------------------                      -------
                                            Weighted
                                             Average
                                            Remaining
        Exercise                           Contractual                 Exercise
         Prices                 Shares        Life          Shares      Price
         ------                 ------        ----          ------      -----
          $.02                   58,656       5.9 years      31,391     $  .02
           .36                  172,594       7.0 years      62,900        .36
           .60                  130,733       8.2 years      12,307        .60
       7.00- 10.63              176,925       9.2 years           -          -
      11.00 - 13.25             214,500       9.9 years           -          -
          18.00                  48,220       9.3 years           -          -
                               --------                     -------
                                801,628                     106,598
                               ========                     =======

Under the 1996 Stock Option Plan, at December 31, 2000, options to purchase
586,772 shares had been granted, net of forfeitures, of which 224,789 were
exercised, and 361,983 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 7.3 years.

Under the 1999 Equity Compensation Plan, at December 31, 2000, options to
purchase 439,645 shares had been granted and none were exercised. Options to
purchase 810,355 remain available for future grants under this plan. The
weighted average remaining exercise period relating to the outstanding options
was approximately 9.5 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 year ended December 31,
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 2000 and 1999, the Company recorded $109,049 and $33,977 of expense in
connection with the vesting of stock options granted to two consultants, based
on the fair value of the options using the Black-Scholes option pricing model.

                                      F-12
<PAGE>

Warrants

In November 1996, the Company issued warrants to purchase 31,249 shares of
Series A Preferred stock, at an exercise price of $2.00 per share, in connection
with the issuance of convertible notes. On the date of issuance, these warrants
were deemed to have nominal fair value. None of these warrants, which expire in
December 2003, have been exercised.

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 are subject to repurchase by the
Company, at $.002 per share, in the event that their employment is terminated.
The number of shares repurchasable by the Company decreases upon the
individuals' first anniversary of employment, and further reduces upon
subsequent quarterly anniversary dates. As of December 31, 2000, 63,188 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, 2000, the Company had approximately $32.4 million and
$945,000 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,
                                                                                                       ------------
                                                                                               1999                     2000
                                                                                           ------------             -------------
            <S>                                                                            <C>                      <C>
            Deferred tax assets:
                Net operating loss carryforwards.......................................    $  6,971,000             $  11,024,000
                Capitalized research and development expenses..........................         406,000                   348,000
                Research and development credit carryforwards..........................         670,000                   945,000
                Capitalized patent rights..............................................         140,000                   276,000
                Accruals and other reserves............................................               -                   203,000
                                                                                           ------------             -------------
                    Total deferred tax assets..........................................       8,187,000                12,796,000
            Valuation allowance for deferred tax assets................................      (8,187,000)              (12,796,000)
                                                                                           ------------             -------------
                    Net deferred tax assets............................................    $         --             $          --
                                                                                           ============             =============
</TABLE>

                                      F-13
<PAGE>

11.   Quarterly Financial Data (unaudited)

Summarized quarterly financial data for the years ended December 31, 2000 and
1999 is as follows

<TABLE>
<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                                       $        (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)    $         (0.13)       $         (0.17)    $        (0.43)
                                               ===================     ===============        ===============     ==============
<CAPTION>
                                                                                       1999
                                            --------------------------------------------------------------------------------------
                                                    March 31,              June 30,            September 30,         December 31,
                                                    --------               --------            -------------         ------------
<S>                                            <C>                     <C>                    <C>                 <C>
OPERATING EXPENSES

     Research and development                  $         1,574,153     $     1,691,917        $     2,628,073     $    3,799,270
     Marketing, general and administrative                 404,419             571,447                444,772            768,938
                                               -------------------     ---------------        ---------------     --------------
          Operating loss                                (1,978,572)         (2,263,364)            (3,072,845)        (4,568,208)
INTEREST INCOME, net                                       198,289             166,591                148,291            123,786
                                               -------------------     ---------------        ---------------     --------------
NET LOSS                                                (1,780,283)         (2,096,773)            (2,924,554)        (4,444,422)
NON CASH PREFERRED STOCK CHARGE                                  -                   -                      -          1,729,651
NET LOSS TO COMMON STOCKHOLDERS                $        (1,780,283)    $    (2,096,773)       $    (2,924,554)    $   (6,174,073)
                                               ===================     ===============        ===============     ==============
BASIC AND DILUTED NET LOSS PER SHARE           $             (2.50)    $         (2.91)       $         (3.81)    $        (7.15)
                                               ===================     ===============        ===============     ==============
PRO FORMA BASIC AND DILUTED
  NET LOSS PER SHARE                           $             (0.23)    $         (0.27)       $         (0.38)    $        (0.78)
                                               ===================     ===============        ===============     ==============
</TABLE>

                                      F-14