<PAGE>

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

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

                                   FORM 10-QSB

           [X] Quarterly Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
                  For the quarterly period ended March 31, 2002

                                       OR

          [_] Transition Report pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
            For the Transition Period from ___________ to ___________

                        Commission File Number: 333-64430

                            MoliChem Medicines, Inc.
             (Exact name of Registrant as specified in its charter)

                  Delaware                                  33-0820923
      (State or other jurisdiction of                    (I.R.S. Employer
       incorporation or organization)                   Identification No.)

                           100 Europa Drive, Suite 421
                        Chapel Hill, North Carolina 27517
          (Address of principal executive offices, including zip code)

                                 (919) 960-0217
              (Registrant's telephone number, including area code)


     The number of shares of the Registrant's common stock outstanding at May
10, 2002 was 18,679,287.

       Transitional Small Business Disclosure Format:  Yes [_]  No [X]

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

<PAGE>

                            MOLICHEM MEDICINES, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                      Page
Item                         Part I. Financial Information                           number
----   -----------------------------------------------------------------------       ------
<S>    <C>                                                                           <C>
 1.    Consolidated Financial Statements:

       a. Consolidated Balance Sheets as of  March 31, 2002 (unaudited) and
          December 31, 2001                                                             2

       b. Unaudited Consolidated Statements of Operations for the three months
          ended March 31, 2002 and 2001, and period from December 22, 1995
          (date of inception) through March 31, 2002                                    3

       c. Unaudited Consolidated Statements of Cash Flows for the three months
          ended March 31, 2002 and 2001, and period from December 22, 1995
          (date of inception) through March 31, 2002                                    4

       d. Notes to Unaudited Consolidated Financial Statements                          5

 2.    Management's Discussion and Analysis of Financial Condition and Results
       of Operations                                                                    9

                              Part II. Other Information
       -----------------------------------------------------------------------
 6.    Exhibits and Reports on Form 8-K                                                14

       Signatures                                                                      15
</TABLE>

<PAGE>


PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
MOLICHEM MEDICINES, INC. AND SUBSIDIARY
(A company in the development stage)

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
-------------------------------------------------------------------------------------------------------------
ASSETS                                                                             March 31,     December 31,
                                                                                     2002            2001
                                                                                 -----------     ------------
                                                                                 (Unaudited)
<S>                                                                              <C>              <C>
CURRENT ASSETS:
     Cash and cash equivalents .............................................     $ 2,119,492      $ 1,481,881
     Accounts receivable ...................................................         335,885          435,800
     Prepaid expenses and other current assets .............................          27,524            2,902
                                                                                 -----------      -----------
              Total current assets .........................................       2,482,901        1,920,583
                                                                                 -----------      -----------

PROPERTY AND EQUIPMENT, net ................................................          41,301           32,299

OTHER ASSETS ...............................................................          32,616            7,646
                                                                                 -----------      -----------

TOTAL ASSETS ...............................................................     $ 2,556,818      $ 1,960,528
                                                                                 ===========      ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

     Accounts payable and accrued expenses .................................     $   438,153      $   380,373
     Deferred revenue ......................................................         360,000          360,000
     Accrued income taxes ..................................................          26,500           39,500
                                                                                 -----------      -----------
              Total current liabilities ....................................         824,653          779,873
                                                                                 -----------      -----------

LONG-TERM LIABILITES:

     Deferred revenue, excluding current portion ...........................         810,000          900,000
                                                                                 -----------      -----------

STOCKHOLDERS' EQUITY:
     Preferred stock - $0.0001 par value, 20,000,000 shares authorized, none
              issued and outstanding at March 31, 2002 and December 31, 2001
     Common stock - $0.0001 par value, 80,000,000 shares authorized,
              18,679,287 and 17,679,287 shares issued and outstanding at
              March 31, 2002 and December 31, 2001, respectively ...........           1,868            1,768
     Additional paid-in capital ............................................       4,373,609        2,873,709
     Deferred compensation .................................................        (350,952)        (369,199)
     Accumulated deficit ...................................................      (3,102,360)      (2,225,623)
                                                                                 -----------      -----------
              Total stockholders' equity ...................................         922,165          280,655
                                                                                 -----------      -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................     $ 2,556,818      $ 1,960,528
                                                                                 ===========      ===========
</TABLE>

See notes to consolidated financial statements.


                                       2

<PAGE>

MOLICHEM MEDICINES, INC. AND SUBSIDIARY
(A company in the development stage)

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001, AND PERIOD FROM
DECEMBER 22, 1995 (DATE OF INCEPTION) THROUGH MARCH 31, 2002
----------------------------------------------------------------------------------------------
                                                                                     Period
                                                                                  December 22,
                                                                                      1995
                                                Three Months Ended March 31,        (Date of
                                                                    2001            Inception)
                                                                (As restated,        Through
                                                   2002          see Note 6)     March 31, 2002
                                                -----------     -------------    --------------
<S>                                             <C>             <C>              <C>
REVENUE:
   Grant revenue ..........................     $      --        $    88,783      $ 1,716,697
   Revenue from joint development agreement         425,585             --          1,101,085
                                                -----------      -----------      -----------
           Total revenue ..................         425,585           88,783        2,817,782
                                                -----------      -----------      -----------

OPERATING EXPENSES:
   Research and development ...............         885,351           98,737        3,588,133
   General and administrative costs .......         421,030          245,430        2,754,304
   Depreciation and amortization ..........           1,926              522           15,411
                                                -----------      -----------      -----------
           Total operating expenses .......       1,308,307          344,689        6,357,848
                                                -----------      -----------      -----------

LOSS FROM OPERATIONS ......................        (882,722)        (255,906)      (3,540,066)
                                                -----------      -----------      -----------

INTEREST EXPENSE ..........................            (620)          (3,483)         (40,145)

INTEREST INCOME ...........................           6,605           11,363           76,607
                                                -----------      -----------      -----------

LOSS BEFORE INCOME TAXES ..................        (876,737)        (248,026)      (3,503,604)

INCOME TAXES ..............................            --               --             39,500
                                                -----------      -----------      -----------

NET LOSS ..................................     $  (876,737)     $  (248,026)     $(3,543,104)
                                                ===========      ===========      ===========

Net loss per share-basic and diluted ......     $     (0.05)     $     (0.01)     $     (0.26)
                                                ===========      ===========      ===========
</TABLE>

See notes to consolidated financial statements.


                                       3

<PAGE>

MOLICHEM MEDICINES, INC. AND SUBSIDIARY
(A company in the development stage)

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001, AND PERIOD FROM
DECEMBER 22, 1995 (DATE OF INCEPTION) TO MARCH 31, 2002
---------------------------------------------------------------------------------------------------------------------------
                                                                                                                Period
                                                                                                          December 22, 1995
                                                                           Three Months Ended March 31,       (Date of
                                                                                               2001           Inception)
                                                                                          (As restated,        Through
                                                                              2002         see Note 6)     March 31, 2002
                                                                          -----------     -------------   -----------------
<S>                                                                       <C>              <C>              <C>
OPERATING ACTIVITIES:
     Net loss .......................................................     $  (876,737)     $  (248,026)     $(3,543,104)
     Adjustments to reconcile net loss to
       net cash used in operating activities:
       Depreciation and amortization ................................           1,926              522           15,411
       Amortization of deferred stock compensation ..................          18,247          182,524        1,252,361
       Stock and options issued for consulting services .............            --               --            117,406
     Increase (decrease) in cash attributable to changes in operating
       assets and liabilities:
       Accounts receivable ..........................................          99,915             (300)        (335,885)
       Prepaid expenses and other assets ............................         (24,622)           1,740          (27,524)
       Accounts payable and accrued expenses ........................          57,780          (11,054)         438,153
       Deferred revenue .............................................         (90,000)            --          1,170,000
       Accrued income taxes .........................................         (13,000)            --             26,500
                                                                          -----------      -----------      -----------
              Net cash used in operating activities .................        (826,491)         (74,594)        (886,682)
                                                                          -----------      -----------      -----------

INVESTING ACTIVITIES:

     Purchases of property and equipment ............................         (10,898)            (830)         (54,222)
     Investment in other assets .....................................            --               --            (10,106)
                                                                          -----------      -----------      -----------
              Net cash used in investing activities .................         (10,898)            (830)         (64,328)
                                                                          -----------      -----------      -----------

FINANCING ACTIVITIES:

     Deferred financing costs .......................................         (25,000)            --            (25,000)
     Borrowing on loan payable ......................................            --             40,000          120,000
     Repayment on loan payable ......................................            --           (120,000)        (120,000)
     Borrowing on note payable ......................................            --              3,483             --
     Issuance of stock in reverse merger ............................            --          1,494,489        1,494,489
     Issuance of stock ..............................................       1,500,000             --          1,601,013
                                                                          -----------      -----------      -----------
              Net cash provided by financing activities .............       1,475,000        1,417,972        3,070,502
                                                                          -----------      -----------      -----------

NET INCREASE IN CASH AND CASH EQUIVALENTS ...........................         637,611        1,342,548        2,119,492

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................       1,481,881           65,908             --
                                                                          -----------      -----------      -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD ............................     $ 2,119,492      $ 1,408,456      $ 2,119,492
                                                                          ===========      ===========      ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
     Cash paid for income taxes .....................................     $    13,000      $      --        $    13,000
                                                                          ===========      ===========      ===========
     Cash paid for interest .........................................     $       620      $      --        $    38,495
                                                                          ===========      ===========      ===========
</TABLE>

See notes to consolidated financial statements.


                                       4

<PAGE>

                            MOLICHEM MEDICINES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.   NATURE OF BUSINESS AND BASIS OF PRESENTATION

     Organization and Description of the Business - Molichem Medicines, Inc.
     (the "Company") is an early stage pharmaceutical company focused on the
     discovery, development and marketing of pharmaceutical products for the
     treatment of serious respiratory and related conditions. These development
     and commercialization activities are conducted by the Company's sole
     wholly-owned subsidiary Molichem R&D, Inc. ("Molichem R&D"). The Company is
     headquartered in Chapel Hill, North Carolina.

     Molichem R&D was incorporated on December 22, 1995 in North Carolina. On
     January 18, 2001, Molichem R&D acquired Cortez Development, Ltd. ("Cortez")
     in a reverse merger in which Molichem R&D was the accounting acquirer and
     Cortez was the legal acquirer (see Note 3). Cortez was incorporated on July
     20, 1998 under the laws of the State of Delaware and had no operations
     prior to the reverse merger.

     Prior to the reverse merger, Molichem R&D was known as Molichem Medicines,
     Inc. In connection with the reverse merger, Cortez assumed the name
     Molichem Medicines, Inc.

     The consolidated financial statements have been prepared in accordance with
     Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and
     Reporting by Development Stage Enterprises. Since its inception, the
     Company has devoted substantially all of its efforts to establishing a new
     business, and its planned principal operations of commercializing
     pharmaceutical products have not commenced. Its principal activities to
     date have been development of a financial plan, procurement of capital,
     research and development, acquisition of operating equipment, recruitment
     of personnel, development of proprietary drug candidates, and clinical
     research. The success of the Company is dependent upon obtaining additional
     financing from third-parties and the successful development and marketing
     of products from the Company's research and development programs in order
     to generate revenue adequate to support its cost structure.

     Basis of Presentation - The consolidated financial statements include the
     accounts of MoliChem Medicines, Inc. and its wholly-owned subsidiary,
     MoliChem R&D, Inc. All intercompany accounts and transactions have been
     eliminated.

     The accompanying unaudited consolidated financial statements include all
     adjustments (consisting only of normal recurring adjustments) that, in the
     opinion of management, are necessary for a fair presentation of financial
     position, results of operations and cash flows. Certain information and
     footnote disclosures usually included in financial statements prepared in
     accordance with accounting principles generally accepted in the United
     States of America have been condensed or omitted. These financial
     statements should be read in conjunction with Management's Discussion and
     Analysis of Financial Condition and Results of Operations included
     elsewhere in this Report, and with the audited financial statements
     included in the Company's Annual Report on Form 10-KSB for the fiscal year
     ended December 31, 2001 filed with the Securities and Exchange Commission.
     The results of operations for interim periods are not necessarily
     indicative of results to be expected for a full year or for any future
     period.

     The accompanying financial statements have been prepared on a going concern
     basis, which assumes continuity of operations and realization of assets and
     satisfaction of liabilities in the ordinary course of business. As shown in
     the accompanying financial statements, the Company incurred a net loss of
     $876,737 in the three months ended March 31, 2002 and used cash from
     operations of $826,491 during that three-month period. Additionally, the
     Company plans to increase


                                       5

<PAGE>

     expenditures on its research and development activities during the
     remainder of 2002.

     The Company's ability to improve its financial position will be influenced
     by, among other things, its ability to obtain additional financing,
     successfully develop its products, obtain Food and Drug Administration
     approval of and successfully market its products. The Company's ability to
     continue as a going concern is dependent upon its ability to generate
     sufficient cash flow and earnings to meet its obligations on a timely basis
     and to obtain additional financial resources as required in the future.

     Management of the Company has plans to continue to expand its drug
     development activities during 2002 and following years. The expansion of
     development activities will require additional capital resources in excess
     of what is currently available to the Company. Current investors in the
     Company exercised warrants in January 2002 providing an additional
     $1,500,000 in working capital for the Company to continue its drug
     development efforts. The Company plans to pursue additional equity
     financing to secure adequate resources to fund its development activities.
     The Company's future cash requirements might differ from those currently
     planned because of uncertainties inherent in the business of drug
     development and commercialization. In the event the Company is unable to
     obtain additional financial resources, it intends to reduce the scope of
     its development activities, adopt a viable alternative business model, and
     reduce its operating costs to permit existing capital resources to finance
     its operations until additional resources become available. Management of
     the Company believes such an alternative plan could be implemented and
     would allow the Company to continue its operations for a reasonable period
     of time. However, an alternative plan might differ significantly from the
     Company's current operating strategy and would not guarantee the long-term
     success of the Company.

     Reclassifications - Certain prior year amounts have been reclassified to
     conform to the 2002 presentation.

     Recently adopted accounting standards - In July 2001, the Financial
     Accounting Standards Board ("FASB") issued Statement of Financial
     Accounting Standard ("SFAS") No. 142, Goodwill and Other Intangible Assets.
     This statement requires that goodwill and other intangible assets with
     indefinite useful lives no longer be amortized, but instead tested for
     impairment at least annually. In August 2001, the FASB issued SFAS No. 144,
     Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No.
     144 applies one accounting model for long-lived assets to be disposed of by
     sale, and broadens the presentation of discontinued operations to include
     more disposal transactions.

     These statements were effective for the Company beginning January 1, 2002.
     The Company has no goodwill or other intangible assets with indefinite
     useful lives. The Company also has no plans to dispose of any long-lived
     assets. Accordingly, the adoption of these statements had no impact on its
     consolidated financial statements.

     Recently issued accounting standard - In June 2001, the FASB issued SFAS
     No. 143, Accounting for Asset Retirement Obligations. The Company has
     evaluated the impact of the adoption of this standard and does not believe
     that its adoption will have an impact on its financial position and results
     of operations.

2.   CONTRACT DEPOSIT AND COMMERCIALIZATION AGREEMENT

     On May 11, 2001, the Company entered into a Development and
     Commercialization Agreement (the "Agreement") with InterMune, Inc.
     ("InterMune") for the joint development and commercialization of its
     compound, Moli1901. Under the Agreement, InterMune is granted a
     co-exclusive worldwide license for Moli1901 and is required to share
     equally the costs of development and commercialization of Moli1901 for the
     treatment of cystic fibrosis and other therapeutic applications. Upon
     commercialization of Moli1901, InterMune and the Company will share equally
     in the net profits or losses from the sale of the products that have been
     jointly developed. At the time of execution of the Agreement, InterMune
     made a non-refundable up-front payment to the Company of $1,450,000.
     InterMune is obligated to make additional non-refundable payments of up to
     $5,000,000 upon achievement of specified milestones related to each
     therapeutic application


                                       6

<PAGE>

     developed from Moli1901. Should one of the parties be unable or unwilling
     to pay for its share of the development and commercialization costs under
     the Agreement, that party's pro-rata share of profits or losses would be
     reduced to the pro-rata share of expenses contributed to the development
     and commercialization for that respective therapeutic application. The
     milestone payments for each respective therapeutic application developed
     from Moli1901 are due to the Company regardless of whether it contributes
     to the current or future development and commercialization expenses. None
     of the milestones that would require additional payment under the agreement
     have been attained as of March 31, 2002.

     In November 2000, InterMune paid the Company $50,000 as a refundable
     exclusive dealing binder (the "Binder Payment") under which the Company
     agreed to pursue the execution of the Agreement. Upon execution of the
     Agreement, the Binder Payment became non-refundable. The up-front payments
     related to the Agreement totaling $1,500,000 are being recognized as
     revenue ratably over the anticipated 50-month period from the signing of
     the Agreement until Moli1901 is approved for sale.

     During the three months ended March 31, 2002, the Company recognized
     $90,000 relating to amortization of the up-front payments and $335,585
     related to shared product development costs. No revenue related to the
     Agreement was recognized during the three months ended March 31, 2001. The
     Company received $435,500 in cost sharing payments from InterMune during
     March 2002 related to costs of developing Moli1901 incurred from May 11,
     2001 through December 31, 2001.

     Deferred revenue related to the Agreement was $1,170,000 at March 31, 2002,
     and $1,260,000 at December 31, 2001.

3.   REVERSE MERGER AND RECAPITALIZATION

     As discussed in Note 1, Molichem R&D acquired Molichem Medicines (formerly
     Cortez Development Company, Ltd.) in a reverse merger on January 18, 2001.
     On January 11, 2001, the Board of Directors of Molichem Medicines declared
     a 6.959314-for-one common share stock split effected in the form of a stock
     dividend to stockholders of record on that date.

     Following the split, 8,469,491 shares of Molichem Medicines $.0001 par
     value common stock were outstanding. In connection with the merger, holders
     of 5,219,486 shares of Molichem Medicines common stock contributed those
     shares to Molichem Medicines and those shares were cancelled. Molichem
     Medicines also issued 50,000 shares of common stock in exchange for legal
     services. These transactions resulted in Molichem Medicines having
     3,300,005 common shares outstanding immediately prior to the merger.

     To effect the merger, each of the 1,732,670 outstanding shares of Molichem
     R&D common stock was exchanged for 7.716 shares of Molichem Medicines
     common stock. Prior to the merger, Molichem Medicines was a shell
     corporation with no significant operations. The merger was accounted for as
     a reverse acquisition of Molichem Medicines through issuance of 3,300,005
     shares of stock by Molichem R&D, accompanied by a recapitalization.
     Accordingly, the financial statements prior to the date of acquisition
     reflect the historical results of operations of Molichem R&D. References to
     the number of outstanding shares, par value, additional paid-in capital,
     and per share amounts for Molichem R&D for all periods have been restated
     to reflect the ratio of the exchange of shares in the merger.

     In connection with the merger, Molichem Medicines sold 1,000,000 stock
     units (each unit consisting of one share of common stock and a warrant for
     the purchase of one share of common stock) in a private placement for cash
     proceeds of $1,494,489, net of issuance costs of $5,511. The warrants were
     exercised on January 17, 2002 at $1.50 per share, resulting in net proceeds
     of $1,500,000 to the Company.


                                       7

<PAGE>

4.   EARNINGS PER SHARE

     The computation of basic and diluted earnings per share for the three
     months ended March 31, 2002 and 2001, and the period from December 22, 1995
     (date of inception) to March 31, 2002 is as follows:

<TABLE>
<CAPTION>
                                                                                          Period from
                                                                                          December 22,
                                                          Three Months    Three Months   1995 (Date of
                                                          Ended March     Ended March    Inception) to
                                                            31, 2002        31, 2001     March 31, 2002
                                                          ------------    ------------   -------------
     <S>                                                  <C>             <C>            <C>
     Numerator:
     Net loss .........................................   $ (876,737)     $ (248,026)    $(3,543,104)

     Denominator:
     Weighted-average common shares outstanding .......   18,490,398      16,857,065      13,872,630

     Basic and diluted loss per share .................   $    (0.05)     $    (0.01)    $     (0.26)
</TABLE>

     The following number of warrants and options to purchase shares of common
     stock were outstanding during each period, but were not included in the
     computation of diluted earnings per share because the Company realized a
     loss during the period, and their effect on the computation would be
     antidilutive:

<TABLE>
<CAPTION>
                                                                                        Inception to
                                                                                         March 31,
                                                           2002            2001            2002
                                                         ---------      ---------       -----------
     <S>                                                 <C>            <C>              <C>
     Number of options ..............................    2,149,248      1,659,248        2,149,248
     Number of warrants .............................          --       1,000,000        1,000,000
                                                         ---------      ---------        ---------
     Total ..........................................    2,149,248      2,659,248        3,149,248
                                                         =========      =========        =========
</TABLE>

5.   COMMITMENTS AND CONTIGENCIES

     Research Grants - The Company has received research grants from the Cystic
     Fibrosis Foundation (the "Foundation") to develop its compound Moli1901 for
     the treatment of cystic fibrosis. The Company is contingently liable to
     repay these grants if the Food and Drug Administration ("FDA") approves
     Moli1901 for marketing to the public. As of March 31, 2002, the Company has
     received a total of $786,560 in grants from the Foundation. Repayment, if
     required, would be due 60 days from the date of FDA approval.

     Royalties - The Company is committed to pay royalties to various parties on
     the sale of products, should it succeed in bringing the products to market.
     The Company's obligations to pay royalties total 3.67% of the net selling
     price of a treatment for cystic fibrosis (Molil901) and 2.00% of the
     selling price derived from the compounds Moli56A and Moli56B.

     Other Commitments - The Company has research and development studies
     currently in process that require progress payments and payment upon
     completion of the studies. At March 31, 2002, the total of those remaining
     commitments was approximately $747,000, all of which will be paid in 2002.

6.   RESTATEMENT

     Subsequent to the issuance of the Company's consolidated financial
     statements as of and for the year ended December 31, 2000, the Company's
     management determined that the merger described in Note 3 should have been
     reported as a reverse acquisition of Molichem Medicines by Molichem R&D. As
     a result the consolidated statement of operations for the three months
     ended March 31, 2001 has been restated from amounts previously reported to
     include the historical results of


                                       8

<PAGE>

     operations of Molichem R&D, and to account for the merger as an issuance of
     Molichem R&D stock for the shares held by existing stockholders of Molichem
     Medicines, followed by a recapitalization. Additionally, the Company's
     management determined that revenues from joint development agreement,
     operating expenses arising from stock compensation expense and the
     provision for income taxes had been improperly recorded in previously
     reported interim information for 2001. As a result the consolidated
     statement of operations for the three months ended March 31, 2001 has been
     restated from amounts previously reported to properly account for these
     transactions.

     A summary of the significant effects of the restatement on the statement of
     operations for that period is as follows:

<TABLE>
<CAPTION>
                                                                                 Three Months Ended
                                                                                   March 31, 2001
                                                                    As Previously Reported      As Restated
       <S>                                                              <C>                     <C>
       Revenue ...................................................      $  138,783              $   88,783
       Total operating expenses ..................................      $  242,686              $  344,689
       Income tax benefit ........................................      $   (8,301)                    --
       Net loss ..................................................      $  (87,722)             $ (248,026)
       Net loss per share - basic and diluted ....................      $     (.01)             $     (.01)
       Weighted-average shares outstanding - basic and diluted ...      15,931,543              16,857,065
</TABLE>


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

     The discussion in this report contains forward-looking statements within
     the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
     the Securities Exchange Act of 1934. The statements contained in this
     report that are not purely historical are forward-looking statements under
     the meaning of the Sections of the Securities Act of 1933 and the
     Securities Exchange Act of 1934 referred to above. Such forward-looking
     statements are subject to risks and uncertainties that that could cause
     actual results to differ materially from historical or anticipated results,
     including the risks and uncertainties that are set forth under the section
     "Cautionary Statement" in this discussion, elsewhere in this report and in
     our other SEC filings. The following discussion should be read in
     conjunction with the Company's consolidated financial statements and notes
     thereto included in this report.

     Overview

     We are an early stage pharmaceutical company focused on the discovery,
     development and marketing of pharmaceutical products for the treatment of
     serious respiratory and related conditions. All of our research and
     development activities are conducted by Molichem R&D, Inc., our
     wholly-owned operating subsidiary, which began operations on December 22,
     1995. MoliChem Medicines has had no operations or revenues since its
     inception and, since the acquisition of MoliChem R&D, Inc., has operated as
     a holding company only. The terms "we", "us", "our", and similar terms
     refer to the entities MoliChem Medicines, Inc. and MoliChem R&D, Inc. on a
     consolidated basis, unless the context requires otherwise.

     Since inception we have devoted substantially all of our resources to the
     discovery and development of pharmaceutical products for the treatment of
     respiratory diseases, and have not generated any revenues from product
     sales. The majority of our resources have been used in the development of
     Moli1901, for which we have completed Phase Ib of clinical development to
     determine safe dose levels in healthy patients. We plan to initiate Phase
     II clinical studies to determine the effectiveness of safe dose levels in
     patients with cystic fibrosis during the fourth quarter of 2002.

     In addition, we plan to develop a product for the treatment of sepsis and
     other serious illnesses


                                       9

<PAGE>

     based on our two compounds Moli56A (commonly known as DTPA iron (III)) and
     Moli56B (commonly known as Ferrioxamine B). Those compounds are currently
     in the early stages of development, with positive results having been
     demonstrated in preclinical studies in animal models. We began additional
     preclinical studies during the first quarter of 2002. We plan to initiate
     further preclinical work during the second quarter of 2002, and begin the
     Investigational New Drug Application process during that quarter.

     The Company also intends to develop additional products based on the
     chemical structure of Moli1901, and initiated research during the first
     quarter of 2002 to develop a library of compounds based on the Moli1901
     structure. That library of compounds will be screened for therapeutic value
     in a variety of disease models for the purpose of identifying additional
     qualified candidates for further development as drugs.

     In the second quarter of 2001 we entered into an agreement with InterMune,
     Inc. for the joint development and commercialization of Moli1901. Under the
     agreement we received $1,450,000 as an up-front non-refundable payment to
     provide InterMune with a worldwide co-exclusive license for the Moli1901
     technology, including all information related to Moli1901 and its patents.
     Under this agreement, MoliChem and InterMune share equally the costs
     incurred subsequent to the date of the agreement related to furthering the
     clinical development and commercialization of Moli1901. The agreement
     provides for additional payments to MoliChem by InterMune for the
     achievement of milestones, and the sharing of revenues from product sales.
     The up-front payments under this agreement of $1,450,000 and a payment of
     $50,000 from InterMune received in 2000 in connection with our agreement
     not to seek another development partner for Moli1901 are being recognized
     as revenue ratably over the estimated 50-month period from the effective
     date of the agreement through the expected date the first product is
     approved for sale. The Company has recognized as revenue $90,000 during the
     first quarter of 2002 related to these up-front payments.

     Results of Operations

     Three Months Ended March 31, 2002 and 2001

     Revenue
     -------

     Revenue totaled $425,585 and $88,783 for the three months ended March 31,
     2002 and 2001, respectively.

     Revenue for the first quarter of 2002 resulted from reimbursements of
     development costs for Moli1901 of $335,585 and amortization of the deferred
     up-front payments of $90,000 under our joint development and
     commercialization agreement with InterMune. We expect joint development
     agreement revenue to fluctuate during future quarters based on the timing
     and level of spending on Moli1901. We expect that these costs and related
     revenue under the agreement will increase over time as we increase spending
     to advance the development of this compound. No revenue under agreement was
     recognized during the three months ended March 31, 2001.

     Revenue for the first quarter of 2001, resulted from $88,783 in
     reimbursements of qualified development costs under grants from the
     National Institutes of Health and the Cystic Fibrosis Foundation. No grant
     revenue was recognized during 2002, primarily due to a decision by
     management to rely less on grant income as a source of funding. We do not
     anticipate requesting any additional grant revenue during 2002.

     Research and Development Costs
     ------------------------------

     Research and development costs were $885,351 and $98,737 for the three
     months ended March 31, 2002 and 2001, respectively. These costs consist
     primarily of payments to contract research organizations, consultants, and
     internal personnel costs and have increased primarily due to


                                       10

<PAGE>

     increased activity and related costs of additional preclinical toxicology
     and drug substance fomulation studies needed to advance to Phase II
     clinical trials of Moli1901 and the accelerated development activity for
     Moli1901 since entering into the agreement with InterMune in May 2001. We
     spent approximately $615,000 on these studies during the first quarter of
     2002, compared to approximately $17,000 during the first quarter of 2001.
     In addition, we increased the number of internal personnel involved in
     advancing research on Moli11901 during late 2001 and into 2002, resulting
     in personnel costs of approximately $134,000 during the first quarter of
     2002 compared to approximately $68,000 during the first quarter of 2001.

     We continued preclinical research on Moli56A during 2002, and also began
     laboratory research to develop our library of stable polypeptides based on
     the chemical structure of Moli1901. These initiatives generated external
     research costs of approximately $118,000 and internal personnel costs of
     approximately $12,000 during the first quarter of 2002. None of these
     activities and related costs occurred during 2001.

     We expect that research and development costs will increase significantly
     in the future, as we proceed with further stages of the clinical
     development of Moli1901, as well as further research and development of
     Moli56A and Moli56B, and the library of stable polypeptides.

     General and Administrative Costs
     --------------------------------

     General and administrative costs were $421,030 and $245,430 for the three
     months ended March 31, 2002, respectively. This increase reflects the
     growth of the Company during the past year as indicated by the increased
     number of employees, our levels of business development activity, and costs
     associated with our responsibilities as a public reporting entity. We
     incurred significant professional fees for legal, auditing, consulting,
     investor relations, and printing services in connection with the filing of
     our annual financial statement on Form 10KSB and amendments to our SB-2 as
     part of our new public reporting responsibilities. These costs totaled
     approximately $274,000 for the first quarter of 2002 as compared to
     approximately $50,000 during the first quarter of 2001. Management
     anticipates that costs of this nature will decrease during the remainder of
     2002 as we have developed our financial and administrative systems.

     Personnel costs included in general and administrative expenses increased
     by approximately $70,000 during the first quarter of 2002 to $74,000. The
     number of employees increased from two in the first quarter of 2001 to six
     during the first quarter of 2002. The majority of the costs of those
     employees are associated with research activities, with a portion of the
     cost being allocated to general and administrative activities.

     The largest component of general and administrative expenses during the
     first quarter of 2001 was a non-cash charge for stock compensation of
     approximately $182,000 related to the granting of fully vested options to
     advisors of the Company. The stock compensation component of general and
     administrative costs for the first quarter of 2002 was approximately
     $18,000.

     Depreciation and Amortization
     -----------------------------

     Depreciation and amortization costs remained nominal at $1,926 in the first
     quarter of 2002 and $522 in the first quarter of 2001. The Company has
     minor investments in property and equipment and we expect depreciation and
     amortization to remain a minor element of our cost structure.

     Loss from Operations
     --------------------

     Loss from operations was $882,722 and $255,906 for the three months ended
     March 31,2002 and 2001, respectively, resulting from increased research and
     development and general and administrative costs. These increases are the
     result of the Company's increased headcount and increased external research
     and development costs for all of its product candidates. Approximately
     $18,000 in 2002 and $183,000 in 2001 of that loss was from the recognition
     of


                                       11

<PAGE>

     non-cash expense for stock compensation. We anticipate that operating
     losses will continue and may increase until such time, if ever, that our
     compounds are developed, approved and successfully marketed.

     Interest Expense
     ----------------

     Interest expense decreased to $620 in the first quarter of 2002 from $3,483
     in the first quarter of 2001. This decrease is the result of the repayment
     during the second quarter of 2001 of the loan from the North Carolina
     Biotechnology Center. We are not currently financing our operations with
     borrowings, and expect interest costs, which are miscellaneous finance
     charges, to be minimal in 2002.

     Interest Income
     ---------------

     Interest income was $6,605 and $11,363 for the first three months ended
     March 31, 2002 and 2001, respectively, primarily due to the decrease in
     short-term interest rates from 2001 to 2002. We are planning to raise
     additional funds during 2002, and the resulting increase in cash and the
     interest rate environment will have an impact on investment income in the
     future.

     Income Taxes
     ------------

     We report income and expenses on the cash basis for income tax purposes,
     file separate returns for MoliChem Medicines and MoliChem R&D for state
     income tax purposes, and file a consolidated return for federal income tax
     purposes. We anticipate that the Company will incur losses in future
     periods for both financial reporting and tax purposes, and do not expect
     significant income tax expenses or benefits until the Company achieves
     profitability. The Company reported no income tax expense or benefit for
     the three months ended March 31, 2002 and 2001. Although the Company
     experienced losses during the periods reported, we have not reported a tax
     benefit associated with those losses because management believes that such
     tax benefits will not be realized in the future.

     Liquidity and Capital Resources

     Until 2001 our operations were primarily funded by government grants and
     third-party and related party loans. Management does not expect these
     sources to provide significant cash in the future, although we would seek
     additional grant funding if that funding source appears advantageous to the
     Company. We expect to generate revenue during the next several years
     primarily from cost-sharing and milestone payments from our collaborative
     agreement with InterMune. In addition to this revenue source, we anticipate
     the need to raise significant amounts of additional capital during the next
     several years in order to successfully bring our products to market and to
     execute our strategy.

     The Company incurred a net loss of $876,737 during the three month period
     ended March 31, 2002, and we have incurred losses since the inception of
     the Company totaling $3,543,104. We expect to continue to incur losses in
     the future until our products have been developed and achieved regulatory
     and market acceptance, which we currently anticipate to occur during 2005.
     Our operating activities used cash of $826,491 during the first three
     months of 2002, compared to cash used of $74,594 during the comparable
     period of 2001. Exclusive of the non-cash stock compensation expense of
     approximately $18,000, operating expenses totaled approximately $1,290,000
     during the quarter ended March 31, 2002. This compares to operating
     expenses exclusive of $183,000 in non-cash stock compensation expense
     totaling approximately $162,000 during the quarter ended March 31, 2001. As
     we continue our efforts to bring Moli1901 through development to
     commercialization, our costs will increase. Our business strategy also
     includes advancing research and development programs for Moli56A and
     Moli56B, and discovery and development of additional compounds. We might
     also license or otherwise acquire the rights to other compounds and
     technologies that complement our current product candidates, although we


                                       12

<PAGE>

     currently do not have any material agreements or commitments for any such
     acquisitions. This increase in development activity will continue to
     generate increasing expenditures, and the need for additional financial
     resources. We will thus become increasingly dependent on InterMune's
     continued financial support for the development of Moli1901 as set forth in
     the agreement, as well as additional funding from other sources, in order
     to successfully execute our business strategy.

     In January 2002, existing investors exercised warrants to purchase common
     shares, providing $1,500,000 of additional funding for the Company's
     near-term development plans. The Company's ability to further improve its
     financial position will be influenced by, among other things, its ability
     to obtain additional financing, successfully develop its products, obtain
     FDA approval and successfully market its products. The Company's actual
     cash requirements might differ from those currently anticipated for a
     number of reasons, including the status of product development, the time
     and cost involved in conducting our preclinical research and clinical
     trials, developments in competing products and other factors.

     In the event the Company is unable to obtain additional financial
     resources, the Company plans to reduce the scope of its planned development
     activities and reduce its costs to better align existing sources of capital
     with its operating costs, and adopt a viable alternative business model.
     Management believes that such an alternative business model could be
     successfully implemented, and that its current cash balances are adequate
     to sustain its operations with a reduction in scope of development costs
     for at least the next twelve months. However, the Company may not be able
     to continue to meet its cash requirements through operations or, if
     necessary, obtain additional financing or product licensing agreements on
     terms that are acceptable to the Company. Additionally, an alternative
     business model might differ significantly from the Company's current
     operating strategy, and would not guarantee the long-term success of the
     Company.

     The Company has certain financial commitments and contractual obligations
     that require us to incur expenses in the future. We are committed under a
     premises lease for our corporate headquarters that obligates us to total
     payments of $77,000 in 2002, $80,300 in 2003, and $51,500 in 2004. In
     addition, several research and development studies are currently in process
     that require progress payments and payment upon completion of the studies.
     As of March 31, 2002 the total of those commitments was approximately
     $747,000.

     Cautionary Statement

     The Company operates in a highly competitive environment that involves a
     number of risks, some of which are beyond the Company's control. The
     following statement highlights some of these risks.

     Statements contained in "Management's Discussion and Analysis of Financial
     Condition and Results of Operations" which are not historical facts are or
     might constitute forward-looking statements under the safe harbor
     provisions of the Private Securities Litigation Reform Act of 1995.
     Although the Company believes the expectations reflected in such
     forward-looking statements are based on reasonable assumptions, its
     expectations might not be attained. Forward-looking statements involve
     known and unknown risks that could cause the Company's actual results to
     differ materially from expected results. Factors that could cause actual
     results to differ materially from the Company's expectations include, among
     others: the Company's ability to secure additional funding on terms that
     are acceptable to the Company; the Company's ability to manage growth; the
     high cost and uncertainty of timing and results of the research, clinical
     trials and other development activities involving pharmaceutical products;
     the unpredictability of the duration and results of regulatory review of
     New Drug Applications and Investigational New Drug Applications; the
     Company's dependence on its compounds Moli1901, Moli56A and Moli56B, and
     the uncertainty of market acceptance of those products; the possible
     impairment of, or inability to obtain, additional intellectual property
     rights and the costs of obtaining such rights from third parties; intense
     competition; and other risk factors detailed from time to time in the
     Company's SEC filings. The Company does not undertake any obligation to
     release publicly any revisions to these statements to reflect later events
     or circumstances or to reflect the occurrence of unanticipated events.


                                       13

<PAGE>

                           PART II--OTHER INFORMATION

ITEM 6. Exhibits and Reports on Form 8-K.

(a)  Exhibits

     The following exhibits are filed as a part of this report on Form 10-QSB:

     Exhibit No.                             Description
        11                   Statement of Computation of Per Share Earnings


(b)  Reports on Form 8-K:

     On February 4, 2002, we filed a Form 8-K to file a press release announcing
     the receipt by MoliChem of $1,5000,000 in funding in connection with the
     exercise by two of its stockholders of warrants to purchase additional
     shares of its common stock.

     On February 6, 2002, we filed a Form 8-K, which we amended on March 7,
     2002, relating to the dismissal of the Company's auditor, Rogoff & Company,
     P.C., and the appointment of Deloitte & Touche LLP, as the Company's new
     auditors.

     On March 5, 2002, we filed a Form 8-K to file a press release announcing
     the issuance of several patents in Europe for the treatment of septic
     shock.


                                       14

<PAGE>

                                   SIGNATURES

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

Date: May 15, 2002                     By: /s/ Luis Molina
                                           -------------------------------------
                                       Luis Molina, Ph.D.
                                       President, Chief Executive Officer
                                       (Principal Executive Officer) and
                                       Director

Date: May 15, 2002                     By: /s/ Richard E. Martin
                                           -------------------------------------
                                       Richard E. Martin
                                       Chief Financial Officer
                                       (Principal Financial and Accounting
                                       Officer)


                                       15

<PAGE>

                                  EXHIBIT INDEX


     Exhibit No.                           Description
        11*                 Statement of Computation of Per Share Earnings

----------
* Included in Financial Statements filed herewith.


                                       16