<PAGE>

================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

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

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2002
                                      OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

                       Commission file number 000-29839

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

                                ORAPHARMA, INC.
            (Exact name of registrant as specified in its charter)

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

                                   Delaware
                         (State or other jurisdiction
                       of incorporation or organization)

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

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

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

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

   As of May 1, 2002, 13,602,785 shares of common stock were outstanding.

================================================================================

<PAGE>

                        ORAPHARMA, INC. AND SUBSIDIARY
                                     INDEX

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<C>        <S>                                                                        <C>
PART I     FINANCIAL INFORMATION

Item 1     Consolidated Financial Statements (unaudited).............................    3

           Balance Sheets--December 31, 2001 and March 31, 2002......................    3

           Statements of Operations--Three months ended March 31, 2001 and 2002......    4

           Statements of Cash Flows--Three months ended March 31, 2001 and 2002......    5

           Notes to Financial Statements.............................................    6

Item 2     Management's Discussion and Analysis of Financial Condition and Results of
           Operations................................................................ 7-13

Item 3     Quantitative and Qualitative Disclosures About Market Risks...............   13

PART II.   OTHER INFORMATION.........................................................   14

Item 1.    Legal Proceedings.........................................................   14

Item 2.    Changes in Securities and Use of Proceeds.................................   14

SIGNATURES                                                                              15
</TABLE>

                                      2

<PAGE>

                         PART I  FINANCIAL INFORMATION

Item 1.  Financial Statements

                        ORAPHARMA, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                           December 31,   March 31,
                                                                               2001         2002
                                                                           ------------  ------------
<S>                                                                        <C>           <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents.............................................. $ 44,121,660  $ 22,018,918
   Short-term investment in government securities.........................           --    15,081,322
   Accounts receivable, net...............................................    1,203,432     1,513,688
   Inventories............................................................    2,551,879     1,912,550
   Prepaid expenses and other.............................................      399,897       566,418
                                                                           ------------  ------------
       Total current assets...............................................   48,276,868    41,092,896
FIXED ASSETS, net.........................................................    6,685,335     6,726,300
INTANGIBLE ASSETS, net....................................................    2,787,693     2,650,614
                                                                           ------------  ------------
       Total assets....................................................... $ 57,749,896  $ 50,469,810
                                                                           ============  ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Accounts payable....................................................... $  4,500,131  $  4,252,060
   Accrued expenses.......................................................    2,168,564     1,687,870
                                                                           ------------  ------------
       Total current liabilities..........................................    6,668,695     5,939,930
                                                                           ------------  ------------
STOCKHOLDERS' EQUITY
   Preferred stock, par value $.001 per share,
     5,000,000 shares authorized, none issued.............................           --            --
   Common stock, par value $.001 per share,
     50,000,000 shares authorized, 13,538,411, and 13,548,248, issued and
     outstanding at December 31, 2001 and March 31, 2002, respectively....       13,538        13,548
   Additional paid-in capital.............................................  112,060,026   112,063,998
   Deferred compensation..................................................     (398,098)     (350,719)
   Accumulated deficit....................................................  (60,594,265)  (67,196,947)
                                                                           ------------  ------------
       Total stockholders' equity.........................................   51,081,201    44,529,880
                                                                           ------------  ------------
       Total liabilities and stockholders' equity......................... $ 57,749,896  $ 50,469,810
                                                                           ============  ============
</TABLE>

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

                                      3

<PAGE>

                        ORAPHARMA, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                Three Months Ended March 31,
                                                ---------------------------
                                                    2001            2002
                                                 -----------    -----------
      <S>                                       <C>             <C>
      REVENUES................................. $        --     $ 4,153,646
                                                 -----------    -----------
      OPERATING EXPENSES
         Cost of revenues......................          --       1,046,212
         Research and development..............   2,545,619       2,733,387
         Marketing, general and administrative.   5,148,999       7,172,453
                                                 -----------    -----------
             Operating loss....................  (7,694,618)     (6,798,406)
      INTEREST INCOME..........................   1,007,565         195,724
                                                 -----------    -----------
      NET LOSS................................. $(6,687,053)    $(6,602,682)
                                                 ===========    ===========
      BASIC AND DILUTED NET LOSS PER
        SHARE.................................. $     (0.50)    $     (0.49)
                                                 ===========    ===========
      SHARES USED IN COMPUTING BASIC
        AND DILUTED NET LOSS PER SHARE.........  13,392,020      13,542,365
                                                 ===========    ===========
</TABLE>

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

                                      4

<PAGE>

                        ORAPHARMA, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                             Three Months Ended March 31,
                                                                             ---------------------------
                                                                                 2001           2002
                                                                             ------------   ------------
<S>                                                                          <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................................... $ (6,687,053)  $ (6,602,682)
Adjustments to reconcile net loss to net cash used in operating activities--
   Depreciation and amortization............................................      289,511        530,664
   Stock based compensation expense.........................................       51,061         47,379
Changes in operating assets and liabilities--
   Accounts receivable......................................................           --       (310,256)
   Inventories..............................................................   (1,110,926)       639,329
   Prepaid expenses and other...............................................     (156,685)      (166,521)
   Accounts payable.........................................................    1,709,815       (248,071)
   Accrued expenses.........................................................     (367,477)      (480,694)
                                                                             ------------   ------------
       Net cash used in operating activities................................   (6,271,754)    (6,590,852)
                                                                             ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investment in government securities..................           --    (15,081,322)
Capital expenditures........................................................   (1,629,566)      (434,550)
Expenditures for intangible assets..........................................   (2,600,000)            --
                                                                             ------------   ------------
       Net cash used in investing activities................................   (4,229,566)   (15,515,872)
                                                                             ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the exercise of stock options and warrants....................       19,268          3,982
                                                                             ------------   ------------
       Net cash provided by financing activities............................       19,268          3,982
                                                                             ------------   ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS...................................  (10,482,052)   (22,102,742)
CASH AND CASH EQUIVALENTS, beginning of period..............................   75,255,171     44,121,660
                                                                             ------------   ------------
CASH AND CASH EQUIVALENTS, end of period.................................... $ 64,773,119   $ 22,018,918
                                                                             ============   ============
</TABLE>

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

                                      5

<PAGE>

                        ORAPHARMA, INC. AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

1.  BASIS OF PRESENTATION

   The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In management's opinion, the accompanying consolidated financial
statements have been prepared on a basis consistent with the audited financial
statements and contain adjustments, which are of a normal and recurring nature,
necessary to present fairly the Company's financial position and results of
operations. Interim financial results are not necessarily indicative of results
anticipated for the full year. These unaudited consolidated financial
statements should be read in conjunction with the Company's 2001 audited
financial statements and footnotes included in the Company's Annual Report
filed with the Securities and Exchange Commission on Form 10-K (File No.
000-29829).

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

2.  NET LOSS PER COMMON SHARE

   The Company has presented basic and diluted net loss per share pursuant to
the Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share", and the Securities and Exchange Commission Staff Accounting Bulletin
No. 98. In accordance with SFAS 128, basic and diluted net loss per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase.

   The calculation of basic and diluted loss per common share excludes all
outstanding stock options and warrants and shares subject to repurchase because
all such securities are antidilutive for all applicable periods presented.

3.  INVENTORIES

   Inventories, which relate solely to Arestin(TM), are stated at the lower of
cost or market, as determined using the first-in, first-out method. Inventories
consisted of:

<TABLE>
<CAPTION>
                                    December 31, March 31,
                                        2001       2002
                                    ------------ ----------
                     <S>            <C>          <C>
                     Raw materials.  $  542,215  $  739,047
                     Finished goods   2,009,664   1,173,503
                                     ----------  ----------
                                     $2,551,879  $1,912,550
                                     ==========  ==========
</TABLE>


                                      6

<PAGE>

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

FORWARD LOOKING STATEMENTS

   The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as information contained elsewhere in this
Report, contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. These unaudited
consolidated financial statements should be read in conjunction with the
Company's 2001 audited financial statements and footnotes included in the
Company's Annual Report filed with the Securities and Exchange Commission on
Form 10-K. These forward-looking statements include statements about the
following:

  .   our ability to successfully market Arestin(TM) in the United States;

  .   our ability to predict future sales levels of Arestin(TM);

  .   our ability to obtain approval to sell Arestin(TM) in Europe;

  .   our intentions regarding European distribution partners;

  .   anticipated operating losses and capital expenditures;

  .   the adequacy of our liquidity position; and

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

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

OVERVIEW OF ORAPHARMA'S FINANCIAL PERFORMANCE

  Background

   We have devoted substantially all of our resources since we began operations
in August 1996 to the research and development of specialty pharmaceutical
products, with an initial focus on oral health care. Our initial research and
development program was based on our core drug delivery technology that we
license from American Home Products ("AHP"), for the development of our first
product, Arestin(TM), that focuses on periodontal disease. In December 1998, we
licensed a technology for an indication in oncology, and on August 27, 2001, we
announced the start of Phase 1 human clinical trials for that product candidate
(OC-1012), which focuses on mucositis, a condition secondary to certain cancer
treatments. In December 1998, we also licensed a technology for bone
regeneration. We continue to make progress on our bone regeneration product
candidate (OC-1016). We performed pre-clinical studies on OC-1016 and we are
currently awaiting clearance from the FDA to begin Phase I clinical trials. We
are currently seeking partners for the OC-1016 compound for both dental
implantation and orthopedics, though we have not entered into any agreement
with potential partners. We

                                      7

<PAGE>

believe that beginning Phase I human clinical trials with partners will enable
us to maximize the value of the OC-1016 compound. We cannot accurately estimate
either the cost of the development activities or clinical trials for either the
OC-1012 or the OC-1016 compounds, nor can we accurately estimate the time when
these costs will be incurred, and we are unable to predict with any certainty
if either of these product candidates will become commercial products.
Likewise, we are unable to estimate either the costs or the time when such
costs will be incurred in connection with our product candidate development
initiatives in the areas of our drug delivery system for large and small
molecule drugs, our second-generation therapeutic for periodontal disease, or
our therapeutic to treat traumatic injuries to teeth.

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

   Prior to April 2, 2001, we operated as a development-stage company and did
not generate any revenue. We are unable to predict how quickly, or to what
extent, revenue from the sale of Arestin(TM) will increase. We have not been
profitable and since inception have incurred cumulative net losses of
approximately $67.2 million through March 31, 2002. These losses have resulted
principally from costs incurred in research and development activities related
to Arestin(TM) and our new product candidates still in development for
mucositis and bone regeneration, together with marketing, general and
administrative expenses, and to a lesser extent from costs incurred in
connection with development initiatives in the areas of our drug delivery
system for large and small molecule drugs, our second-generation therapeutic
for periodontal disease, and our therapeutic to treat traumatic injuries to
teeth.

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

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

  Milestone Payments, Royalties and License Fees

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

   In April 2000, we paid Gary R. Jernberg, D.D.S. a milestone payment of
$50,000 based on the FDA acceptance of our NDA for review. A second milestone
payment of $100,000 was paid to Dr. Jernberg on March 16, 2001 as a result of
the FDA approval of Arestin(TM) for the adjunct treatment of adult
periodontitis. We also issued Dr. Jernberg a warrant to purchase 20,000 shares
of common stock at an exercise price of $0.10 per share,

                                      8

<PAGE>

which warrant was exercised in April 1997, and engaged Dr. Jernberg as an
advisor, for an annual retainer fee of $30,000. We are required to pay
royalties on sales of Arestin(TM) to Dr. Jernberg, a holder of three U.S.
patents, and to Technical Development and Investments, Est. ("TDI"), relating
to technology previously licensed by AHP to this third party. The cumulative
amount of any retainers paid to Dr. Jernberg will reduce any royalties payable
to Dr. Jernberg, and any royalties payable to either of these parties can be
fully credited against up to 50% of the royalties payable under our agreement
with AHP.

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

   We have also entered into a research and consulting agreement with Biomodels
LLC, an affiliate of Mucosal Therapeutics LLC, to perform preclinical studies
on our behalf and to provide us with research and general consulting services
regarding our development of the mucositis technology. At March 31, 2002, all
remaining payments due to this third party total $60,000, all of which is due
in 2002.

   We issued 82,500 shares of common stock in June, 1999, valued at $400,950,
to Children's Medical Center Corporation ("CMCC"). We are also required to make
milestone payments totaling $1.0 million to CMCC, payable in the form of cash
or shares of our common stock, upon submission of our first NDA relating to a
bone regeneration product candidate and upon approval of our first such NDA. We
are also obligated to pay CMCC royalties on sales of products covered by the
CMCC patents, or which are specified bone and soft-tissue regeneration
products. We have also entered into a sponsored research agreement with
Children's Hospital, a non-profit affiliate of CMCC, to conduct research in the
area of bone and soft-tissue regeneration and perform related preclinical
studies. At March 31, 2002, all remaining payments due under the sponsored
research agreement total $69,000, all of which is due in 2002.

RESULTS OF OPERATIONS

   From its founding through the three months ended March 31, 2001, the Company
had no revenues. The Company's first commercial product, Arestin(TM), was
launched on April 2, 2001.

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS MARCH 31, 2001.

   Revenues.  The Company reported approximately $4.2 million in revenue for
the three months ended March 31, 2002. Revenues for the three months ended
March 31, 2002 were solely comprised of sales of Arestin(TM). Prior to the
launch of Arestin(TM) on April 2, 2001, the Company had reported no revenue.

   Cost of Revenues.  Cost of revenues for Arestin(TM) was approximately $1.0
million, or 25.2% of revenues, for the three months ended March 31, 2002.

   Research and Development Expenses.  Research and development expenses were
approximately $2.7 million for the three months ended March 31, 2002 compared
to approximately $2.5 million in the same period in 2001, an increase of 7.4%.
This increase of $188,000 is primarily due to increased spending on clinical
research for the Phase I trial of our mucositis product candidate and ongoing
Arestin(TM) studies, offset by a reduction in R&D spending for the scale up of
Arestin(TM) production.

                                      9

<PAGE>

   Marketing, General and Administrative Expenses.  Marketing, general and
administrative expenses were approximately $7.2 million for the three months
ended March 31, 2002 compared to approximately $5.1 million in the same period
in 2001, an increase of 39.3%. This increase of approximately $2.0 million is
due to increased spending for sales and marketing activities associated with
Arestin(TM) and higher personnel costs offset by lower professional expenses.

   Interest Income.  Interest income was $196,000 for the three months ended
March 31, 2002 compared to approximately $1.0 million in the same period in
2001, a decrease of 80.6%. This decrease of $812,000 is due to lower levels of
cash and cash equivalents available for investment in 2002, together with lower
interest rates in 2002. The lower levels of cash and cash equivalents were due
to cash required to finance the net loss in 2001 and the net loss for the three
months ended March 30, 2002, together with working capital requirements and
investing activities in 2001 and 2002.

   Net Loss.  The net loss was approximately $6.6 million for the three months
ended March 31, 2002 compared to approximately $6.7 million in the same period
in 2001, a decrease of 1.3%. This decrease of $84,000 is due to increased
expenditures for research and development, increased marketing, general and
administrative expenses, and decreased interest income, offset by the gross
profit realized on revenues generated by the sale of Arestin(TM).

LIQUIDITY AND CAPITAL RESOURCES

   As of March 31, 2002, we had cash, cash equivalents and short-term
investments totaling approximately $37.1 million, a decrease of approximately
$7.0 million from December 31, 2001. The decrease in cash was due to the net
loss we incurred for the three months ended March 31, 2002, together with cash
required for capital equipment and changes in working capital.

   During the three months ended March 31, 2002, net cash used in operating
activities was approximately $6.6 million. This represents the net loss for the
three months, adjusted for certain non-cash charges and changes in operating
assets and liabilities, principally increases in accounts receivable and
prepaid expenses and decreases in accounts payable and accrued expenses, offset
by decreases in inventories.

   Net cash used in investing activities for the three months ended March 31,
2002 was approximately $15.5 million. During the first quarter of 2002, the
Company invested approximately $15.1 million of its excess cash in a debt
instrument of the U.S. Government, which matures on February 15, 2003. During
the first quarter the Company also purchased $435,000 of capital equipment,
consisting of dispenser handles, computer software, lab equipment, and office
equipment.

   We lease our corporate and research and development facilities under two
operating leases that expire on September 30, 2003 and January 31, 2004. Each
lease has two 5-year renewal options subject to the landlord's determination of
the fair rental value for each renewal term. We have also entered into
operating lease agreements for miscellaneous office equipment. The terms of
these lease agreements range from 9 to 21 months. Maximum annual payments for
both the real and personal property leases total $274,000 per year.

   We anticipate that our aggregate capital expenditures will be approximately
$1.6 million for the year ending December 31, 2002, of which $435,000 was
incurred during the first quarter. Of this amount, $610,000 will be used to
purchase production equipment and Arestin(TM) dispenser handles, and $984,000
will be used to purchase computer hardware and software, telephone equipment,
leasehold improvements, laboratory equipment, office equipment and furniture.
We expect that our 2002 aggregate working capital requirements to finance
growth in accounts receivables, inventories and prepaid expenses, offset by
increased accounts payable and accrued expenses, will aggregate approximately
$4.2 million.

                                      10

<PAGE>

   We believe that our current cash position and expected interest income will
be sufficient to fund our operations, capital expenditures, and working capital
requirements through at least the first half of 2003. Our marketing, general
and administrative expenses, working capital requirements and capital
expenditures will increase due to the manufacturing scale-up and marketing of
Arestin(TM). Research and development expenditures, including clinical studies
for new product candidates, will continue at high levels as we attempt to both
advance the development and potential commercialization of our new product
candidates and to obtain approval to sell Arestin(TM) in Europe. Due to the
need for higher volume manufacturing capability, we are incurring expenditures
for the purchase of additional production equipment. Sales and marketing
activities are expected to increase to support the sale of Arestin(TM) in the
United States and to begin sales efforts internationally, initially in Europe
if European approval is obtained and one or more distribution partners are
engaged.

CRITICAL ACCOUNTING POLICIES

   Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation
of financial statements. Note 2, in Notes to Consolidated Financial Statements
in our Form 10-K filed with the Securities and Exchange Commission, includes a
summary of the significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements. The following is a brief
discussion of the more significant accounting policies and methods used by us.
In addition, Financial Reporting Release No. 61 was recently released by the
SEC to require all companies to include a discussion to address, among other
things, liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments.

  Revenue Recognition

   We recognize revenue from the sale of Arestin(TM) upon shipment. We do not
grant price protection or product return rights to customers. The Securities
and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition" provides guidance on the application of generally accepted
accounting principles to selected revenue recognition issues. We have concluded
that our revenue recognition policy is appropriate and in accordance with
generally accepted accounting principles and SAB No. 101. In accordance with
Emerging Issues Task Force ("EITF") 00-10, we record shipping and handling
charges billed to customers as revenue and the related cost as cost of revenue.

  Accounts Receivable

   At March 31, 2002, accounts receivable totaled approximately $1.5 million
and were net of an allowance for doubtful accounts of $59,000, which represents
a reserve for estimated bad debts. We launched our initial product on April 2,
2001 and despite our limited sales history, believe our estimate to be
appropriate. As we establish more history with the sale of Arestin(TM), we may
find it necessary to refine the method used for determining our allowance for
doubtful accounts.

  Inventories

   Inventories totaled approximately $1.9 million and are stated at the lower
of cost or market, as determined using the first-in, first-out method, which
most closely reflects the physical flow of our inventories. Our product is
subject to a shelf life and is not saleable following the expiration of that
shelf life. The component with the shortest shelf life after production must be
packaged within twelve months. Finished product must be sold within twenty-four
months of packaging. Although we had no expiration of inventory during the
year, less than anticipated future sales could result in excess inventory,
which could become obsolete. To the extent that we have excess inventory in the
future, we would be required to thoroughly evaluate, and potentially reserve
for obsolescence. While we have a limited history, we believe this carrying
value to be appropriate at this time.


                                      11

<PAGE>

  Intangibles

   Certain acquired technologies, together with acquired patent license rights,
have been recorded at cost and are being amortized on a straight-line basis
over the ten year estimated useful life of the technology. In accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," if indicators of impairment exist, we
assess the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, we will measure the
amount of such impairment by comparing the carrying value of the assets to the
present value of the expected future cash flows associated with the use of the
asset. While our current and historical operating and cash flow losses are
indicators of impairment, we believe the future cash flows to be received from
the sale of Arestin(TM) will exceed the long-lived assets' carrying value, and,
accordingly, we have not recognized any impairment losses through March 31,
2002. If in the future we determine indications of impairment exist, we will be
required to write off the value of the impairment assessed at that time.

COMMITMENTS

   As outlined in Note 7 in Notes to Consolidated Financial Statements in our
Form 10-K filed with the Securities and Exchange Commission, we have entered
into various contractual obligations and commercial commitments. These
commitments include the following:

  .   facility leases;

  .   equipment leases;

  .   license agreements;

  .   royalty contracts; and

  .   outside manufacturing contracts.

  Facility Leases

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

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

  Equipment Operating Leases

   We have also entered into operating lease agreements for various office
equipment. The terms of these lease agreements range from 9 to 21 months.
Current minimum annual payments under these leases aggregate to $5,020 per
year. We believe we will enter into additional operating leases for office
equipment as the current leases expire or as additional office equipment is
required.

  License Agreements

   We have entered into research and consulting agreement with Biomodels LLC,
an affiliate of Mucosal Therapeutics LLC, and Children's Medical Center
Corporation ("CMCC"). These agreements are to perform research on our behalf
and to provide general consulting services regarding our development of certain
new product technologies. As of March 31, 2002, future sponsored research and
consulting payments required under these agreements total $129,000, all of
which is due in 2002. We may elect to enter into additional sponsored research
agreements with one or both of these entities.

                                      12

<PAGE>

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

  Royalty Contracts on Sales of Arestin(TM)

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

  Outside Manufacturing Commitments

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

  Off-Balance Sheet Arrangements

   We have not entered into any off-balance sheet arrangements through March
31, 2002.

INCOME TAXES

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risks

   Our cash, cash equivalents, and short-term investments total approximately
$37.1 million at March 31, 2002. Approximately $22.0 million is invested in a
money market fund and approximately $15.1 million in a U.S. Government debt
instrument that matures on February 15, 2003. The money market invests in
short-term government and investment-grade, interest-bearing securities on
which we were earning 1.94% at March 31, 2002 and we are earning 2.39% on the
U.S. Government debt instrument. The reduction of interest rates in the year
2002 had, and any future decline in interest rates will have, a negative impact
on the interest income we earn on these assets.

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

                                      13

<PAGE>

                          PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 2.  Changes in Securities and Use of Proceeds

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

   The net offering proceeds to the Company from the Offering, after deducting
discounts, commissions, fees and expenses, were $75,983,746. During the period
March 9, 2000 through December 31, 2001, we had used cash on hand prior to the
Offering plus $31,862,086 of the Offering proceeds. For the three months ended
March 31, 2002, we used $7,021,420 of the Offering proceeds and have applied it
as follows:

<TABLE>
<S>                                                                       <C>
To finance our net loss for the three months ended March 31, 2002, net of
  non-cash charges....................................................... $6,024,639
Working capital requirements.............................................    562,231
Purchase of fixed assets.................................................    434,550
</TABLE>

   As of March 31, 202, we have $37,100,240 of the offering proceeds remaining,
of which $22,018,918 is invested in a money market fund and $15,081,322 is
invested in a debt instrument of the U.S. Government that matures on February
15, 2003.

                                      14

<PAGE>

                                  SIGNATURES

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

<TABLE>
<C>   <S>                           <C>

Date: May 14, 2002                                 /S/  MICHAEL D. KISHBAUCH
                                    --------------------------------------
                                                    Michael D. Kishbauch
                                            President and Chief Executive Officer
                                                (Principal Executive Officer)

Date: May 14, 2002                                   /S/  JAMES A. RATIGAN
                                    --------------------------------------
                                                      James A. Ratigan
                                    Executive Vice President, Chief Financial Officer and
                                           Secretary (Principal Financial Officer)

Date: May 14, 2002                                   /s/  ROBERT D. HADDOW
                                    --------------------------------------
                                                      Robert D. Haddow
                                          Controller (Principal Accounting Officer)
</TABLE>

                                      15
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================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

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

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2002
                                      OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

                       Commission file number 000-29839

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

                                ORAPHARMA, INC.
            (Exact name of registrant as specified in its charter)

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

                                   Delaware
                         (State or other jurisdiction
                       of incorporation or organization)

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

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

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

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

   As of May 1, 2002, 13,602,785 shares of common stock were outstanding.

================================================================================
ORAPHARMA, INC. AND SUBSIDIARY
                                     INDEX
Page
                                                                                      ----
PART I     FINANCIAL INFORMATION

Item 1     Consolidated Financial Statements (unaudited).............................    3

           Balance Sheets--December 31, 2001 and March 31, 2002......................    3

           Statements of Operations--Three months ended March 31, 2001 and 2002......    4

           Statements of Cash Flows--Three months ended March 31, 2001 and 2002......    5

           Notes to Financial Statements.............................................    6

Item 2     Management's Discussion and Analysis of Financial Condition and Results of
           Operations................................................................ 7-13

Item 3     Quantitative and Qualitative Disclosures About Market Risks...............   13

PART II.   OTHER INFORMATION.........................................................   14

Item 1.    Legal Proceedings.........................................................   14

Item 2.    Changes in Securities and Use of Proceeds.................................   14

SIGNATURES                                                                              15
2
PART I  FINANCIAL INFORMATION

Item 1.  Financial Statements

                        ORAPHARMA, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS
                                  (unaudited)
December 31,   March 31,
                                                                               2001         2002
                                                                           ------------  ------------
ASSETS
CURRENT ASSETS
   Cash and cash equivalents.............................................. $ 44,121,660  $ 22,018,918
   Short-term investment in government securities.........................           --    15,081,322
   Accounts receivable, net...............................................    1,203,432     1,513,688
   Inventories............................................................    2,551,879     1,912,550
   Prepaid expenses and other.............................................      399,897       566,418
                                                                           ------------  ------------
       Total current assets...............................................   48,276,868    41,092,896
FIXED ASSETS, net.........................................................    6,685,335     6,726,300
INTANGIBLE ASSETS, net....................................................    2,787,693     2,650,614
                                                                           ------------  ------------
       Total assets....................................................... $ 57,749,896  $ 50,469,810
                                                                           ============  ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Accounts payable....................................................... $  4,500,131  $  4,252,060
   Accrued expenses.......................................................    2,168,564     1,687,870
                                                                           ------------  ------------
       Total current liabilities..........................................    6,668,695     5,939,930
                                                                           ------------  ------------
STOCKHOLDERS' EQUITY
   Preferred stock, par value $.001 per share,
     5,000,000 shares authorized, none issued.............................           --            --
   Common stock, par value $.001 per share,
     50,000,000 shares authorized, 13,538,411, and 13,548,248, issued and
     outstanding at December 31, 2001 and March 31, 2002, respectively....       13,538        13,548
   Additional paid-in capital.............................................  112,060,026   112,063,998
   Deferred compensation..................................................     (398,098)     (350,719)
   Accumulated deficit....................................................  (60,594,265)  (67,196,947)
                                                                           ------------  ------------
       Total stockholders' equity.........................................   51,081,201    44,529,880
                                                                           ------------  ------------
       Total liabilities and stockholders' equity......................... $ 57,749,896  $ 50,469,810
                                                                           ============  ============
The accompanying notes are an integral part of these financial statements.

                                      3
ORAPHARMA, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)
Three Months Ended March 31,
                                                ---------------------------
                                                    2001            2002
                                                 -----------    -----------
REVENUES................................. $        --     $ 4,153,646
                                                 -----------    -----------
      OPERATING EXPENSES
         Cost of revenues......................          --       1,046,212
         Research and development..............   2,545,619       2,733,387
         Marketing, general and administrative.   5,148,999       7,172,453
                                                 -----------    -----------
             Operating loss....................  (7,694,618)     (6,798,406)
      INTEREST INCOME..........................   1,007,565         195,724
                                                 -----------    -----------
      NET LOSS................................. $(6,687,053)    $(6,602,682)
                                                 ===========    ===========
      BASIC AND DILUTED NET LOSS PER
        SHARE.................................. $     (0.50)    $     (0.49)
                                                 ===========    ===========
      SHARES USED IN COMPUTING BASIC
        AND DILUTED NET LOSS PER SHARE.........  13,392,020      13,542,365
                                                 ===========    ===========
The accompanying notes are an integral part of these financial statements.

                                      4
ORAPHARMA, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)
Three Months Ended March 31,
                                                                             ---------------------------
                                                                                 2001           2002
                                                                             ------------   ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................................... $ (6,687,053)  $ (6,602,682)
Adjustments to reconcile net loss to net cash used in operating activities--
   Depreciation and amortization............................................      289,511        530,664
   Stock based compensation expense.........................................       51,061         47,379
Changes in operating assets and liabilities--
   Accounts receivable......................................................           --       (310,256)
   Inventories..............................................................   (1,110,926)       639,329
   Prepaid expenses and other...............................................     (156,685)      (166,521)
   Accounts payable.........................................................    1,709,815       (248,071)
   Accrued expenses.........................................................     (367,477)      (480,694)
                                                                             ------------   ------------
       Net cash used in operating activities................................   (6,271,754)    (6,590,852)
                                                                             ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investment in government securities..................           --    (15,081,322)
Capital expenditures........................................................   (1,629,566)      (434,550)
Expenditures for intangible assets..........................................   (2,600,000)            --
                                                                             ------------   ------------
       Net cash used in investing activities................................   (4,229,566)   (15,515,872)
                                                                             ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the exercise of stock options and warrants....................       19,268          3,982
                                                                             ------------   ------------
       Net cash provided by financing activities............................       19,268          3,982
                                                                             ------------   ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS...................................  (10,482,052)   (22,102,742)
CASH AND CASH EQUIVALENTS, beginning of period..............................   75,255,171     44,121,660
                                                                             ------------   ------------
CASH AND CASH EQUIVALENTS, end of period.................................... $ 64,773,119   $ 22,018,918
                                                                             ============   ============
The accompanying notes are an integral part of these financial statements.

                                      5
ORAPHARMA, INC. AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

1.  BASIS OF PRESENTATION

   The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In management's opinion, the accompanying consolidated financial
statements have been prepared on a basis consistent with the audited financial
statements and contain adjustments, which are of a normal and recurring nature,
necessary to present fairly the Company's financial position and results of
operations. Interim financial results are not necessarily indicative of results
anticipated for the full year. These unaudited consolidated financial
statements should be read in conjunction with the Company's 2001 audited
financial statements and footnotes included in the Company's Annual Report
filed with the Securities and Exchange Commission on Form 10-K (File No.
000-29829).

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

2.  NET LOSS PER COMMON SHARE

   The Company has presented basic and diluted net loss per share pursuant to
the Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share", and the Securities and Exchange Commission Staff Accounting Bulletin
No. 98. In accordance with SFAS 128, basic and diluted net loss per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase.

   The calculation of basic and diluted loss per common share excludes all
outstanding stock options and warrants and shares subject to repurchase because
all such securities are antidilutive for all applicable periods presented.

3.  INVENTORIES

   Inventories, which relate solely to Arestin(TM), are stated at the lower of
cost or market, as determined using the first-in, first-out method. Inventories
consisted of:
December 31, March 31,
                                        2001       2002
                                    ------------ ----------
Raw materials.  $  542,215  $  739,047
                     Finished goods   2,009,664   1,173,503
                                     ----------  ----------
                                     $2,551,879  $1,912,550
                                     ==========  ==========
6
Item 2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations

FORWARD LOOKING STATEMENTS

   The following Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as information contained elsewhere in this
Report, contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. These unaudited
consolidated financial statements should be read in conjunction with the
Company's 2001 audited financial statements and footnotes included in the
Company's Annual Report filed with the Securities and Exchange Commission on
Form 10-K. These forward-looking statements include statements about the
following:

  .   our ability to successfully market Arestin(TM) in the United States;

  .   our ability to predict future sales levels of Arestin(TM);

  .   our ability to obtain approval to sell Arestin(TM) in Europe;

  .   our intentions regarding European distribution partners;

  .   anticipated operating losses and capital expenditures;

  .   the adequacy of our liquidity position; and

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

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

OVERVIEW OF ORAPHARMA'S FINANCIAL PERFORMANCE

  Background

   We have devoted substantially all of our resources since we began operations
in August 1996 to the research and development of specialty pharmaceutical
products, with an initial focus on oral health care. Our initial research and
development program was based on our core drug delivery technology that we
license from American Home Products ("AHP"), for the development of our first
product, Arestin(TM), that focuses on periodontal disease. In December 1998, we
licensed a technology for an indication in oncology, and on August 27, 2001, we
announced the start of Phase 1 human clinical trials for that product candidate
(OC-1012), which focuses on mucositis, a condition secondary to certain cancer
treatments. In December 1998, we also licensed a technology for bone
regeneration. We continue to make progress on our bone regeneration product
candidate (OC-1016). We performed pre-clinical studies on OC-1016 and we are
currently awaiting clearance from the FDA to begin Phase I clinical trials. We
are currently seeking partners for the OC-1016 compound for both dental
implantation and orthopedics, though we have not entered into any agreement
with potential partners. We

                                      7
believe that beginning Phase I human clinical trials with partners will enable
us to maximize the value of the OC-1016 compound. We cannot accurately estimate
either the cost of the development activities or clinical trials for either the
OC-1012 or the OC-1016 compounds, nor can we accurately estimate the time when
these costs will be incurred, and we are unable to predict with any certainty
if either of these product candidates will become commercial products.
Likewise, we are unable to estimate either the costs or the time when such
costs will be incurred in connection with our product candidate development
initiatives in the areas of our drug delivery system for large and small
molecule drugs, our second-generation therapeutic for periodontal disease, or
our therapeutic to treat traumatic injuries to teeth.

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

   Prior to April 2, 2001, we operated as a development-stage company and did
not generate any revenue. We are unable to predict how quickly, or to what
extent, revenue from the sale of Arestin(TM) will increase. We have not been
profitable and since inception have incurred cumulative net losses of
approximately $67.2 million through March 31, 2002. These losses have resulted
principally from costs incurred in research and development activities related
to Arestin(TM) and our new product candidates still in development for
mucositis and bone regeneration, together with marketing, general and
administrative expenses, and to a lesser extent from costs incurred in
connection with development initiatives in the areas of our drug delivery
system for large and small molecule drugs, our second-generation therapeutic
for periodontal disease, and our therapeutic to treat traumatic injuries to
teeth.

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

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

  Milestone Payments, Royalties and License Fees

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

   In April 2000, we paid Gary R. Jernberg, D.D.S. a milestone payment of
$50,000 based on the FDA acceptance of our NDA for review. A second milestone
payment of $100,000 was paid to Dr. Jernberg on March 16, 2001 as a result of
the FDA approval of Arestin(TM) for the adjunct treatment of adult
periodontitis. We also issued Dr. Jernberg a warrant to purchase 20,000 shares
of common stock at an exercise price of $0.10 per share,

                                      8
which warrant was exercised in April 1997, and engaged Dr. Jernberg as an
advisor, for an annual retainer fee of $30,000. We are required to pay
royalties on sales of Arestin(TM) to Dr. Jernberg, a holder of three U.S.
patents, and to Technical Development and Investments, Est. ("TDI"), relating
to technology previously licensed by AHP to this third party. The cumulative
amount of any retainers paid to Dr. Jernberg will reduce any royalties payable
to Dr. Jernberg, and any royalties payable to either of these parties can be
fully credited against up to 50% of the royalties payable under our agreement
with AHP.

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

   We have also entered into a research and consulting agreement with Biomodels
LLC, an affiliate of Mucosal Therapeutics LLC, to perform preclinical studies
on our behalf and to provide us with research and general consulting services
regarding our development of the mucositis technology. At March 31, 2002, all
remaining payments due to this third party total $60,000, all of which is due
in 2002.

   We issued 82,500 shares of common stock in June, 1999, valued at $400,950,
to Children's Medical Center Corporation ("CMCC"). We are also required to make
milestone payments totaling $1.0 million to CMCC, payable in the form of cash
or shares of our common stock, upon submission of our first NDA relating to a
bone regeneration product candidate and upon approval of our first such NDA. We
are also obligated to pay CMCC royalties on sales of products covered by the
CMCC patents, or which are specified bone and soft-tissue regeneration
products. We have also entered into a sponsored research agreement with
Children's Hospital, a non-profit affiliate of CMCC, to conduct research in the
area of bone and soft-tissue regeneration and perform related preclinical
studies. At March 31, 2002, all remaining payments due under the sponsored
research agreement total $69,000, all of which is due in 2002.

RESULTS OF OPERATIONS

   From its founding through the three months ended March 31, 2001, the Company
had no revenues. The Company's first commercial product, Arestin(TM), was
launched on April 2, 2001.

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS MARCH 31, 2001.

   Revenues.  The Company reported approximately $4.2 million in revenue for
the three months ended March 31, 2002. Revenues for the three months ended
March 31, 2002 were solely comprised of sales of Arestin(TM). Prior to the
launch of Arestin(TM) on April 2, 2001, the Company had reported no revenue.

   Cost of Revenues.  Cost of revenues for Arestin(TM) was approximately $1.0
million, or 25.2% of revenues, for the three months ended March 31, 2002.

   Research and Development Expenses.  Research and development expenses were
approximately $2.7 million for the three months ended March 31, 2002 compared
to approximately $2.5 million in the same period in 2001, an increase of 7.4%.
This increase of $188,000 is primarily due to increased spending on clinical
research for the Phase I trial of our mucositis product candidate and ongoing
Arestin(TM) studies, offset by a reduction in R&D spending for the scale up of
Arestin(TM) production.

                                      9
Marketing, General and Administrative Expenses.  Marketing, general and
administrative expenses were approximately $7.2 million for the three months
ended March 31, 2002 compared to approximately $5.1 million in the same period
in 2001, an increase of 39.3%. This increase of approximately $2.0 million is
due to increased spending for sales and marketing activities associated with
Arestin(TM) and higher personnel costs offset by lower professional expenses.

   Interest Income.  Interest income was $196,000 for the three months ended
March 31, 2002 compared to approximately $1.0 million in the same period in
2001, a decrease of 80.6%. This decrease of $812,000 is due to lower levels of
cash and cash equivalents available for investment in 2002, together with lower
interest rates in 2002. The lower levels of cash and cash equivalents were due
to cash required to finance the net loss in 2001 and the net loss for the three
months ended March 30, 2002, together with working capital requirements and
investing activities in 2001 and 2002.

   Net Loss.  The net loss was approximately $6.6 million for the three months
ended March 31, 2002 compared to approximately $6.7 million in the same period
in 2001, a decrease of 1.3%. This decrease of $84,000 is due to increased
expenditures for research and development, increased marketing, general and
administrative expenses, and decreased interest income, offset by the gross
profit realized on revenues generated by the sale of Arestin(TM).

LIQUIDITY AND CAPITAL RESOURCES

   As of March 31, 2002, we had cash, cash equivalents and short-term
investments totaling approximately $37.1 million, a decrease of approximately
$7.0 million from December 31, 2001. The decrease in cash was due to the net
loss we incurred for the three months ended March 31, 2002, together with cash
required for capital equipment and changes in working capital.

   During the three months ended March 31, 2002, net cash used in operating
activities was approximately $6.6 million. This represents the net loss for the
three months, adjusted for certain non-cash charges and changes in operating
assets and liabilities, principally increases in accounts receivable and
prepaid expenses and decreases in accounts payable and accrued expenses, offset
by decreases in inventories.

   Net cash used in investing activities for the three months ended March 31,
2002 was approximately $15.5 million. During the first quarter of 2002, the
Company invested approximately $15.1 million of its excess cash in a debt
instrument of the U.S. Government, which matures on February 15, 2003. During
the first quarter the Company also purchased $435,000 of capital equipment,
consisting of dispenser handles, computer software, lab equipment, and office
equipment.

   We lease our corporate and research and development facilities under two
operating leases that expire on September 30, 2003 and January 31, 2004. Each
lease has two 5-year renewal options subject to the landlord's determination of
the fair rental value for each renewal term. We have also entered into
operating lease agreements for miscellaneous office equipment. The terms of
these lease agreements range from 9 to 21 months. Maximum annual payments for
both the real and personal property leases total $274,000 per year.

   We anticipate that our aggregate capital expenditures will be approximately
$1.6 million for the year ending December 31, 2002, of which $435,000 was
incurred during the first quarter. Of this amount, $610,000 will be used to
purchase production equipment and Arestin(TM) dispenser handles, and $984,000
will be used to purchase computer hardware and software, telephone equipment,
leasehold improvements, laboratory equipment, office equipment and furniture.
We expect that our 2002 aggregate working capital requirements to finance
growth in accounts receivables, inventories and prepaid expenses, offset by
increased accounts payable and accrued expenses, will aggregate approximately
$4.2 million.

                                      10
We believe that our current cash position and expected interest income will
be sufficient to fund our operations, capital expenditures, and working capital
requirements through at least the first half of 2003. Our marketing, general
and administrative expenses, working capital requirements and capital
expenditures will increase due to the manufacturing scale-up and marketing of
Arestin(TM). Research and development expenditures, including clinical studies
for new product candidates, will continue at high levels as we attempt to both
advance the development and potential commercialization of our new product
candidates and to obtain approval to sell Arestin(TM) in Europe. Due to the
need for higher volume manufacturing capability, we are incurring expenditures
for the purchase of additional production equipment. Sales and marketing
activities are expected to increase to support the sale of Arestin(TM) in the
United States and to begin sales efforts internationally, initially in Europe
if European approval is obtained and one or more distribution partners are
engaged.

CRITICAL ACCOUNTING POLICIES

   Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation
of financial statements. Note 2, in Notes to Consolidated Financial Statements
in our Form 10-K filed with the Securities and Exchange Commission, includes a
summary of the significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements. The following is a brief
discussion of the more significant accounting policies and methods used by us.
In addition, Financial Reporting Release No. 61 was recently released by the
SEC to require all companies to include a discussion to address, among other
things, liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments.

  Revenue Recognition

   We recognize revenue from the sale of Arestin(TM) upon shipment. We do not
grant price protection or product return rights to customers. The Securities
and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition" provides guidance on the application of generally accepted
accounting principles to selected revenue recognition issues. We have concluded
that our revenue recognition policy is appropriate and in accordance with
generally accepted accounting principles and SAB No. 101. In accordance with
Emerging Issues Task Force ("EITF") 00-10, we record shipping and handling
charges billed to customers as revenue and the related cost as cost of revenue.

  Accounts Receivable

   At March 31, 2002, accounts receivable totaled approximately $1.5 million
and were net of an allowance for doubtful accounts of $59,000, which represents
a reserve for estimated bad debts. We launched our initial product on April 2,
2001 and despite our limited sales history, believe our estimate to be
appropriate. As we establish more history with the sale of Arestin(TM), we may
find it necessary to refine the method used for determining our allowance for
doubtful accounts.

  Inventories

   Inventories totaled approximately $1.9 million and are stated at the lower
of cost or market, as determined using the first-in, first-out method, which
most closely reflects the physical flow of our inventories. Our product is
subject to a shelf life and is not saleable following the expiration of that
shelf life. The component with the shortest shelf life after production must be
packaged within twelve months. Finished product must be sold within twenty-four
months of packaging. Although we had no expiration of inventory during the
year, less than anticipated future sales could result in excess inventory,
which could become obsolete. To the extent that we have excess inventory in the
future, we would be required to thoroughly evaluate, and potentially reserve
for obsolescence. While we have a limited history, we believe this carrying
value to be appropriate at this time.

                                      11
Intangibles

   Certain acquired technologies, together with acquired patent license rights,
have been recorded at cost and are being amortized on a straight-line basis
over the ten year estimated useful life of the technology. In accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," if indicators of impairment exist, we
assess the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, we will measure the
amount of such impairment by comparing the carrying value of the assets to the
present value of the expected future cash flows associated with the use of the
asset. While our current and historical operating and cash flow losses are
indicators of impairment, we believe the future cash flows to be received from
the sale of Arestin(TM) will exceed the long-lived assets' carrying value, and,
accordingly, we have not recognized any impairment losses through March 31,
2002. If in the future we determine indications of impairment exist, we will be
required to write off the value of the impairment assessed at that time.

COMMITMENTS

   As outlined in Note 7 in Notes to Consolidated Financial Statements in our
Form 10-K filed with the Securities and Exchange Commission, we have entered
into various contractual obligations and commercial commitments. These
commitments include the following:

  .   facility leases;

  .   equipment leases;

  .   license agreements;

  .   royalty contracts; and

  .   outside manufacturing contracts.

  Facility Leases

   We lease our corporate and research and development facilities under two
separate operating leases. The first lease is scheduled to expire on September
30, 2003 and the second lease is scheduled to expire on January 31, 2004. We
have two 5-year renewal options on each of the leases. The following is a
summary of the minimum annual lease payments required under these leases.
2002........................ $268,782
                     2003........................  228,940
                     2004........................    7,442
                                                  --------
                     Total minimum lease payments $505,164
                                                  ========
Equipment Operating Leases

   We have also entered into operating lease agreements for various office
equipment. The terms of these lease agreements range from 9 to 21 months.
Current minimum annual payments under these leases aggregate to $5,020 per
year. We believe we will enter into additional operating leases for office
equipment as the current leases expire or as additional office equipment is
required.

  License Agreements

   We have entered into research and consulting agreement with Biomodels LLC,
an affiliate of Mucosal Therapeutics LLC, and Children's Medical Center
Corporation ("CMCC"). These agreements are to perform research on our behalf
and to provide general consulting services regarding our development of certain
new product technologies. As of March 31, 2002, future sponsored research and
consulting payments required under these agreements total $129,000, all of
which is due in 2002. We may elect to enter into additional sponsored research
agreements with one or both of these entities.

                                      12
In addition, we are also required to make payments to Mucosal Therapeutics
totaling $2.0 million in cash, or $1.0 million in cash and $1.25 million in
common stock, and to CMCC, totaling $1.0 million, payable in the form of cash
or shares of our common stock, as preclinical and clinical milestones are
achieved, and upon FDA approval of any pharmaceutical products covered by the
license agreements. These license agreements further obligate us to pay
royalties on sales of pharmaceutical products covered by the licenses or
involving use of the technologies.

  Royalty Contracts on Sales of Arestin(TM)

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

  Outside Manufacturing Commitments

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

  Off-Balance Sheet Arrangements

   We have not entered into any off-balance sheet arrangements through March
31, 2002.

INCOME TAXES

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risks

   Our cash, cash equivalents, and short-term investments total approximately
$37.1 million at March 31, 2002. Approximately $22.0 million is invested in a
money market fund and approximately $15.1 million in a U.S. Government debt
instrument that matures on February 15, 2003. The money market invests in
short-term government and investment-grade, interest-bearing securities on
which we were earning 1.94% at March 31, 2002 and we are earning 2.39% on the
U.S. Government debt instrument. The reduction of interest rates in the year
2002 had, and any future decline in interest rates will have, a negative impact
on the interest income we earn on these assets.

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

                                      13
PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 2.  Changes in Securities and Use of Proceeds

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

   The net offering proceeds to the Company from the Offering, after deducting
discounts, commissions, fees and expenses, were $75,983,746. During the period
March 9, 2000 through December 31, 2001, we had used cash on hand prior to the
Offering plus $31,862,086 of the Offering proceeds. For the three months ended
March 31, 2002, we used $7,021,420 of the Offering proceeds and have applied it
as follows:
To finance our net loss for the three months ended March 31, 2002, net of
  non-cash charges....................................................... $6,024,639
Working capital requirements.............................................    562,231
Purchase of fixed assets.................................................    434,550
As of March 31, 202, we have $37,100,240 of the offering proceeds remaining,
of which $22,018,918 is invested in a money market fund and $15,081,322 is
invested in a debt instrument of the U.S. Government that matures on February
15, 2003.

                                      14
SIGNATURES

   Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2002                                 /S/  MICHAEL D. KISHBAUCH
                                    --------------------------------------
                                                    Michael D. Kishbauch
                                            President and Chief Executive Officer
                                                (Principal Executive Officer)

Date: May 14, 2002                                   /S/  JAMES A. RATIGAN
                                    --------------------------------------
                                                      James A. Ratigan
                                    Executive Vice President, Chief Financial Officer and
                                           Secretary (Principal Financial Officer)

Date: May 14, 2002                                   /s/  ROBERT D. HADDOW
                                    --------------------------------------
                                                      Robert D. Haddow
                                          Controller (Principal Accounting Officer)
15