SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
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CollaGenex Pharmaceuticals, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

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(Name of Person(s) Filing Proxy Statement, if other than Registrant)

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COLLAGENEX PHARMACEUTICALS, INC.
41 University Drive
Newtown, PA 18940

April 18, 2001

To Our Stockholders:

You are cordially invited to attend the 2001 Annual Meeting of Stockholders
of CollaGenex Pharmaceuticals, Inc. at 8:30 A.M., local time, on Thursday, May
10, 2001, at the Philadelphia Airport Marriott Hotel, One Arrivals Road,
Philadelphia, Pennsylvania.

The Notice of Meeting and Proxy Statement on the following pages describe
the matters to be presented at the meeting.

It is important that your shares be represented at this meeting to assure
the presence of a quorum. Whether or not you plan to attend the meeting, we hope
that you will have your stock represented by signing, dating and returning your
proxy in the enclosed envelope, as soon as possible. Your stock will be voted in
accordance with the instructions you have given in your proxy.

Thank you for your continued support.

Sincerely,

/s/ Brian M. Gallagher, Ph.D.

Brian M. Gallagher, Ph.D.
Chairman, President and
Chief Executive Officer

COLLAGENEX PHARMACEUTICALS, INC.
41 University Drive
Newtown, PA 18940

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 10, 2001

The Annual Meeting of Stockholders (the "Meeting") of COLLAGENEX
PHARMACEUTICALS, INC., a Delaware corporation (the "Company"), will be held at
the Philadelphia Airport Marriott Hotel, One Arrivals Road, Philadelphia,
Pennsylvania, on Thursday, May 10, 2001, at 8:30 A.M., local time, for the
following purposes:

(1) To elect seven directors to serve until the next Annual Meeting of
Stockholders and until their respective successors shall have been duly
elected and qualified;

(2) To amend the Company's 1996 Stock Option Plan (the "1996 Stock Option
Plan") to increase the maximum aggregate number of shares of Common Stock
available for issuance thereunder from 1,500,000 to 2,000,000 shares and to
reserve an additional 500,000 shares of Common Stock of the Company for
issuance in connection with awards granted under the 1996 Stock Option
Plan;

(3) To ratify the appointment of KPMG LLP as independent auditors for the year
ending December 31, 2001; and

(4) To transact such other business as may properly come before the Meeting or
any adjournment or adjournments thereof.

Holders of Common Stock and Series D Cumulative Convertible Preferred Stock
of record at the close of business on April 4, 2001 are entitled to notice of
and to vote at the Meeting, or any adjournment or adjournments thereof. A
complete list of such stockholders will be open to the examination of any
stockholder at the Company's principal executive offices at 41 University Drive,
Newtown, Pennsylvania 18940 and at the Philadelphia Airport Marriott Hotel, One
Arrivals Road, Philadelphia, Pennsylvania, for a period of 10 days prior to the
Meeting. The Meeting may be adjourned from time to time without notice other
than by announcement at the Meeting.

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER OF
SHARES YOU MAY HOLD. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE ENCLOSED RETURN ENVELOPE. THE PROMPT RETURN OF PROXIES WILL ENSURE A QUORUM
AND SAVE THE COMPANY THE EXPENSE OF FURTHER SOLICITATION. EACH PROXY GRANTED MAY
BE REVOKED BY THE STOCKHOLDER APPOINTING SUCH PROXY AT ANY TIME BEFORE IT IS
VOTED. IF YOU RECEIVE MORE THAN ONE PROXY CARD BECAUSE YOUR SHARES ARE
REGISTERED IN DIFFERENT NAMES OR ADDRESSES, EACH SUCH PROXY CARD SHOULD BE
SIGNED AND RETURNED TO ASSURE THAT ALL OF YOUR SHARES WILL BE VOTED.

By Order of the Board of Directors

/s/ Nancy C. Broadbent

Nancy C. Broadbent
Secretary

Newtown, Pennsylvania
April 18, 2001

THE COMPANY'S 2000 ANNUAL REPORT ACCOMPANIES THE PROXY STATEMENT.

COLLAGENEX PHARMACEUTICALS, INC.
41 University Drive
Newtown, PA 18940

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

PROXY STATEMENT

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

This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of CollaGenex Pharmaceuticals, Inc. (the "Company") of
proxies to be voted at the Annual Meeting of Stockholders of the Company to be
held on Thursday, May 10, 2001 (the "Meeting") at the Philadelphia Airport
Marriott Hotel, One Arrivals Road, Philadelphia, PA at 8:30 a.m., local time,
and at any adjournment or adjournments thereof. Holders of record of Common
Stock, $.01 par value (the "Common Stock"), and Series D Cumulative Convertible
Preferred Stock, $.01 par value (the "Series D Preferred Stock"), as of the
close of business on April 4, 2001, will be entitled to notice of and to vote at
the Meeting and any adjournment or adjournments thereof. As of that date, there
were 10,550,638 shares of Common Stock issued and outstanding and entitled to
vote and 200,000 shares of Series D Preferred Stock issued and outstanding and
entitled to vote. Such shares of Series D Preferred Stock were, as of such date,
convertible into 2,012,599 shares of Common Stock. Except for the proposal to
elect the Series D Director (as hereinafter defined), as set forth below, each
share of Common Stock is entitled to one vote on any matter presented at the
Meeting. The aggregate number of Common Stock votes entitled to be cast at the
Meeting is 12,563,237 including the 2,012,599 shares underlying the Series D
Preferred Stock to be voted on an as converted to Common Stock basis. The
holders of all classes of stock will vote as a single class for all proposals
generally, except that the holders of Series D Preferred Stock will also vote as
a separate class for the proposal to elect the Series D Director.

If proxies in the accompanying form are properly executed and returned, the
shares of Common Stock and Series D Preferred Stock represented thereby will be
voted in the manner specified therein. If not otherwise specified, the shares of
Common Stock and Series D Preferred Stock represented by the proxies will be
voted (i) FOR, as applicable, the election of the seven nominees named below as
directors, (ii) FOR a proposal to amend the Company's 1996 Stock Option Plan
(the "1996 Stock Option Plan") to increase the maximum number of shares of
Common Stock available for issuance under the 1996 Stock Option Plan from
1,500,000 to 2,000,000 shares and to reserve an additional 500,000 shares of
Common Stock of the Company for issuance in connection with awards granted under
the 1996 Stock Option Plan, (iii) FOR the ratification of the appointment of
KPMG LLP as independent auditors for the year ending December 31, 2001, and (iv)
in the discretion of the persons named in the enclosed form of proxy, on any
other proposals which may properly come before the Meeting or any adjournment or
adjournments thereof. Any Stockholder who has submitted a proxy may revoke it at
any time before it is voted, by written notice addressed to and received by the
Secretary of the Company, by submitting a duly executed proxy bearing a later
date or by electing to vote in person at the Meeting. The mere presence at the
Meeting of the person appointing a proxy does not, however, revoke the
appointment.

The presence, in person or by proxy, of holders of shares of Common Stock,
including the shares of Common Stock underlying the Series D Preferred Stock to
be voted on an as converted to Common Stock basis, in the aggregate having a
majority of the votes entitled to be cast by the holders of Common Stock at the
Meeting, shall constitute a quorum with respect to all matters except for the
election of the Series D Director. The presence, in person or by proxy, of
holders of shares of Series D Preferred Stock having a majority of the votes
entitled to be cast by the holders of Series D Preferred Stock at the Meeting
shall constitute a quorum with respect to the election of the Series D Director.
The affirmative vote by the holders of a plurality of the shares of Common Stock
represented at the Meeting, but not including the shares of Common Stock
underlying the Series D Preferred Stock to be voted on an as converted to Common
Stock basis, is required for the election of directors other than the Series D
Director, provided a quorum of such Stockholders is present in person or by
proxy. The affirmative vote by the holders of a majority of the shares of Series
D Preferred Stock is required for the election of the Series D Director. All
actions proposed herein other than the election of directors may be taken upon
the affirmative vote of Stockholders possessing a majority of the requisite
voting power represented at the Meeting, provided a quorum is present in person
or by proxy.

Abstentions are included in the shares present at the Meeting for purposes
of determining whether a quorum is present, and are counted as a vote against
for purposes of determining whether a proposal is approved. Broker non-votes
(when shares are represented at the Meeting by a proxy specifically conferring
only limited authority to vote on certain matters and no authority to vote on
other matters) are included in the determination of the number of shares
represented at the Meeting for purposes of determining whether a quorum is
present but are not counted for purposes of determining whether a proposal has
been approved and thus have no effect on the outcome.

This Proxy Statement, together with the related proxy cards, is being
mailed to the Stockholders of the Company on or about April 18, 2001. The Annual
Report to Stockholders of the Company for the year ended December 31, 2000,
including financial statements (the "Annual Report"), is being mailed together
with this Proxy Statement to all Stockholders of record as of April 4, 2001. In
addition, the Company has provided brokers, dealers, banks, voting trustees and
their nominees, at the Company's expense, with additional copies of the Annual
Report so that such record holders could supply such materials to beneficial
owners as of April 4, 2001.

-2-

ELECTION OF DIRECTORS

At the Meeting, seven directors are to be elected (which number shall
constitute the entire Board of Directors of the Company) to hold office until
the next Annual Meeting of Stockholders and until their successors shall have
been elected and qualified. The holders of Common Stock, voting as a class, will
elect six directors. The holders of Series D Preferred Stock, voting as a class,
will elect one director (the "Series D Director").

It is the intention of the persons named in the enclosed form of proxy to
vote the stock represented thereby, unless otherwise specified in the proxy, for
the election as directors of the persons whose names and biographies appear
below. All such persons are at present directors of the Company. In the event
any of the nominees should become unavailable or unable to serve as a director,
it is intended that votes will be cast for a substitute nominee designated by
the Board of Directors. The Board of Directors has no reason to believe that the
nominees named will be unable to serve if elected. Each of the nominees has
consented to being named in this Proxy Statement and to serve if elected.

The current members of the Board of Directors who are also nominees for
election to the Board of Directors are as follows:

Common Stock Directors:
- -----------------------
Served as a Positions With
Name Age Director Since the Company
- ---- --- -------------- --------------

Brian M. Gallagher, Ph.D..... 53 1994 President, Chief Executive
Officer and Chairman of
the Board
Peter R. Barnett, D.M.D...... 49 1997 Director
Robert C. Black.............. 58 1999 Director
James E. Daverman............ 51 1995 Director
Robert J. Easton............. 56 1993 Director
W. James O'Shea.............. 51 2000 Director

Series D Preferred Stock Director:
- ----------------------------------

Stephen A. Kaplan............ 42 1999 Director

An additional member of the Board of Directors is not standing for
re-election to the Board of Directors:

Served as a Positions With
Name Age Director Since the Company
- ---- --- -------------- -----------

Helmer P.K. Agersborg, Ph.D.. 72 1992 Director

-3-

The principal occupations and business experience, for at least the past
five years, of each nominee are as follows:

Dr. Gallagher joined the Company in April 1994 as President and Chief
Executive Officer and was elected to the Board of Directors in November 1994. On
March 10, 2000, Dr. Gallagher was appointed Chairman of the Board of Directors.
From 1988 until joining the Company, Dr. Gallagher was employed by Bristol-Myers
Squibb Company and its predecessor, Squibb Corporation, in various executive
positions including strategic planning, worldwide product and business
development and marketing. From 1991 until joining the Company, Dr. Gallagher
was Vice President and General Manager of Squibb Diagnostics in the in vivo
imaging pharmaceutical division. Prior to that, Dr. Gallagher served for ten
years with E.I. DuPont de Nemours & Co. in a variety of pharmaceutical research,
development, marketing and business management positions.

Dr. Barnett has been a director of the Company since February 1997. Dr.
Barnett currently serves as President, Chief Executive Officer and a member of
the Board of Directors of HealthASPex, Inc., a claims technology firm, and has
held these positions since June 2000. He was formerly Chief Operating Officer of
United Dental Care, Inc., a managed dental benefits firm, where he served in
such capacity from January 1995 until May 2000. From August 1994 to January
1995, Dr. Barnett was Executive Director of Prudential DMO, and from March 1993
to August 1994, he served as an independent consultant in the managed care
field. From January 1985 to March 1993, Dr. Barnett was a Senior Vice President
with Pearle Vision, Inc.

Mr. Black has been a director of the Company since September 1999. He was
President of the Zeneca Pharmaceuticals Division of AstraZeneca, Inc., a
pharmaceutical company, until his retirement on July 1, 1999. He joined
AstraZeneca, Inc. in 1965 as a pharmaceutical sales representative and held
numerous positions of increasing responsibility in sales and marketing prior to
becoming President of the Zeneca Pharmaceuticals Division in 1991.

Mr. Daverman has been a director of the Company since November 1995. He is
a managing general partner of Marquette Venture Partners, a venture capital
investment company which he founded in 1987. Mr. Daverman is President of
Marquette Management Partners, LLC, the general partner of Marquette Venture
Partners, L.P. and a general partner of MG II, L.P., the general partner of
Marquette Venture Partners II, L.P. and MVP II Affiliates Fund, L.P. Mr.
Daverman is a member of the Board of Directors of Endocardial Solutions, Inc.
and numerous privately held companies, for many of which he serves on the
compensation committee.

Mr. Easton has been a director of the Company since November 1993. He
currently serves as Chairman of Easton Associates, a consulting firm, and has
held this position since May 2000. He was formerly Managing Director of IBM
Healthcare Consulting, Inc., a major health care consulting firm, where he
served in such capacity from 1981 to May 2000. Mr. Easton is a former President
of the Biomedical Marketing Association. Mr. Easton is a member of the Board of
Directors of Cytoclonal Pharmaceuticals, Inc., and several privately held
companies.

Mr. O'Shea has been a director of the Company since September 2000. He
currently serves as President and Chief Operating Officer of Sepracor, Inc., a
position he has held since October 1999. Formerly, he was Senior Vice President
of AstraZeneca, Inc., a pharmaceutical company, from 1975 to October 1999.

Mr. Kaplan has been a director of the Company since September 1999. He is a
principal and portfolio manager of Oaktree Capital Management, LLC, which is the
general partner of OCM Principal Opportunities Fund, L.P., a venture capital
fund. He has held such positions since June 1995 and November 1993,
respectively. From November 1993 to May 1995 he was Managing Director of Trust
Company of The West. Mr. Kaplan serves as a director of Acorn Products, Inc.,
Biopure Corporation, Forest Oil Corporation, KinderCare Learning Center Inc. and
Stratagene Holding Corporation, as well as numerous privately held companies.

Pursuant to the terms of the Company's Certificate of Designation,
Preferences and Rights of Series D Cumulative Convertible Preferred Stock, the
holders of the Series D Preferred Stock, acting as a single class, have the
right to designate and elect one member of the Board of Directors. Such holders
have exercised such right by designating Mr. Kaplan to serve as a member of the
Board of Directors.

All directors will hold office until the next annual meeting of
Stockholders and until their successors shall have been duly elected and
qualified. None of the Company's directors are related to any other director or
to any executive officer of the Company.

-4-

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS, AS APPLICABLE, VOTE
FOR EACH OF THE NOMINEES FOR THE BOARD OF DIRECTORS.

COMMITTEES AND MEETINGS OF THE BOARD

The Board of Directors currently consists of Brian M. Gallagher, Ph.D., who
serves as Chairman, Helmer P.K. Agersborg, Ph.D., Peter R. Barnett, D.M.D.,
Robert C. Black, James E. Daverman, Robert J. Easton, W. James O' Shea and
Stephen A. Kaplan. Dr. Agersborg has elected to retire from the Board of
Directors and will not be standing for re-election. Subsequent to the Meeting,
there will be two vacancies on the Company's Board of Directors. There were six
meetings of the Board of Directors during 2000. Each incumbent director attended
at least 75% of the aggregate of all meetings of the Board of Directors held
during the period in which he served as a director and the total number of
meetings held by the committee on which he served during the period, if
applicable.

There are currently three committees of the Board of Directors: the
Compensation Committee; the Nominating Committee; and the Audit Committee.

The Compensation Committee of the Board of Directors (The "Compensation
Committee")

The Nominating Committee of the Board of Directors (The "Nominating Committee")

The Nominating Committee currently consists of Robert C. Black, who serves
as Chairman, Peter R. Barnett and Stephen A. Kaplan. The Nominating Committee
was established in March 2000 and held one meeting in 2000. The primary
responsibility of the Nominating Committee is reviewing and nominating
candidates for election to the Board of Directors.

The Audit Committee of the Board of Directors (The "Audit Committee")

The Audit Committee currently consists of James E. Daverman, who serves as
Chairman, Robert J. Easton and Stephen A. Kaplan. The Audit Committee was
established in March 1996 and held five meetings in 2000. The primary
responsibilities of the Audit Committee, as more fully set forth in the Audit
Committee Charter adopted by the Company on May 8, 2000 and attached hereto as
APPENDIX A, include: (i) evaluating and recommending to the Board of Directors
- ----------
the engagement of the Company's independent auditors; (ii) reviewing the results
and scope of the audit and other services provided by the Company's independent
auditors; and (iii) monitoring on a periodic basis the internal controls of the
Company.

Each Audit Committee Member is an independent member of the Board of
Directors as defined in Rule 4200(a)(14) of the National Association of
Securities Dealers' listing standards. As an independent director of the Board
of Directors of the Company, each Audit Committee Member is not an officer or
employee of the Company or its subsidiaries or does not have a relationship
which, in the opinion of the Company's Board of Directors, would interfere with
the exercise of independent judgement in carrying out the responsibilities of a
director.

COMPENSATION OF DIRECTORS

During 2000, Brian M. Gallagher, Ph.D. was not paid any compensation for
his services as Chairman of the Board. Helmer P.K. Agersborg, Ph.D. was paid
$12,000 in 2000 for his services as Chairman of the Board, a position he held
until March 2000. Robert Easton, Peter R. Barnett, Robert C. Black and W. James
O'Shea each receive $1,500 per meeting for each meeting of the Board of
Directors attended. No other directors receive cash compensation for services on
the Board of Directors. The Company provides reimbursement to directors for
reasonable and necessary expenses incurred in connection with attendance at
meetings of the Board of Directors and other Company business.

-5-

From time-to-time, members of the Board of Directors have been granted
options to purchase shares of Common Stock of the Company. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."

Pursuant to the Company's 1996 Non-Employee Director Stock Option Plan (the
"Non-Employee Plan"), each new non-employee director of the Company is
automatically granted an option to purchase 25,000 shares of Common Stock, at an
exercise price per share equal to the then current fair market value per share.
All such options become exercisable in five equal annual installments commencing
one year after the date of grant, provided that the optionee then remains a
director. The right to exercise annual installments of options under the
Non-Employee Plan will be reduced proportionately based on the optionee's actual
attendance at meetings of the Board of Directors if the optionee fails to attend
at least 75% of the meetings of the Board of Directors held in any calendar
year. On September 8, 2000, W. James O'Shea, upon appointment to the Board of
Directors, was granted an option to purchase 25,000 shares of Common Stock, at
an exercise price equal to $9.375 per share under the Non-Employee Plan.

-6-

REPORT OF THE AUDIT COMMITTEE

March 23, 2001

To the Board of Directors of CollaGenex Pharmaceuticals, Inc.:

We have reviewed and discussed with management the Company's audited financial
statements as of and for the year ended December 31, 2000.

We have discussed with the Company's independent auditors the matters required
to be discussed by Statement on Auditing Standards No. 61, Communication with
Audit Committees, as amended, by the Auditing Standards Board of the American
Institute of Certified Public Accountants.

We have received and reviewed the written disclosures and the letter from the
independent auditors required by Independence Standard No. 1, Independence
Discussions with Audit Committees, as amended, by the Independence Standards
Board, and have discussed with the auditors the auditors' independence.

We have considered whether the non audit services provided by the independent
auditors are compatible with maintaining the auditors' independence.

Based on the reviews and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2000.

James E. Daverman
Audit Committee Chairman

Robert J. Easton
Audit Committee Member

Stephen A. Kaplan
Audit Committee Member

INDEPENDENT AUDITORS' FEES AND OTHER MATTERS

Audit Fees

KPMG LLP billed the Company an aggregate of $73,000 in fees for
professional services rendered in connection with the audit of the Company's
financial statements for the most recent fiscal year and the reviews of the
financial statements included in each of the Company's Quarterly Reports on Form
10-Q during the fiscal year ended December 31, 2000.

Financial Information Systems Design and Implementation Fees

KPMG LLP did not bill the Company for any professional services rendered to
the Company and its affiliates for the fiscal year ended December 31, 2000 in
connection with financial information systems design or implementation, the
operation of the Company's information system or the management of its local
area network.

All Other Fees

KPMG LLP billed the Company $23,500 for other services rendered for the
most recent fiscal year.

-7-

EXECUTIVE OFFICERS

The following table identifies the current executive officers of the
Company:

Capacities in In Current
Name Age Which Served Position Since
- ---- --- ------------ --------------

Brian M. Gallagher, Ph.D. 53 President, Chief Executive April 1994
Officer and Chairman of the (Director since November
Board 1994 and Chairman since
March 2000)

Robert A. Ashley(1)...... 43 Senior Vice President January 1999
(Vice President,
Commercial Development
since September 1994)

Nancy C. Broadbent(2).... 45 Chief Financial Officer, March 1996
Treasurer and Secretary

Douglas C. Gehrig(3)..... 56 Vice President, Sales June 1997

David P. Pfeiffer(4)..... 38 Senior Vice President, December 2000
Sales and Marketing (Vice President, Marketing
since June 1997)

(1) Mr. Ashley joined the Company in September 1994 as Vice President,
Commercial Development. He was promoted to Senior Vice President in January
1999. From 1989 until joining the Company, he was employed by Bristol-Myers
Squibb Company and its predecessor, Squibb Corporation, in various
positions including product development, commercial and business
development and, most recently, as Director, Business Development where he
was responsible for the worldwide product and market development of several
new drugs. From 1979 to 1989, Mr. Ashley held various positions at Amersham
International (UK) Ltd., including research, development, manufacturing,
sales and marketing positions, as well as worldwide product development and
product launch positions.

(2) Ms. Broadbent joined the Company in March 1996 as Chief Financial Officer,
Treasurer and Secretary. From October 1994 until joining the Company, Ms.
Broadbent served as Senior Vice President, Chief Financial Officer and
director of Human Genome Sciences, Inc., a pharmaceuticals company. From
January 1993 to October 1994, she served as Vice President and Chief
Financial Officer of Cangene, Inc., a biopharmaceutical company. From
January 1992 through December 1992, Ms. Broadbent served as an independent
financial consultant. From March 1990 to December 1991, she was employed by
Baring Brothers & Co., Inc., initially as Senior Vice President and then as
Executive Director, Corporate Finance. Prior to that, Ms. Broadbent served
for nine years in corporate finance positions with Salomon Brothers, Inc.
and PaineWebber Incorporated.

(3) Mr. Gehrig joined the Company in June 1997 as Vice President, Sales. From
September 1991 until joining the Company, he was employed by the
Musculoskeletal Transplant Foundation, most recently as Vice President,
Hospital Sales. From January 1990 until September 1991, Mr. Gehrig was
Director of Sales for the Consumer Product Division of Warner Lambert.
Prior to that, he served for 19 years in various sales, marketing and sales
management positions with Johnson & Johnson.

(4) Mr. Pfeiffer joined the Company in June 1997 as Vice President, Marketing.
He was promoted to Senior Vice President, Sales and Marketing in December
2000. From September 1995 until June 1997, Mr. Pfeiffer served as Director
of Marketing, Health Management Services, for SmithKline Beecham. From May
1994 to September 1995, he served as Director, Disease Management Services
of Stuart Disease Management Services, a division of Zeneca
Pharmaceuticals. From October 1991 to May 1994 he was employed in various
product management positions with Zeneca Pharmaceuticals Group. From July
1988 to October 1991, he held various marketing and product management
positions with the Lederle Laboratories Division of American Cyanamid.

-8-

None of the Company's executive officers is related to any other executive
officer or to any director of the Company. Executive officers of the Company are
elected annually by the Board of Directors and serve until their successors are
duly elected and qualified.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, officers and stockholders who
beneficially own more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act to file initial reports of
ownership and reports of changes in ownership with respect to the Company's
equity securities with the Securities and Exchange Commission (the "SEC"). All
reporting persons are required by SEC regulation to furnish the Company with
copies of all reports that such reporting persons file with the SEC pursuant to
Section 16(a).

Based solely on the Company's review of the copies of such forms received
by the Company and upon written representations of the Company's reporting
persons received by the Company, except as described below, each such reporting
person has filed all of their respective reports pursuant to Section 16(a) on a
timely basis. Douglas C. Gehrig, Vice President, Sales, failed to timely file a
Form 4 related to his acquisition of Common Stock on November 21, 2000, for
which he filed a Form 4 on January 9, 2001.

-9-

EXECUTIVE COMPENSATION

Summary of Compensation in Fiscal 2000, 1999 and 1998

The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to
each person who served as the Company's Chief Executive Officer at any time
during 2000 and each other executive officer of the Company whose aggregate cash
compensation exceeded $100,000 at the end of 2000 (collectively, the "Named
Executives") during the years ended December 31, 2000, 1999 and 1998.

SUMMARY COMPENSATION TABLE(1)
- --------------------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
Awards
-------------------------------------------------------------------------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
($) ($) (#) ($)
(a) (b) (c) (d) (g) (i)
- --------------------------------------------------------------------------------------------------------------------------------

Brian M. Gallagher, Ph.D.(2)...... 2000 300,000 137,917 95,000 --
Chairman, President and 1999 268,000 81,021 75,000 --
Chief Executive Officer 1998 262,500 53,074 75,000 --

Robert A. Ashley.................. 2000 215,000 64,117 40,000 --
Senior Vice President 1999 190,000 63,542 35,000 --
1998 175,000 36,701 25,000 --

Nancy C. Broadbent................ 2000 200,000 53,717 25,000 --
Chief Financial Officer, 1999 186,000 43,916 25,000 --
Treasurer and Secretary 1998 182,000 36,789 25,000 --

Douglas C. Gehrig(3).............. 2000 190,000 53,505 40,000 --
Vice President, Sales 1999 157,000 43,021 25,000 --
1998 153,500 36,413 20,000 --

David F. Pfeiffer(4) ............. 2000 210,000 94,408 50,000 --
Senior Vice President, 1999 157,000 43,263 25,000 --
Sales and Marketing 1998 153,500 36,544 20,000 35,000(5)

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

(1) The costs of certain benefits are not included because they did not exceed,
in the case of each Named Executive, the lesser of $50,000 or 10% of the
total annual salary and bonus reported in the above table.

(2) In November 1994, Dr. Gallagher purchased 125,000 shares of the Company's
restricted Common Stock at $0.335 per share. Such shares were subject to
the Company's right of first refusal, pursuant to which the Company was
permitted to buy such shares back from Dr. Gallagher at $0.335 per share,
if Dr. Gallagher was terminated for cause, and at the then current market
value per share, if he was terminated for any other reason. On May 11,
1999, the Board of Directors unanimously voted to remove the right of first
refusal restriction from the 125,000 shares. At December 31, 2000, Dr.
Gallagher held all of such restricted shares, with a year-end value of
$419,063 based on the value of the Common Stock as of such date ($3.6875
per share), less the purchase price per share paid for such shares ($0.335
per share).

(3) Mr. Gehrig joined the Company in June 1997 as Vice President, Sales.

(4) Mr. Pfeiffer joined the Company in June 1997 as Vice President, Marketing.
Mr. Pfeiffer was promoted to Senior Vice President, Sales and Marketing in
December 2000.

(5) Represents reimbursable relocation allowance.

-10-

Option Grants in 2000

The following table sets forth information concerning individual grants of
stock options made during 2000 to each of the Named Executives.

OPTION GRANTS IN LAST FISCAL YEAR

- -----------------------------------------------------------------------------------------------------------------------
Individual Grants

- -----------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at
Percent of Assumed Annual Rates
Number of Total of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise Option
Options Employees or Base Term (2)
Granted in Fiscal Price Expiration ---------------------------
Name (#) Year (1) ($/Sh) Date 5%($) 10%($)
(a) (b) (c) (d) (e) (f) (g)
- -----------------------------------------------------------------------------------------------------------------------

Brian M. Gallagher, Ph.D..... 95,000(3) 13.2% 18.063 2/16/10 1,079,174 2,734,838

Robert A. Ashley............. 40,000(4) 5.5% 18.063 2/16/10 454,389 1,151,511

Nancy C. Broadbent........... 25,000(5) 3.5% 18.063 2/16/10 283,993 719,694

Douglas C. Gehrig............ 40,000(6) 5.5% 18.063 2/16/10 454,389 1,151,511

David F. Pfeiffer............ 50,000(7) 6.9% 18.063 2/16/10 567,986 1,439,389

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

(1) Based on an aggregate of 721,880 options granted to employees in 2000,
including options granted to Named Executives.

(2) Based on a grant date fair market value of $18.063 per share.

(3) Of such 95,000 options granted, 79,762 were Non-Qualified Stock Options and
15,238 were Incentive Stock Options.

(4) Of such 40,000 options granted, 22,494 were Non-Qualified Stock Options and
17,506 were Incentive Stock Options.

(5) Of such 25,000 options granted, 8,549 were Non-Qualified Stock Options and
16,451 were Incentive Stock Options.

(6) Of such 40,000 options granted, 18,964 were Non-Qualified Stock Options and
21,036 were Incentive Stock Options.

(7) Of such 50,000 options granted, 28,964 were Non-Qualified Stock Options and
21,036 were Incentive Stock Options.

-11-

Aggregated Option Exercises in 2000 and Year End Option Values

The following table sets forth information concerning each exercise of
options during 2000 by each of the Named Executives and the year end value of
unexercised in-the-money options.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

- ----------------------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares Fiscal Fiscal
Acquired Year-End Year-End
on Value (#) ($) (1)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------------------------------

Brian M. Gallagher, Ph.D....... -- -- 175,000 / 220,000 292,000 / 0

Robert A. Ashley............... 9,375 133,969 69,500 / 93,000 93,281 / 0

Nancy C. Broadbent............. 16,000 19,000 50,000 / 70,000 33,750 / 0

Douglas L. Gehrig.............. -- -- 61,000 / 84,000 0/0

David F. Pfeiffer.............. -- -- 61,000 / 94,000 0/0

- ----------

(1) Based on a year end fair market value of the underlying securities equal to
$3.6875 per share, less the exercise price payable for such shares.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

The Company has executed indemnification agreements with each of its
executive officers and directors pursuant to which the Company has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if any such party becomes subject to an action because such party is
a director, officer, employee, agent or fiduciary of the Company. In general,
the Company's employees are covered by confidentiality agreements.

In addition, each of Dr. Gallagher, Ms. Broadbent and Messrs. Ashley,
Gehrig and Pfeiffer have agreed that during the term of his or her employment
and for a period of two years thereafter, such person will not directly or
indirectly provide services to or for any business engaged in research regarding
the development, manufacture, testing, marketing or sale of collagenase
inhibiting drugs for application in periodontal disease or any other application
which, during the period of such person's employment with the Company, is either
marketed or in advanced clinical development by the Company.

-12-

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee currently consists of W. James O'Shea, who
serves as Chairman, Helmer P. K. Agersborg, Ph.D. and Robert J. Easton. James E.
Daverman served as acting Chairman following the resignation from the Board of
Directors of Dr. Winters in December 2000. Dr. Agersborg formerly served as the
Company's President and Chief Executive Officer until March 1994. Mr. Daverman
is a managing general partner of Marquette Venture Partners, a venture capital
investment company which he founded in 1987. Additionally, Mr. Daverman is
President of Marquette Management Partners, LLC, the general partner of
Marquette Venture Partners, L.P. and a general partner of MG II, L.P., the
general partner of Marquette Venture Partners II, L.P. and MVP II Affiliates
Fund, L.P. Both Marquette Venture Partners II, L.P. and MVP II Affiliates Fund,
L.P. are, as of March 15, 2001, holders of 910,914 and 575 shares, respectively,
of the Company's Common Stock. There are no, and during 2000 there were no,
Compensation Committee interlocks.

As of March 15, 2001, Marquette Venture Partners II, L.P. held 890,860
shares of the Company's Common Stock which were issued upon conversion of
certain shares of the Company's Series A, Series B or Series C Redeemable
Preferred Stock previously held by such entity. Marquette Venture Partners II,
L.P. and MVP II Affiliates Fund, L.P. held, in the aggregate, 10,000 shares of
the Company's Series D Preferred Stock which were convertible into 100,630
shares of Common Stock as of March 15, 2001. Mr. Easton, in his individual
capacity, held 2,000 shares of the Company's Series D Preferred Stock which were
convertible into 20,126 shares of Common Stock as of such date. All such shares
of Common Stock are entitled to certain registration rights or have previously
been registered by the Company and are entitled to certain rights to participate
in certain future offerings undertaken by the Company as set forth below.

In September 1995, the Company and the then holders of the Company's Series
A, Series B and Series C Redeemable Preferred Stock entered into a Registration
Rights Agreement (the "Rights Agreement") pursuant to which the Company has
granted certain registration rights to such stockholders. Pursuant to the Rights
Agreement, at any time beginning six months after June 20, 1996, the effective
date of the Company's initial public offering, the holders of at least a
majority of the Common Stock issued upon the conversion of the Series A, Series
B and Series C Redeemable Preferred Stock (the "Registrable Securities") have
the right, subject to certain restrictions set forth in the Rights Agreement, to
require that the Company register the Registrable Securities requested by such
holders at the Company's expense (on no more than two occasions) on either a
Form S-1, Form S-2 or Form S-3 Registration Statement under the Securities Act
of 1933, as amended (the "Securities Act"). The Company is not, however,
required to register any Registrable Securities unless such shares represent at
least 10% of the Company's outstanding shares of Common Stock, or, if less than
10%, if the anticipated aggregate offering price exceeds $1,000,000.

The holders of Registrable Securities also have the right to an unlimited
number of registrations on Form S-3 under the Securities Act. The Company is
not, however, required to effect such a registration unless the requesting
holders reasonably anticipate having an aggregate disposition price of at least
$500,000.

Also pursuant to the Rights Agreement, if, at any time during the
seven-year period commencing on the effective date of the Company's initial
public offering, the Company proposes to register any of its Common Stock under
the Securities Act for sale to the public, the holders of the Registrable
Securities have unlimited piggyback registration rights at the Company's
expense, subject to certain restrictions set forth in the Rights Agreement.

Also in September 1995, the Company granted to the then holders of Series
A, Series B and Series C Redeemable Preferred Stock certain rights to
participate in certain future offerings undertaken by the Company. Such rights
to participate require that, with certain exceptions including, but not limited
to, an underwritten public offering, any time the Company proposes to issue,
sell or exchange, or reserve therefor, any securities, the Company must first
offer to sell to each of the pre-conversion holders of Series A, Series B and
Series C Redeemable Preferred Stock their respective pro rata share of such
securities at a price and on terms identical to the price and terms of the
securities proposed to be issued, sold or exchanged in the applicable offering.

In May 1999, the Company and the holders of the Series D Preferred Stock
entered into a Stockholder and Registration Rights Agreement (the "Series D
Rights Agreement") pursuant to which, among other things, the Company
registered, on a Registration Statement on a Form S-3, all of the shares of
Common Stock underlying the shares of Series D Preferred Stock then issued and
outstanding. The Series D Rights Agreement further obligates the Company to
register, on a Registration Statement on Form S-3, all of the shares of Common
Stock issued, as dividends on the Series D Preferred Stock to the holders
thereof and within a reasonable period of time after each

-13-

such dividend payment is made. The Company is obligated to keep current each
such Registration Statement on Form S-3 until such time as all of the shares of
Common Stock registered thereunder have been sold or are otherwise exempt from
registration.

The holders of at least a majority of the Series D Preferred Stock also
have the right, subject to certain restrictions, to require the Company to
register the shares of Common Stock underlying their Series D Preferred Stock on
a Registration Statement on Form S-1 at the Company's expenses (on no more than
two occasions). Also, pursuant to the Series D Rights Agreement, if the Company
proposes to register any of its securities under the Securities Act for sale to
the public, the holders of the Series D Preferred Stock have certain piggyback
registration rights with respect to the shares of Common Stock underlying their
Series D Preferred Stock at the Company's expense, subject to certain
restrictions. In addition, if the Company grants registration rights to the
holders of any security of the Company that are more favorable than the
registration rights granted under the Series D Rights Agreement, then the
holders of the Series D Preferred Stock shall be deemed to have been granted
such superior registration rights as well with respect to the shares of Common
Stock underlying their Series D Preferred Stock. Also pursuant to the terms of
the Series D Rights Agreement, the holders of Series D Preferred Stock have
certain rights of first refusal with respect to certain stock issuances by the
Company, beginning twelve months after the date of initial issuance of the
Series D Preferred Stock.

-14-

PERFORMANCE GRAPH

The following graph compares the cumulative total Stockholder return on the
Company's Common Stock with the cumulative total return on the Nasdaq Composite
Index and the Nasdaq Pharmaceutical Index (capitalization weighted) for the
period beginning on the date on which the Securities and Exchange Commission
declared effective the Company's Form 8-A Registration Statement pursuant to
Section 12 of the Exchange Act and ending on the last day of the Company's last
completed fiscal year.

COMPARISON OF CUMULATIVE TOTAL RETURN(1)(2)(3)

Among the Company, the Nasdaq Composite Index and the
Nasdaq Pharmaceutical Index
(Capitalization Weighted)

[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]

Base Period
Company/ June December June December June December June December June December
Index Name 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000
---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----

CGPI............ $100 $ 89.04 $131.51 $136.99 $ 94.52 $105.48 $109.59 $273.97 $102.74 $ 40.41

NASDAQ.......... $100 $110.46 $123.67 $135.61 $162.72 $190.80 $234.02 $354.49 $345.89 $213.29

NASDAQ PHAR..... $100 $ 98.41 $101.11 $101.87 $103.82 $130.09 $145.33 $244.51 $333.12 $304.13

- -----------
(1) Graph assumes $100 invested on June 20, 1996 in the Company's Common Stock,
the Nasdaq Composite Index and the Nasdaq Pharmaceutical Index
(capitalization weighted).

(2) Total return assumes reinvestment of dividends.

(3) Year ended December 31.

-15-

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee has furnished the following report:

The Compensation Committee is composed of three non-employee directors. The
Compensation Committee recommends, and the Board approves, all matters relating
to executive compensation, including setting and administering policies
governing executive salaries, bonuses (if any) and stock option awards (if any).
The Compensation Committee meets twice annually to set performance objectives
for the Chief Executive Officer ("CEO") and to determine the annual compensation
of the CEO and other senior executives of the Company. The CEO is not present
during the discussion of his compensation.

Executive Compensation Policy
- -----------------------------

The goal of the Company's executive compensation policy is to ensure that
an appropriate relationship exists between executive compensation and the
creation of stockholder value, while at the same time attracting and retaining
qualified senior management. In order to continually attract and retain highly
experienced executives, the Company's compensation packages for senior
executives are highly competitive with those paid to executives of other
emerging pharmaceutical companies.

Compensation Mix
- ----------------

The Company's executive compensation packages generally include three
components: base salary, a discretionary annual cash bonus and stock options.

Base Salary
- -----------

The Compensation Committee seeks to establish base salaries for each
position and level of responsibility which are competitive with those of
executive officers at other emerging pharmaceutical companies.

Discretionary Cash Bonus
- ------------------------

The Compensation Committee believes that discretionary cash bonuses are
important to motivate and reward executive officers. However, cash bonuses are
not guaranteed. Annual cash bonuses are awarded to executives based on their
achievements against a stated list of objectives developed at the beginning of
each year by senior management and the Compensation Committee. Such objectives
are reviewed and approved by the Board of Directors.

Stock Options
- -------------

Stock option grants under the Company's stock option plans are designed to
align the long term interests of the Company's executives with those of its
stockholders by rewarding executives for increasing stockholder value. All
executive officers are awarded option grants upon joining the Company which are
competitive with those at comparable emerging pharmaceutical companies. In
addition, the Compensation Committee may award additional stock option grants
annually. When granting stock options, the Compensation Committee considers the
recommendation of the Company's Chief Executive Officer and the relative
performance and contributions of each officer compared to that of other officers
within the Company with similar levels of responsibility.

Compensation of the Chief Executive Officer
- -------------------------------------------

In establishing Dr. Gallagher's compensation package, the Compensation
Committee seeks to maintain a level of total current compensation that is
competitive with that paid to chief executive officers of other comparable
emerging pharmaceutical companies. In addition, in order to align Dr.
Gallagher's interests with the interests of the Company's stockholders, the
Compensation Committee attempts to make a substantial portion of the value of
his total compensation dependent on the appreciation of the Company's stock
price.

Dr. Gallagher's performance is evaluated annually by the Compensation
Committee against a stated list of short, medium and long term objectives
developed by the Compensation Committee at the beginning of each year and
approved by the Board of Directors. Based on his achievements relating to these
objectives, the Compensation

-16-

Committee recommended, and the Board approved, a bonus to Dr. Gallagher of
$30,000 for 2000, which is paid in 2001, and an increase in base salary from
$300,000 to $315,000 effective January 1, 2001.

Tax Considerations
- ------------------

Section 162(m) of the Internal Revenue Code disallows the deductibility by
the Company of any compensation over $1 million paid to the Chief Executive
Officer or any of the other four most highly compensated executives, unless
certain criteria are satisfied. The Company's Chief Executive Officer and the
other named executives have not received annual compensation over $1 million,
and the Company has not determined what measures, if any, it should take to
comply with Section 162.

Compensation Committee Members:

W. James O'Shea, Chairman
Helmer P.K. Agersborg, Ph.D., Member
Robert J. Easton, Member

-17-

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

There were, as of March 15, 2001, approximately 119 holders of record and
approximately 3,800 beneficial holders of the Company's Common Stock. The
following table sets forth certain information, as of March 15, 2001, with
respect to holdings of the Company's Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5% of the total number of
shares of the Common Stock outstanding as of such date, based on currently
available Schedules 13D and 13G filed with the SEC, (ii) each of the Company's
directors (which includes all nominees) and Named Executives, and (iii) all
directors and officers as a group.

Amount and Nature of Percent
Name and Address of Beneficial Owner(1) Beneficial Ownership(1) of Class(2)
- --------------------------------------- -------------------- -----------

(i) Certain Beneficial Owners:

Oaktree Capital Management, LLC
OCM Principal Opportunities Fund, L.P.
333 South Grand Avenue, 28th Floor
Los Angeles, California 90071................. 2,146,236 (3) 17.4%

Perseus-Soros BioPharmaceutical Fund, L.P.
c/o Soros Fund Management LLC
888 Seventh Avenue, 29th Floor
New York, NY 10106 .......................... 1,266,668 (4) 11.7%

Marquette Venture Partners II, L.P.
and MVP II Affiliates Fund, L.P.
520 Lake Cook Road, Suite 450
Deerfield, Illinois 60015..................... 1,012,119 (5) 9.5%

Columbine Venture Fund II, L.P. and
Columbine Venture Management II, L.P.
6155 N. Scottsdale Road, Suite 100
Scottsdale, Arizona 85250..................... 633,446 (6) 6.0%

(ii) Directors (which includes all nominees)
and Named Executives:

Brian M. Gallagher, Ph.D...................... 540,000 (7) 4.9%
Robert A. Ashley.............................. 211,100 (8) 2.0%
Nancy C. Broadbent............................ 173,000 (9) 1.6%
Douglas C. Gehrig............................. 148,320 (10) 1.4%
David F. Pfeiffer............................. 166,500(11) 1.6%
Helmer P.K. Agersborg, Ph.D................... 136,209(12) 1.3%
Peter R. Barnett, D.M.D....................... 22,000(13) *
Robert Black.................................. 5,000(14) *
James E. Daverman............................. 1,087,119(15) 10.2%
Robert J. Easton.............................. 67,892(16) *
Stephen Kaplan................................ 2,154,236(17) 17.5%

(iii) All Directors and officers as a
group (12 persons)..................... 4,711,376(18) 34.7%

- -----------
* Less than 1%

-18-

(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons and entities named in the
table have sole voting and investment power with respect to all shares.

(2) Applicable percentage of ownership for each holder is based on 10,550,638
shares of Common Stock outstanding on March 15, 2001, plus any Common Stock
equivalents and presently exercisable stock options or warrants held by
each such holder, and options or warrants held by each such holder which
will become exercisable within 60 days after March 15, 2001.

(3) Includes 1,781,150 shares of Common Stock issuable upon the conversion of
177,000 shares the Series D Preferred Stock held thereby and 365,086 shares
of Common Stock issued in payment of dividends on the Series D Preferred
Stock.

(4) Includes 266,668 shares of Common Stock underlying warrants which are or
may be exercisable as of March 15, 2001 or 60 days after such date.

(5) Includes an aggregate of 1,008,746 shares owned by Marquette Venture
Partners II, L.P. (which includes 97,832 shares of Common Stock issuable
upon the conversion of 9,722 shares of the Series D Preferred Stock held
thereby, 20,054 shares of Common Stock issued in payment of dividends on
the Series D Preferred Stock and 890,860 shares of Common Stock otherwise
held thereby), and an aggregate of 3,373 shares owned by MVP II Affiliates
Fund, L.P (which includes 2,798 shares of Common Stock issuable upon the
conversion of 278 shares of the Series D Preferred Stock held thereby, and
575 shares of Common Stock issued in payment of dividends on the Series D
Preferred Stock).

(6) Includes 586,241 shares and 47,205 shares owned by Columbine Venture Fund
II, L.P. and Columbine Venture Management II, L.P., respectively. Dr.
Winters resigned from the Company's Board of Directors in December 2000.

(7) Includes 415,000 shares of Common Stock underlying options which are or may
be exercisable as of March 15, 2001 or 60 days after such date.

(8) Includes 178,500 shares of Common Stock underlying options which are or may
be exercisable as of March 15, 2001 or 60 days after such date.

(9) Includes 130,000 shares of Common Stock underlying options which are or may
be exercisable as of March 15, 2001 or 60 days after such date. Also
includes 2,000 shares held as custodian for minor children, and 1,000
shares held in the name of Ms. Broadbent's spouse.

(10) Includes 143,000 shares of Common Stock underlying options which are or may
be exercisable as of March 15, 2001 or 60 days after such date.

(11) Includes 159,000 shares of Common Stock underlying options which are
exercisable as of March 15, 2001 or 60 days after such date.

(12) Includes 47,500 shares of Common Stock underlying options which are
exercisable as of March 15, 2001 or 60 days after such date.

(13) Includes 20,000 shares underlying options which are exercisable as of March
15, 2001 or 60 days after such date.

(14) Includes 5,000 shares underlying options which are exercisable as of March
15, 2001 or 60 days after such date.

-19-

(15) James E. Daverman is President of Marquette Management Partners, LLC, the
general partner of Marquette Venture Partners, L.P. and a general partner
of MG II, L.P., the general partner of Marquette Venture Partners II, L.P.
and MVP II Affiliates Fund, L.P. and, as such, has the power to vote or
direct the vote of and to dispose of or direct the disposition of the
shares owned by Marquette Venture Partners II, L.P. and MVP II Affiliates
Fund, L.P. Mr. Daverman expressly disclaims beneficial ownership of such
shares, except as to his proportionate interest in Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P. Includes 20,000 shares
of Common Stock underlying options which are exercisable as of March 15,
2001 or 60 days after such date and 55,000 shares of Common Stock otherwise
held by Mr. Daverman, individually.

(16) Includes 20,000 shares of Common Stock underlying options which are
exercisable as of March 15, 2001 or 60 days after such date. Also includes
20,126 shares of Common Stock issuable upon the conversion of 2,000 shares
of the Series D Preferred Stock held by Mr. Easton and 4,127 shares of
Common Stock issued in payment of dividends on the Series D Preferred
Stock. Also includes 19,189 shares of Common Stock held by Mr. Easton,
individually, and 4,450 shares of Common Stock held as trustee for the
Rachel Easton Charitable Trust.

(17) Stephen Kaplan is a principal of OCM Principal Opportunities Fund, L.P.
and, as such, has the power to vote or direct the vote of and to dispose of
or direct the disposition of the shares owned by OCM Principal
Opportunities Fund, L.P. Mr. Kaplan expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in OCM
Principal Opportunities Fund, L.P. Includes 3,000 shares of Common Stock
held by Mr. Kaplan in his individual capacity.

(18) See Notes 7 through 17.

-20-

SERIES D PREFERRED STOCK

There were, as of March 15, 2001, 6 holders of record of the Company's Series D
Preferred Stock. The following table sets forth certain information, as of March
15, 2001, with respect to the beneficial ownership of the Company's Series D
Preferred Stock by (i) each person known by the Company to be the beneficial
owner of more than 5% of the total number of shares of Series D Preferred Stock
outstanding as of such date, (ii) each of the Company's directors (which
includes all nominees) and Named Executives who beneficially own shares of
Series D Preferred Stock, and (iii) all directors and officers as a group.

Amount and Nature of Percent
Name and Address of Beneficial Owner(1) Beneficial Ownership(1) of Class(2)
- --------------------------------------- ----------------------- -----------

(i) Certain Beneficial Owners:

OCM Principal Opportunities Fund, L.P......... 177,000(3) 88.5%

Richard A. Horstmann.......................... 10,000(4) 5.0%

Marquette Venture Partners II, L.P. and
MVP II Affiliates Fund, L.P................ 10,000(5) 5.0%

(ii) Directors (which includes all nominees)
and Named Executives:

Robert J. Easton.............................. 2,000(6) 1.0%

Stephen Kaplan................................ 177,000(7) 88.5%

(iii) All Directors and officers as a
group (12 persons)..................... 189,000(5)(6)(7) 94.5%

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

(2) Applicable percentage of ownership is based on 200,000 shares of Series D
Preferred Stock outstanding on March 15, 2001.

(3) Such shares of Series D Preferred Stock are convertible into 1,781,150
shares of Common Stock.

(4) Such shares of Series D Preferred Stock are convertible into 100,630 shares
of Common Stock.

(5) Of such shares of Series D Preferred Stock, 9,722 shares are held by
Marquette Venture Partners II, L.P. and are convertible into 97,832 shares
of Common Stock. Also, of such shares of Series D Preferred Stock, 278
shares are held by MVP II Affiliates Fund, L.P. and are convertible into
2,798 shares of Common Stock.

(6) Such shares of Series D Preferred Stock are convertible into 20,126 shares
of Common Stock.

(7) Stephen Kaplan is a principal of OCM Principal Opportunities Fund, L.P.
and, as such, has the power to vote or direct the vote of and to dispose of
or direct the disposition of the shares owned by OCM Principal
Opportunities Fund, L.P. Mr. Kaplan expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in OCM
Principal Opportunities Fund, L.P.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For transactions and information relating to certain registration
rights and rights to participate in certain future offerings undertaken by the
Company, for each of Mr. Daverman, who served as acting Chairman of the
Compensation Committee following the resignation from the Board of Dr. Winters,
Mr. Easton, a current member of the Company's Compensation Committee, and Dr.
Agersborg, a member of the Compensation Committee until the Meeting, please see
"EXECUTIVE COMPENSATION - Compensation Committee Interlocks and Insider
Participation."

-21-

As of March 15, 2001, Columbine Venture Fund II, L.P. and Columbine Venture
Management II, L.P., with which Dr. Winters, a director of the Company until
December 2000, is affiliated, held an aggregate of 633,446 shares of the
Company's Common stock which were previously issued upon conversion of the
Company's Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock previously held by each such entities. Such entities are,
therefore, with respect to such shares of Common Stock, entitled to the
identical registration rights and rights to participate in certain future
offerings undertaken by the Company as is Marquette Venture Partners II, L.P.
with which Mr. Daverman is affiliated.

As of March 15, 2001, OCM Principal Opportunities Fund, L.P., with which
Mr. Kaplan is affiliated, held 177,000 shares of the Company's Series D
Preferred Stock. Such entity is, therefore, with respect to such shares of
Series D Preferred Stock, entitled to identical registration rights and rights
of participation as is Robert Easton, also a holder of the Company's Series D
Preferred Stock.

In April 1998 and February 1999 the Company loaned to Robert Ashley, its
Senior Vice President, $56,195 and $10,000, respectively. All such amounts were
repaid by Mr. Ashley to the Company in March 2000, with accrued interest thereon
at an annual rate of 6.58%.

1996 STOCK OPTION PLAN PROPOSAL

The 1996 Stock Option Plan was adopted by the Board of Directors and
approved by the Stockholders of the Company on March 22, 1996 and March 29,
1996, respectively. Those eligible to receive stock option grants or stock
purchase rights under the 1996 Stock Option Plan include the Company's
employees, directors and consultants. The 1996 Stock Option Plan was adopted to

o attract and retain the best available personnel for positions of
substantial responsibility;

o provide additional incentives to employees, members of the Board
and consultants of the Company and its subsidiaries; and

o promote the success of the Company's business.

Currently there are 1,500,000 shares of Common Stock reserved for issuance
upon the exercise of options and/or stock purchase rights granted under the 1996
Stock Option Plan.

The 1996 Stock Option Plan is administered by the Compensation Committee,
which is comprised solely of outside directors. The Compensation Committee
determines, among other things, the

o nature of the options to be granted;

o persons, or grantees, who are to receive options;

o number of shares to be subject to each option;

o exercise price of the options; and

o vesting schedule of the options.

The 1996 Stock Option Plan provides for the granting of options intended to
qualify as incentive stock options, or ISOs, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), to employees of the
Company. The 1996 Stock Option Plan also provides for the granting of
non-qualified stock options, or NQSOs, to employees, non-employee directors and
consultants who perform services for the Company or its subsidiaries. The
exercise price of all ISOs granted under the 1996 Stock Option Plan may not be
less than the fair market value of the shares at the time the option is granted.
In addition, no ISO may be granted to an employee who owns more than 10% of the
total combined voting power of all classes of stock of the Company unless the
exercise price as to that employee is at least 110% of the fair market value of
the stock at the time of the grant. To

-22-

the extent that options designated as ISOs become exercisable for the first time
during any calendar year for Common Stock having a fair market value greater
than $100,000 (determined for each share as of the date of grant of the options
covering such share), the portion of such options which exceeds such amount
shall be treated as NQSOs. Options may be exercisable for a period of not more
than ten years from the date of grant, provided, however that the term of an ISO
granted to an employee who owns more than 10% of the total combined voting power
of all classes of stock of the Company may not exceed five years. The exercise
price of NQSOs granted under the 1996 Stock Option Plan may not be less than 85%
of the fair market value per share of the Common Stock on the date of grant. No
NQSO may be granted to a person who owns more than 10% of the total combined
voting power of all classes of stock of the Company unless the exercise price to
that person is at least 110% of the fair market value of the stock at the time
of the grant. The exercise price must be paid in full at the time an option is
exercised, and at the Compensation Committee's discretion, all or part of the
exercise price may be paid with previously owned shares or other approved
methods of payment. An option is exercisable as determined by the Compensation
Committee. The 1996 Stock Option Plan will terminate on March 28, 2006.

Subject to the terms as specified in any option agreement, the following
time table applies with respect to exercising outstanding vested options if a
grantee's employment or consulting relationship is terminated:

Reason for termination during term of
employment or consulting relationship Latest exercise date
- ------------------------------------- --------------------

Disability One year following termination by grantee

Death One year following death by grantee's estate

Any other reason 90 days following termination by grantee

Options are not assignable or otherwise transferable except by will or the
laws of descent and distribution and shall be exercisable during the grantee's
lifetime only by the grantee.

The 1996 Stock Option Plan also permits the awarding of stock purchase
rights at not less than 50% of the fair market value of the shares as of the
date offered. The 1996 Stock Option Plan requires the execution of a restricted
stock purchase agreement in a form determined by the Compensation Committee.
Once a stock purchase right is exercised, the purchaser will have the rights of
a stockholder. The purchaser will be a stockholder when the purchase is entered
on the Company's records.

The 1996 Stock Option Plan provides that in the event of a

o reorganization; o recapitalization;

o stock split; o stock dividend;

o combination of or reclassification o or any other change in the corporate
of the shares; structure or shares of the Company,

the Board of Directors shall make adjustments with respect to the shares that
may be issued under the 1996 Stock Option Plan or that are covered by
outstanding options, or in the option price per share.

The Board shall notify the grantee at least fifteen days prior to a
dissolution or liquidation of the Company. The outstanding options, not
previously exercised, will terminate immediately prior to the consummation of
such proposed action. In the event of a merger or consolidation of the Company
or the sale of all or substantially all of the Company's assets (a "merger"),
the outstanding options will be assumed or an equivalent option will be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation. If such successor corporation does not agree to assume
the outstanding options or to substitute equivalent options, the Board of
Directors will, in lieu of such assumption or substitution, provide for the
grantee to have the right to exercise all of his outstanding options. If the
Board of Directors makes an option fully exercisable in lieu of assumption or
substitution, in the event of a merger, the Board of Directors shall notify the
grantee that the option will be fully

-23-

exercisable for a period of fifteen days from the date of such notice, and the
option will terminate upon the expiration of such period. The option will be
considered assumed if, following the merger, the option confers the right to
purchase, for each share of Common Stock subject to the option immediately prior
to the merger, the consideration (whether stock, cash, or other securities or
property) received in the merger by holders of Common Stock for each share held
on the effective date of the transaction (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a majority
of the outstanding shares). If such consideration received in the merger was not
solely common stock of the successor corporation or its parent, the Board of
Directors may, with the consent of the successor corporation and the
participant, provide for the consideration to be received upon the exercise of
an option for each share of stock subject to the option to be solely common
stock of the successor corporation or its parent equal in fair market value to
the per share consideration received by holders of Common Stock in the merger or
sale of assets.

The Board may at any time amend, alter, suspend or discontinue the 1996
Stock Option Plan, but no such action will be made which would impair the rights
of any grantee under any grant previously made, without such grantee's consent.
In addition, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act, or with Section 422 of the Code (or any other applicable
law or regulation, including the requirements of the National Association of
Securities Dealers or an established stock exchange), the Company shall obtain
stockholder approval of any 1996 Stock Option Plan amendment in such a manner
and to such a degree as required. Any such amendment or termination of the 1996
Stock Option Plan is not permitted to affect options already granted and such
options will remain in full force and effect as if the 1996 Stock Option Plan
had not been amended or terminated, unless mutually agreed otherwise between the
grantee and the Board of Directors, which agreement must be in writing and
signed by the grantee and the Company.

FEDERAL INCOME TAX ASPECTS

(a) INCENTIVE STOCK OPTIONS

Some options to be issued under the 1996 Stock Option Plan will be
designated as ISOs and are intended to qualify under Section 422 of the Code.
Under the provisions of that Section of the Code and the related regulations, an
optionee will not be required to recognize any income for Federal income tax
purposes at the time of grant of an ISO. Additionally, the Company will not be
entitled to any deduction. The exercise of an ISO also is not a taxable event,
although the difference between the option price and the fair market value on
the date of exercise is an item of tax preference for purposes of the
alternative minimum tax. The taxation of gain or loss upon the sale of stock
acquired upon exercise of an ISO depends in part on whether the stock is
disposed of at least two years after the date the option was granted and at
least one year after the date the stock was transferred to the optionee,
referred to as the ISO Holding Period.

If the ISO Holding Period is not met, then, upon disposition of such
shares, referred to as a disqualifying disposition, the optionee will realize
compensation, taxable as ordinary income, in an amount equal to the excess of
the fair market value of the shares at the time of exercise over the option
price, limited, however, to the gain on sale. Any additional gain would be
taxable as capital gain (see discussion of capital gains under the section
relating to NQSOs, below). If the optionee disposes of the shares in a
disqualifying disposition at a price that is below the fair market value of the
shares at the time the ISO was exercised and such disposition is a sale or
exchange to an unrelated party, the amount includible as compensation income to
the optionee will be limited to the excess of the amount received on the sale or
exchange over the exercise price.

If the optionee recognizes ordinary income upon a disqualifying
disposition, the Company generally will be entitled to a tax deduction in the
same amount.

Effective as of January 1, 1998, the holding period for long term capital
gain treatment is reduced to one year. Hence, if the ISO Holding Period is met,
any disposition on or after January 1, 1998 would be taxable as a long term
capital gain or loss; any such gains are taxable at a maximum rate of 20%.

A maximum capital gains rate of 18% applies to certain sales after December
31, 2000 of shares acquired upon the exercise of an ISO if such shares have been
held for at least five years.

-24-

If the ISO is exercised by delivery of previously owned shares of Common
Stock in partial or full payment of the option price, no gain or loss will
ordinarily be recognized by the optionee on the transfer of such previously
owned shares. However, if the previously owned transferred shares were acquired
through the exercise of an ISO, the optionee may realize ordinary income with
respect to the shares used to exercise an ISO if such transferred shares have
not been held for the ISO Holding Period. If an ISO is exercised through the
payment of the exercise price by the delivery of Common Stock, to the extent
that the number of shares received exceeds the number of shares surrendered,
such excess shares will possibly be considered ISO stock with a zero basis.

(b) NON-QUALIFIED STOCK OPTIONS

Some options to be issued under the 1996 Stock Option Plan will be
designated as NQSOs. If (as in the case of NQSOs granted under the 1996 Stock
Option Plan at this time) the NQSO does not have a "readily ascertainable fair
market value" at the time of the grant, the NQSO is not included as compensation
income at the time of grant. Rather, the optionee realizes compensation income
only when the NQSO is exercised and the optionee has become substantially vested
in the shares transferred. The shares are considered to be substantially vested
when they are either transferable or not subject to a substantial risk of
forfeiture. The amount of income realized is equal to the excess of the fair
market value of the shares at the time the shares become substantially vested
over the sum of the exercise price plus the amount, if any, paid by the optionee
for the NQSO. If a NQSO is exercised through payment of the exercise price by
the delivery of Common Stock, to the extent that the number of shares received
by the optionee exceeds the number of shares surrendered, ordinary income will
be realized by the optionee at that time only in the amount of the fair market
value of such excess shares, and the tax basis of such excess shares will be
such fair market value. When the optionee disposes of the shares acquired
pursuant to a NQSO, the optionee will recognize capital gain or loss equal to
the difference between the amount received for the shares and the optionee's
basis in the shares.

Under the 1996 Stock Option Plan, the optionee's basis in the shares will
be the exercise price plus the compensation income realized at the time of
exercise. Under tax legislation which became effective as of January 1, 1998,
the capital gain or loss will be short term (with gains generally subject to tax
as ordinary income) if the shares are disposed of within one year after the
option is exercised and long term (with gains generally subject to tax at a
maximum rate of 20%) if the shares are disposed of more than one year after the
option is exercised.

A maximum capital gains rate of 18% applies to certain sales, after
December 31, 2000, of shares acquired upon the exercise of a NQSO if such shares
have been held for at least five years.

The Company is generally entitled to a deductible compensation expense in
an amount equivalent to the amount included as compensation income to the
optionee. This deduction is allowed in the Company's taxable year in which the
income is included as compensation to the optionee.

Except as otherwise indicated, the preceding discussion is based upon
Federal tax laws and regulations in effect on the date of the preparation of
this Summary, which are subject to change, and upon an interpretation of the
relevant sections of the Code, their legislative histories and the income tax
regulations which interpret similar provisions of the Code. Furthermore, the
foregoing is only a general discussion of the Federal income tax aspects of the
1996 Stock Option Plan and does not purport to be a complete description of all
Federal income tax aspects of the 1996 Stock Option Plan. Optionees may also be
subject to state and local taxes in connection with the grant or exercise of
options granted under the 1996 Stock Option Plan and the sale or other
disposition of shares acquired upon exercise of the options. Each key employee
receiving a grant of options should consult with his or her personal tax advisor
regarding the Federal, state and local tax consequences of participating in the
1996 Stock Option Plan.

PREVIOUSLY GRANTED OPTIONS UNDER THE 1996 STOCK OPTION PLAN

As of March 31, 2001, the Company had granted options to purchase an
aggregate of 1,401,430(1) shares of Common Stock under the 1996 Stock Option
Plan at an average exercise price of $12.30 per share. As of March 31, 2001,
632,650 options to purchase shares were vested and 12,775 options to purchase
shares had been exercised under the 1996 Stock Option Plan. The following table
sets forth the options granted under the 1996 Stock Option Plan to (i) the Named
Executives; (ii) all current executive officers as a group; (iii) each nominee
for election as a

-25-

Director; (iv) all current Directors who are not executive officers as a group;
(v) each associate of any of such Directors, executive officers or nominees;
(vi) each person who has received or is to receive 5% of such options or rights;
and (vii) all employees, including all current officers who are not executive
officers, as a group:

Options Granted
Through Weighted Average
Name March 31, 2001(2) Exercise Price Expiration Date
- ---------------------------------------------- ------------------ ---------------- ----------------

Brian M. Gallagher, Ph.D...................... 295,000 $11.49 2/2007-2/2011

Robert A. Ashley.............................. 125,000 $11.65 2/2007-2/2011

Nancy C. Broadbent............................ 100,000 $10.84 2/2007-2/2011

Douglas C. Gehrig............................. 145,000 $11.98 7/2007-2/2011

David F. Pfeiffer............................. 155,000 $12.37 7/2007-2/2011

All current executive
officers as a group
(5 persons)(3).............................. 820,000 $11.69 2/2007-2/2011

All current Directors who are not executive
officers as a group (8 persons)............ -- -- --

All employees, including all current
officers who are not executive officers,
as a group (156 persons)(3)(4).............. 581,430 $13.17 11/2006-3/2011

As of March 31, 2001, the market value of the Common Stock underlying the
1996 Stock Option Plan was $5.00 per share.

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

(1) Of the 1,401,430 options granted as of March 31, 2001, 159,988 of such
options have been canceled and may be reissued by the Company.

(2) Options are granted under the 1996 Stock Option Plan pursuant to various
vesting schedules. In general, such options vest over two (2) to five (5)
year periods.

(3) All 161 of the Company's employees and consultants are eligible to
participate in the 1996 Stock Option Plan.

(4) Includes 3 consultants who were granted options to purchase an aggregate of
60,000 shares of Common Stock at an exercise price of $12.19 per share with
an expiration date of February 2009.

Each of the following individuals prior to the proposed increase in shares of
common stock available under the 1996 Stock Option Plan, holds more than
five-percent (5%) of the total options issuable under the 1996 Stock Option
Plan: Brian M. Gallagher, Ph.D. (19.7%); Robert A. Ashley (8.3%); Nancy C.
Broadbent (6.7%); Douglas C. Gehrig (9.7%) and David F. Pfeiffer (10.3%).
Subsequent to the adoption of the proposed amendment to the 1996 Stock Option
Plan, as further discussed below, each of the following individuals will hold
more than five-percent of the total options issuable under the 1996 Stock Option
Plan: Brian M. Gallagher, Ph.D. (14.8%); Robert A. Ashley (6.3%); Nancy C.
Broadbent (5.0%); Douglas C. Gehrig (7.3%) and David F. Pfeiffer (7.8%).

PROPOSED AMENDMENT

Stockholders are being asked to consider and vote upon a proposed amendment
(the "Amendment") to the 1996 Stock Option Plan to increase the maximum number
of shares of Common Stock available for issuance under the 1996 Stock Option
Plan from 1,500,000 to 2,000,000 shares and to reserve an additional 500,000
shares of Common Stock of the Company for issuance in connection with awards
granted under the 1996 Stock Option Plan.

-26-

The Board of Directors believes that the Amendment provides an important
inducement to recruit and retain the best available personnel. The Board of
Directors believes that providing employees with an opportunity to invest in the
Company rewards them appropriately for their efforts on behalf of the Company.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT.

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors of the Company intends, subject to Stockholder
approval, to retain KPMG LLP as independent auditors of the Company for the year
ending December 31, 2001. KPMG LLP also served as independent auditors of the
Company for 2000. Neither the firm nor any of its members has any direct or
indirect financial interest in the Company.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF KPMG LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY FOR THE YEAR
ENDING DECEMBER 31, 2001.

One or more representatives of KPMG LLP is expected to attend the Meeting
and have an opportunity to make a statement and/or respond to appropriate
questions from Stockholders.

STOCKHOLDERS' PROPOSALS

Stockholders who intend to have a proposal considered for inclusion in the
Company's proxy materials for presentation at the Company's 2002 Annual Meeting
of Stockholders pursuant to Rule 14a-8 under the Exchange Act must submit the
proposal to the Company at its offices at 41 University Drive, Newtown,
Pennsylvania 18940, attention Nancy C. Broadbent, not later than December 13,
2001.

Stockholders who intend to present a proposal at such meeting without
inclusion of such proposal in the Company's proxy materials pursuant to Rule
14a-8 under the Exchange Act are required to provide advanced notice of such
proposal to the Company at the aforementioned address not later than February
26, 2002.

If the Company does not receive notice of a stockholder proposal within
this timeframe, the Company's management will use its discretionary authority to
vote the shares it represents, as the Board of Directors of the Company may
recommend. The Company reserves the right to reject, rule out of order, or take
other appropriate action with respect to any proposal that does not comply with
these other applicable requirements.

OTHER MATTERS

The Board of Directors is not aware of any matter to be presented for
action at the Meeting other than the matters referred to above and does not
intend to bring any other matters before the Meeting. However, if other matters
should come before the Meeting, it is intended that holders of the proxies will
vote thereon in their discretion.

GENERAL

The accompanying proxy is solicited by and on behalf of the Board of
Directors of the Company, whose notice of meeting is attached to this Proxy
Statement, and the entire cost of such solicitation will be borne by the
Company.

In addition to the use of the mails, proxies may be solicited by personal
interview, telephone and telegram by directors, officers and other employees of
the Company who will not be specially compensated for these services. The
Company will also request that brokers, nominees, custodians and other
fiduciaries forward soliciting materials to the beneficial owners of shares held
of record by such brokers, nominees, custodians and other fiduciaries. The
Company will reimburse such persons for their reasonable expenses in connection
therewith.

Certain information contained in this Proxy Statement relating to the
occupations and security holdings of directors and officers of the Company is
based upon information received from the individual directors and officers.

-27-

COLLAGENEX PHARMACEUTICALS, INC. WILL FURNISH, WITHOUT CHARGE, A COPY OF
ITS REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000, INCLUDING
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE THERETO BUT NOT INCLUDING
EXHIBITS, TO EACH OF ITS STOCKHOLDERS OF RECORD ON APRIL 4, 2001, AND TO EACH
BENEFICIAL STOCKHOLDER ON THAT DATE UPON WRITTEN REQUEST MADE TO MS. NANCY C.
BROADBENT, SECRETARY, COLLAGENEX PHARMACEUTICALS, INC., 41 UNIVERSITY DRIVE,
NEWTOWN, PENNSYLVANIA 18940. A REASONABLE FEE WILL BE CHARGED FOR COPIES OF
REQUESTED EXHIBITS.

PLEASE DATE, SIGN AND RETURN THE PROXY CARD AT YOUR EARLIEST CONVENIENCE IN
THE ENCLOSED RETURN ENVELOPE. A PROMPT RETURN OF YOUR PROXY CARD WILL BE
APPRECIATED AS IT WILL SAVE THE EXPENSE OF FURTHER MAILINGS.

By Order of the Board of Directors

/s/ Nancy C. Broadbent

Nancy C. Broadbent,
Secretary

Newtown, Pennsylvania
April 18, 2001

-28-

APPENDIX A

AUDIT COMMITTEE CHARTER

COLLAGENEX PHARMACEUTICALS, INC.

CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

I. AUDIT COMMITTEE PURPOSE

The Audit Committee is appointed by the Board of Directors to assist the Board
in fulfilling its oversight responsibilities. The Audit Committee's primary
duties and responsibilities are to:

o Monitor the integrity of the Company's financial reporting process and
systems of internal controls regarding finance, accounting, and legal
compliance.

o Monitor the independence and performance of the Company's independent
auditors and internal auditing department.

o Provide an avenue of communication among the independent auditors,
management, the internal auditing department, and the Board of Directors.

The Audit Committee has the authority to conduct any investigation appropriate
to fulfilling its responsibilities, and it has direct access to the independent
auditors as well as anyone in the organization. The Audit Committee has the
ability to retain, at the Company's expense, special legal, accounting, or other
consultants or experts it deems necessary in the performance of its duties.

II. AUDIT COMMITTEE COMPOSITION AND MEETINGS

Audit Committee members shall meet the requirements of the National Association
of Securities Dealers (NASD). The Audit Committee shall be comprised of three or
more directors as determined by the Board, each of whom shall be independent
nonexecutive directors, free from any relationship that would interfere with the
exercise of his or her independent judgment. All members of the Committee shall
have a basic understanding of finance and accounting and be able to read and
understand fundamental financial statements, and at least one member of the
Committee shall have accounting or related financial management expertise.

Audit Committee members shall be appointed by the Board on recommendation of the
Nominating Committee. If an audit committee Chair is not designated or present,
the members of the Committee may designate a Chair by majority vote of the
Committee membership.

The Committee shall meet at least four times annually, or more frequently as
circumstances dictate. The Audit Committee Chair shall prepare and/or approve
an, agenda in advance of each meeting. The Committee should meet privately in
executive session at least annually with management, the independent auditors,
and as a committee to discuss any matters that the Committee or each of these
groups believe should be discussed. In addition, the Committee, or at least its
Chair should communicate with management and the independent auditors quarterly
to review the Company's financial statements and significant findings based upon
the auditors limited review procedures.

III. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES

Review Procedures
- -----------------

1. Review and reassess the adequacy of this Charter at least
annually. Submit the charter to the Board of Directors for
approval and have the document published at least every three
years in accordance with SEC regulations.

2. Review the Company's annual audited financial statements prior to
filing or distribution. Review should include discussion with
management and independent auditors of significant issues
regarding accounting principles, practices, and judgments.

-1-

3. In consultation with the management and the independent auditors,
consider the integrity of the Company's financial reporting
processes and controls. Discuss significant financial risk
exposures and the steps management has taken to monitor, control,
and report such exposures. Review significant findings prepared
by the independent auditors and the internal auditing department
together with management's responses.

4. Review with financial management and the independent auditors the
company's quarterly financial results prior to the release of
earnings and/or the company's quarterly financial statements
prior to filing or distribution. Discuss any significant changes
to the Company's accounting principles and any items required to
be communicated by the independent auditors in accordance with
SAS 61 (see item 9). The Chair of the Committee may represent the
entire Audit Committee for purposes of this review.

Independent Auditors
- --------------------

5. The independent auditors are ultimately accountable to the Audit
Committee and the Board of Directors. The Audit Committee shall
review the independence and performance of the auditors and
annually recommend to the Board of Directors the appointment of
the independent auditors or approve any discharge of auditors
when circumstances warrant.

6. Approve the fees and other significant compensation to be paid to
the independent auditors.

7. On an annual basis, the Committee should review and discuss with
the independent auditors all significant relationships they have
with the Company that could impair the auditors' independence.

8. Review the independent auditors audit plan - discuss scope,
staffing, locations, reliance upon management, and internal audit
and general audit approach.

9. Prior to releasing the year-end earnings, discuss the results of
the audit with the independent auditors. Discuss certain matters
required to be communicated to audit committees in accordance
with AICPA SAS 61.

10. Consider the independent auditors' judgments about the quality
and appropriateness of the Company's accounting principles as
applied in its financial reporting.

Legal Compliance
- ----------------

11. On at least an annual basis, review with the Company's counsel
any legal matters that could have a significant impact on the
organization's financial statements, the Company's compliance
with applicable laws and regulations, and inquiries received from
regulators or governmental agencies.

Other Audit Committee Responsibilities
- --------------------------------------

12. Annually prepare a report to shareholders as required by the
Securities and Exchange Commission. The report should be included
in the Company's annual proxy statement.

13. Perform any other activities consistent with this Charter, the
Company's by-laws, and governing law, as the Committee or the
Board deems necessary or appropriate.

14. Maintain minutes of meetings and periodically report to the Board
of Directors on significant results of the foregoing activities.

Adopted by the Board of Directors
as of May 8, 2000.

-2-

COMMON STOCK
COLLAGENEX PHARMACEUTICALS, INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE CORPORATION FOR THE ANNUAL MEETING OF STOCKHOLDERS

The undersigned hereby constitutes and appoints Brian M. Gallagher, Ph.D.
and Nancy C. Broadbent, and each of them, his or her true and lawful agent and
proxy with full power of substitution in each, to represent and to vote on
behalf of the undersigned all of the shares of CollaGenex Pharmaceuticals, Inc.
(the "Company") which the undersigned is entitled to vote at the Annual Meeting
of Stockholders of the Company to be held at the Philadelphia Airport Marriott
Hotel, One Arrivals Road, Philadelphia, Pennsylvania at 8:30 A.M., local time,
on Thursday, May 10, 2001, and at any adjournment or adjournments thereof, upon
the following proposals more fully described in the Notice of Annual Meeting of
Stockholders and Proxy Statement for the Meeting (receipt of which is hereby
acknowledged).

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2 AND 3.

(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)

PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!

ANNUAL MEETING OF STOCKHOLDERS
COLLAGENEX PHARMACEUTICALS, INC.

COMMON STOCK

MAY 10, 2001

Please Detach and Mail In the Envelope Provided

A [X] Please mark your votes as in this example.

1. ELECTION OF FOR WITHHELD Nominees:
DIRECTORS. [ ] [ ] Brian M. Gallagher, Ph.D.
Peter R. Barnett, D.M.D.
Robert C. Black
James E. Daverman
VOTE FOR all the nominees listed at right; except Robert J. Easton
vote withheld from the following nominee(s) (if any). W. James O'Shea

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

2. APPROVAL OF PROPOSAL TO AMEND THE COMPANY'S 1996 STOCK OPTION PLAN TO FOR AGAINST ABSTAIN
INCREASE THE MAXIMUM AGGREGATE NUMBER OF SHARES OF COMMON STOCK AVAILABLE FOR [ ] [ ] [ ]
ISSUANCE THEREUNDER FROM 1,500,000 SHARES TO 2,000,000 SHARES AND TO RESERVE AN
ADDITIONAL 500,000 SHARES OF COMMON STOCK OF THE COMPANY FOR ISSUANCE IN
CONNECTION WITH AWARDS GRANTED UNDER THE 1996 STOCK OPTION PLAN.

3. APPROVAL OF PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG LLP AS THE FOR AGAINST ABSTAIN
INDEPENDENT AUDITORS OF THE COMPANY FOR THE YEAR ENDING DECEMBER 31, 2001. [ ] [ ] [ ]

4. In his or her discretion, the proxy is authorized to vote upon other
matters as may properly come before the Meeting.

I will I will not
[ ] [ ]

attend the Meeting.

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.

Signature of Common Stockholder Signature of Common Stockholder Dated:
---------------------- ---------------------- ------------
IF HELD JOINTLY

NOTE: This proxy must be signed exactly as the name appears hereon. When
shares are held by joint tenants, both should sign. If the signer is a
corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If the signer is a partnership,
please sign in partnership name by authorized person.

PREFERRED STOCK
COLLAGENEX PHARMACEUTICALS, INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE CORPORATION FOR THE ANNUAL MEETING OF STOCKHOLDERS

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2 AND 3.

(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)

PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!

ANNUAL MEETING OF STOCKHOLDERS
COLLAGENEX PHARMACEUTICALS, INC.

PREFERRED STOCK

MAY 10, 2001

Please Detach and Mail In the Envelope Provided

A [X] Please mark your votes as in this example.

1. ELECTION FOR WITHHELD
OF [ ] [ ]
STEPHEN A. KAPLAN AS DIRECTOR

3. APPROVAL OF PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG LLP AS THE FOR AGAINST ABSTAIN
INDEPENDENT AUDITORS OF THE COMPANY FOR THE YEAR ENDING DECEMBER 31, 2001. [ ] [ ] [ ]

4. In his or her discretion, the proxy is authorized to vote upon other
matters as may properly come before the Meeting.

I will I will not
[ ] [ ]

attend the Meeting.

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.

Signature of Preferred Stockholder Signature of Preferred Stockholder Dated:
---------------------- ---------------------- ----------
IF HELD JOINTLY

COLLAGENEX PHARMACEUTICALS, INC.

1996 STOCK PLAN

1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, non-Employee
members of the Board and Consultants of the Company and its Subsidiaries and to
promote the success of the Company's business. Options granted under the Plan
may be incentive stock options (as defined under Section 422 of the Code) or
non-statutory stock options, as determined by the Administrator at the time of
grant of an option and subject to the applicable provisions of Section 422 of
the Code, as amended, and the regulations promulgated thereunder. Stock purchase
rights may also be granted under the Plan.

2. CERTAIN DEFINITIONS. As used herein, the following definitions shall
apply:

(a) "Administrator" means the Board or any of its Committees appointed
pursuant to Section 4 of the Plan.

(b) "Board" means the Board of Directors of the Company.

(d) "Committee" means the Committee appointed by the Board of Directors in
accordance with paragraph (a) of Section 4 of the Plan.

(e) "Common Stock" means the Common Stock of the Company.

(f) "Company" means CollaGenex Pharmaceuticals, Inc., a Delaware
corporation.

(g) "Consultant" means any person, including an advisor, who is engaged by
the Company or any Parent or subsidiary to render services and is compensated
for such services, and any director of the Company whether compensated for such
services or not.

(h) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship by the Company or any
Subsidiary. Continuous Status as an Employee shall not be considered interrupted
in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Board, provided that such leave is for a period of not
more than ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract or statute, or unless provided otherwise
pursuant to Company policy adopted from time to time; or (iv) transfers between
locations of the Company or between the Company, its Subsidiaries or its
successor.

(i) "Employee" means any person, including officers and directors, employed
by the Company or any Parent or Subsidiary of the Company. The payment of a
director's fee by the Company shall not be sufficient to constitute "employment"
by the Company.

(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(k) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a
national market system including without limitation the National Market System
of the National Association of Securities Dealers, Inc. Automated Quotation
("Nasdaq") System, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
system or exchange for the last market trading day prior to the time of
determination as reported in the Wall Street Journal or such other source as the
Administrator deems reliable or;

(ii) If the Common Stock is quoted on Nasdaq (but not on the National
Market System thereof) or regularly quoted by a recognized securities dealer but
selling prices are not reported, its Fair Market Value shall be the mean between
the high and low asked prices for the Common Stock or;

(iii) In the absence of an established market for the Common Stock, the
Fair Market Value thereof shall be determined in good faith by the
Administrator.

(l) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.

(m) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.

(n) "Option" means a stock option granted pursuant to the Plan.

(o) "Optioned Stock" means the Common Stock subject to an Option.

(p) "Optionee" means an Employee or Consultant who receives an Option.

(q) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.

(r) "Plan" means this 1996 Stock Plan.

(s) "Restricted Stock" means shares of Common Stock acquired pursuant to a
grant of stock purchase rights under Section 11 below.

-2-

(t) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 13 of the Plan.

(u) "Subsidiary" means a "subsidiary corporation", whether now or hereafter
existing, as defined in Section 424(f) of the Code.

3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 1,500,000 shares of Common Stock, such number of shares
determined on a post-reverse stock split recapitalization basis, such
recapitalization to be completed upon consummation of the Company's proposed
initial public offering of Common Stock. The shares may be authorized, but
unissued, or reacquired Common Stock.

If an option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan.

4. ADMINISTRATION OF THE PLAN.

(a) PROCEDURE.

(i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS. With respect to
grants of Options or stock purchase rights to Employees who are also officers or
directors of the Company, the Plan shall be administered by (A) the Board if the
Board may administer the Plan in compliance with Rule 16b-3 promulgated under
the Exchange Act or any successor thereto ("Rule 16b-3") with respect to a plan
intended to qualify thereunder as a discretionary plan, or (B) a Committee
designated by the Board to administer the Plan, which Committee shall be
constituted in such a manner as to permit the Plan to comply with Rule 16b-3
with respect to a plan intended to qualify thereunder as a discretionary plan.
Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as
a discretionary plan.

(ii) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3, the Plan
may be administered by different bodies with respect to directors, non-director
officers and Employees who are neither directors nor officers.

(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER EMPLOYEES. With
respect to grants of Options or stock purchase rights to Employees who are
neither directors nor officers of the Company or to Consultants, the Plan shall
be administered by (A) the Board, if the Board may administer the Plan in
compliance with Rule 16b-3, or (B) a Committee designated by the Board, which
Committee shall be constituted in such a manner as to satisfy the legal

-3-

requirements relating to the administration of incentive stock option plans, if
any, of Delaware corporate law and applicable securities laws and of the Code
(the "Applicable Laws"). Once appointed, such Committee shall continue to serve
in its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies, however caused, and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.

(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and
in the case of a Committee, the specific duties delegated by the Board to such
Committee, the Administrator shall have the authority, in its discretion:

(i) to determine the Fair Market Value of the Common Stock, in accordance
with Section 2(k) of the Plan;

(ii) to select the officers, Consultants and Employees to whom Options and
stock purchase rights may from time to time be granted hereunder;

(iii) to determine whether and to what extent Options and stock purchase
rights or any combination thereof, are granted hereunder;

(iv) to determine the number of shares of Common Stock to be covered by
each such award granted hereunder;

(v) to approve forms of agreement for use under the Plan;

(vi) to determine the terms and conditions, not inconsistent with the terms
of the Plan, of any award granted hereunder (including, but not limited to, the
share price and any restriction or limitation or waiver of forfeiture
restrictions regarding any Option or other award and/or the shares of Common
Stock relating thereto, based in each case on such factors as the Administrator
shall determine, in its sole discretion);

(vii) to determine whether and under what circumstances an Option may be
settled in cash under subsection 9(f) instead of Common Stock;

(viii) to determine whether, to what extent and under what circumstances
Common Stock and other amounts payable with respect to an award under this Plan
shall be deferred either automatically or at the election of the participant
(including providing for and determining the amount, if any, of any deemed
earnings on any deferred amount during any deferral period);

(ix) to reduce the exercise price of any Option to the then current Fair
Market Value if the Fair Market Value of the Common Stock covered by such Option
shall have declined since the date the Option was granted; and

-4-

(x) to determine the terms and restrictions applicable to stock purchase
rights and the Restricted Stock purchased by exercising such stock purchase
rights.

(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all Optionees
and any other holders of any Options.

5. ELIGIBILITY.

(a) Nonstatutory Stock Options may be granted to Employees and Consultants.
Incentive Stock Options may be granted only to Employees. An Employee or
Consultant who has been granted an Option may, if he is otherwise eligible, be
granted an additional Option or Options.

(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.

(c) For purposes of Section 5(b), Incentive Stock Options shall be taken
into account in the order in which they were granted, and the Fair Market Value
of the Shares shall be determined as of the time the Option with respect to such
Shares is granted.

(d) The Plan shall not confer upon any Optionee any right with respect to
continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his right or the Company's right to terminate
his employment or consulting relationship at any time, with or without cause.

6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.

-5-

7. TERM OF OPTION.

The term of each Option shall be the term stated in the Option Agreement;
provided, however, that in the case of an Incentive Stock Option, the term shall
be no more than ten (10) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement. However, in the case of an
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.

8. OPTION EXERCISE PRICE AND CONSIDERATION.

(a) The per share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:

(i) In the case of an Incentive Stock Option

(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of
grant.

(B) granted to any Employee, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of
grant.

(ii) In the case of a Nonstatutory Stock Option

(A) granted to a person who, at the time of the grant of such Option,
owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of the grant.

(B) granted to any person, the per Share exercise price shall be no
less than 85% of the Fair Market Value per Share on the date of grant.

(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option either have been owned by the Optionee for
more than six months on the date of surrender or were not acquired, directly or
indirectly, from the Company, and (y) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised, (5) authorization from the Company to retain from the
total number of Shares as to which the Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise price

-6-

for the total number of Shares as to which the option is exercised, (6) delivery
of a properly executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price, (7) by delivering an irrevocable
subscription agreement for the Shares which irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under Applicable Laws. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.

9. EXERCISE OF OPTION.

(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Administrator, including performance criteria with respect to
the Company and/or the Optionee, and as shall be permissible under the terms of
the Plan.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.

Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.

(b) TERMINATION OF EMPLOYMENT. In the event of termination of an Optionee's
consulting relationship or Continuous Status as an Employee with the Company (as
the case may be), such Optionee may, but only within ninety (90) days (or such
other period of time as is determined by the Board, with such determination in
the case of an Incentive Stock Option being made at the time of grant of the
Option and not exceeding ninety (90) days) after the date of such termination
(but in no event later than the expiration date of the term of such Option as
set forth in the Option Agreement), exercise his Option to the extent that
Optionee was entitled to exercise

-7-

it at the date of such termination. To the extent that Optionee was not entitled
to exercise the Option at the date of such termination, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.

(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 9(b)
above, in the event of termination of an Optionee's consulting relationship or
Continuous Status as an Employee as a result of his total and permanent
disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only
within twelve (12) months from the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate.

(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the Option
may be exercised, at any time within twelve (12) months following the date of
death (but in no event later than the expiration date of the term of such Option
as set forth in the Option Agreement), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent the Optionee was entitled to exercise the Option at the date
of death. To the extent that Optionee was not entitled to exercise the Option at
the date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall terminate.

(e) RULE 16B-3. Options granted to persons subject to Section 16(b) of the
Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.

(f) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.

10. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee. The terms of the Option shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Optionee.

-8-

11. STOCK PURCHASE RIGHTS.

(a) RIGHTS TO PURCHASE. Stock purchase rights may be issued either alone,
in addition to, or in tandem with other awards granted under the Plan and/or
cash awards made outside of the Plan. After the Administrator determines that it
will offer stock purchase rights under the Plan, it shall advise the offeree in
writing of the terms, conditions and restrictions related to the offer,
including the number of Shares that such person shall be entitled to purchase,
the price to be paid (which price shall not be less than 50% of the Fair Market
Value of the Shares as of the date of the offer), and the time within which such
person must accept such offer, which shall in no event exceed thirty (30) days
from the date upon which the Administrator made the determination to grant the
stock purchase right. The offer shall be accepted by execution of a Restricted
Stock purchase agreement in the form determined by the Administrator.

(b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the
Restricted Stock purchase agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with the Company for any reason (including death or Disability). The
purchase price for Shares repurchased pursuant to the Restricted Stock purchase
agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option shall lapse at such rate as the Committee may determine.

(c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall contain
such other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the Administrator in its sole discretion. In addition, the
provisions of Restricted Stock purchase agreements need not be the same with
respect to each purchaser.

(d) RIGHTS AS A SHAREHOLDER. Once the stock purchase right is exercised,
the purchaser shall have the rights equivalent to those of a shareholder, and
shall be a shareholder when his or her purchase is entered upon the records of
the duly authorized transfer agent of the Company. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the
stock purchase right is exercised, except as provided in Section 13 of the Plan.

12. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or stock purchase right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold

-9-

from the Shares to be issued upon exercise of the Option, or the Shares to be
issued in connection with the stock purchase right, if any, that number of
Shares having a Fair Market Value equal to the amount required to be withheld.
The Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined (the "Tax Date").

All elections by an Optionee to have Shares withheld for this purpose shall
be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:

(a) the election must be made on or prior to the applicable Tax Date;

(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Right as to which the election is made;

(d) if the Optionee is subject to Rule 16b-3, the election must comply with
the applicable provisions of Rule 16b-3 and shall be subject to such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.

In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or stock purchase right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.

13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to
any required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of

-10-

any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.

In the event of the proposed dissolution or liquidation of the Company, the
Board shall notify the Optionee at least fifteen (15) days prior to such
proposed action. To the extent it has not been previously exercised, the Option
will terminate immediately prior to the consummation of such proposed action. In
the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets
(hereinafter, a "merger"), the Option shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary of
such successor corporation. In the event that such successor corporation does
not agree to assume the Option or to substitute an equivalent option, the Board
shall, in lieu of such assumption or substitution, provide for the Optionee to
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. If the Board
makes an Option fully exercisable in lieu of assumption or substitution in the
event of a merger, the Board shall notify the Optionee that the Option shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the Option will terminate upon the expiration of such period. For
the purposes of this paragraph, the Option shall be considered assumed if,
following the merger, the Option or right confers the right to purchase, for
each Share of stock subject to the Option immediately prior to the merger, the
consideration (whether stock, cash, or other securities or property) received in
the merger by holders of Common Stock for each Share held on the effective date
of the transaction (and if holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the merger
was not solely common stock of the successor corporation or its Parent, the
Board may, with the consent of the successor corporation and the participant,
provide for the consideration to be received upon the exercise of the Option,
for each Share of stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in Fair Market Value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.

14. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.

15. AMENDMENT AND TERMINATION OF THE PLAN.

(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the

-11-

Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.

(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.

16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.

As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.

17. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.

18. AGREEMENTS. Options and stock purchase rights shall be evidenced by
written agreements in such form as the Board shall approve from time to time.

19. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law.

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20. INFORMATION TO OPTIONEES. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.

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