SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 10-Q


(Mark One)
[X]              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended June 30, 2004

                                       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 0-13634

                              MACROCHEM CORPORATION
                              ---------------------
             (Exact name of registrant as specified in its charter)


           Delaware                                       04-2744744
---------------------------------                     -------------------
   (State or Other Jurisdiction                        (I.R.S. Employer
of Incorporation or Organization)                     Identification No.)

            110 Hartwell Avenue, Lexington, Massachusetts 02421-3134
            --------------------------------------------------------
               (Address of principal executive offices, Zip Code)

                                  781-862-4003
                                  ------------
              (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
   ---    ---

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes     No X
   ---    ---

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

          Class                               Outstanding at August 10, 2004:
----------------------------                  -------------------------------
Common Stock, $.01 par value                          38,632,591


                                       1
<PAGE>
                              MACROCHEM CORPORATION

                               INDEX TO FORM 10-Q
                               ------------------

                                                               Page Number
                                                               -----------
PART I    FINANCIAL INFORMATION

Item 1    Financial Statements

            Condensed Balance Sheets
            June 30, 2004 and December 31, 2003 (Unaudited)        3

            Condensed Statements of Operations for the
            Three and Six Months Ended June 30, 2004
            and 2003 (Unaudited)                                   4

            Condensed Statements of Cash Flows for the
            Six Months Ended June 30, 2004
            and 2003 (Unaudited)                                   5

            Notes to Unaudited Condensed Financial
            Statements                                           6-10

Item 2    Management's Discussion and Analysis of
          Financial Condition and Results of Operations          11-16

Item 3    Quantitative and Qualitative Disclosures About
          Market Risk                                             16

Item 4    Control and Procedures                                  16


PART II   OTHER INFORMATION

Item 4    Submission of Matters to a Vote of Security Holders     18

Item 6    Exhibits and Reports on Form 8-K                       18-19

SIGNATURES                                                        20

EXHIBIT INDEX                                                     21

                                       2
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                              MACROCHEM CORPORATION
                            CONDENSED BALANCE SHEETS
                                   (Unaudited)
                    (Amounts in thousands except share data)
<S>                                                                         <C>                 <C>

                                                                               June 30,             December 31,
                                                                                 2004                   2003
                                                                            ------------         -----------------

                                     ASSETS
Current assets:
       Cash and cash equivalents                                            $       8,579        $       3,840
       Short-term investments                                                       1,177                3,170
       Prepaid expenses and other current assets                                      453                  316
                                                                            -------------         ------------
           Total current assets                                                    10,209                7,326
                                                                            -------------         ------------

Property and equipment, net                                                           183                  228
                                                                            -------------         ------------

Other assets:
       Patents, net                                                                   541                  667
       Deposit                                                                        ---                   29
                                                                            -------------         ------------
           Total other assets                                                         541                  696
                                                                            -------------         ------------

Total assets                                                               $       10,933        $       8,250
                                                                            =============         ============

                                   LIABILITIES
Current liabilities:
       Accounts payable                                                    $          390        $         358
       Accrued expenses                                                               770                  622
                                                                            -------------         ------------
           Total current liabilities                                                1,160                  980

Deferred rent                                                                          21                   34
                                                                            -------------         ------------

Total liabilities                                                                   1,181                1,014
                                                                            -------------         ------------

Commitments and contingencies

                              STOCKHOLDERS' EQUITY
Preferred stock, authorized and unissued, 6,000,000 shares                            ---                  ---
Common stock, $.01 par value, 60,000,000 shares authorized;
       38,724,694 and 32,944,334
       shares issued at June 30, 2004
       and December 31, 2003, respectively                                            387                  329
Additional paid-in capital                                                         82,835               75,779
Unearned compensation                                                                 ---                  (2)
Accumulated deficit                                                              (73,222)             (68,550)
Less treasury stock, at cost, 92,103 and 116,302
       shares at June 30, 2004 and
       December 31, 2003, respectively                                              (248)                (320)
                                                                            -------------         ------------
           Total stockholders' equity                                               9,752                7,236
                                                                            -------------         ------------
Total liabilities and stockholders' equity                                 $       10,933        $       8,250
                                                                            =============         ============
</TABLE>

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

                                       3
<PAGE>
<TABLE>
<CAPTION>
                              MACROCHEM CORPORATION
                   CONDENSED STATEMENTS OF OPERATIONS
           For the three and six months ended June 30, 2004 and 2003
                                   (Unaudited)
             (Amounts in thousands except share and per share data)

                                           For the three months ended June 30,   For the six months ended June 30,
                                           -----------------------------------   ---------------------------------
<S>                                          <C>             <C>                <C>                 <C>
                                                  2004               2003             2004                2003
                                                  ----               ----             ----                ----


Revenues:
    Sale of patent                           $         ---   $        1,000     $         ---       $      1,000
    Research contracts                                 ---               10               ---                 10
                                              ------------    -------------      ------------        -----------
       Total revenues                                  ---            1,010               ---              1,010
                                              ------------    -------------      ------------        -----------

Operating expenses:
    Research and development                         1,185              652             2,506              1,192
    Marketing, general and administrative            1,301              921             2,220              1,566
    Consulting fees with related parties               ---              ---               ---                  6
                                              ------------    -------------      ------------        ------------
       Total operating expenses                      2,486            1,573             4,726              2,764
                                              ------------    -------------      ------------        -----------

Loss from operations                                (2,486)            (563)           (4,726)             (1,754)
                                              ------------    -------------      ------------        ------------

Other income (expense):
    Interest income                                     32               16                54                 37
                                              ------------    -------------      ------------        -----------
       Total other income                               32               16                54                 37
                                              ------------    -------------      ------------        -----------

Net loss                                     $      (2,454)  $         (547)    $      (4,672)      $      (1,717)
                                              ============    =============      ============        ============

Net loss per share -
    basic and diluted                        $       (0.06)  $        (0.02)    $       (0.13)      $       (0.06)
                                              ============    =============      ============        ============

Weighted average shares                         38,621,000       28,239,000        36,508,000         28,121,000
outstanding (basic and diluted)
</TABLE>

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



                                       4
<PAGE>
<TABLE>
<CAPTION>
                              MACROCHEM CORPORATION
                       CONDENSED STATEMENTS OF CASH FLOWS
                 For the six months ended June 30, 2004 and 2003
                                   (Unaudited)
                             (Amounts in thousands)

                                                                               For the six months ended June 30,
                                                                               ---------------------------------
                                                                                   2004                 2003
                                                                                   ----                 ----
<S>                                                                             <C>                <C>

Cash flows from operating activities:
       Net loss                                                                 $  (4,672)         $    (1,717)
       Adjustments to reconcile net loss to net cash
         used by operating activities:
           Depreciation and amortization                                                92                   99
           Stock-based compensation                                                     29                   38
           401(k) contribution made in Company common stock                             34                   26
           Deferred rent                                                              (13)                  (6)
           Reduction to capitalized patents                                            125                  ---
       Changes in assets and liabilities:
           Accounts receivable                                                         ---                   28
           Prepaid expenses and other current assets                                 (137)                (290)
           Accounts payable and accrued expenses                                       180                   38
           Deposits                                                                     29                  ---
                                                                                ----------          -----------


Net cash used by operating activities                                              (4,333)              (1,784)
                                                                                ----------          -----------

Cash flows from investing activities:
       Purchases of short-term investments                                             (8)                 (33)
       Sales of short-term investments                                               2,000                2,000
       Expenditures for patents                                                       (31)                 (47)
       Expenditures for property and equipment                                        (14)                  ---
                                                                                ----------          -----------
Net cash provided by investing activities                                            1,947                1,920
                                                                                ----------          -----------

Cash flows from financing activities:
       Proceeds from sale of common stock (net of offering costs)                    6,681                  ---
       Proceeds from exercise of common stock options                                  ---                   99
       Proceeds from exercise of warrants                                              444                  ---
                                                                                ----------          -----------
Net cash provided by financing activities                                            7,125                   99
                                                                                ----------          -----------

Net change in cash and cash equivalents                                              4,739                  235
Cash and cash equivalents at beginning of period                                     3,840                  771
                                                                                ----------          -----------

Cash and cash equivalents at end of period                                      $    8,579         $      1,006
                                                                                ==========          ===========
</TABLE>


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


                                       5
<PAGE>



                              MACROCHEM CORPORATION
                NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(1)      BASIS OF PRESENTATION
         ---------------------

         The financial statements included herein have been prepared by
         MacroChem Corporation ("MacroChem" or the "Company") without audit,
         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 accounting
         principles generally accepted in the United States of America have been
         condensed or omitted pursuant to such rules and regulations. In the
         opinion of management, the accompanying unaudited condensed financial
         statements include all adjustments (consisting only of normal recurring
         adjustments) necessary to present fairly the financial position,
         results of operations and cash flows of the Company at the dates and
         for the periods indicated. The unaudited condensed financial statements
         included herein should be read in conjunction with the audited
         financial statements and the notes thereto included in the Company's
         Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

         The Company has been engaged primarily in research and development
         since its inception in 1981 and has derived limited revenues from the
         commercial sale of its products, licensing of certain technology and
         feasibility studies. The Company has had no revenues relating to the
         sale of any products currently under development. The Company has
         incurred net losses every year since its inception and the Company
         anticipates that losses may continue for the foreseeable future. At
         June 30, 2004, the Company's accumulated deficit was approximately
         $73.2 million. The Company's ability to continue operations after its
         current capital resources are exhausted depends on its ability to
         obtain additional financing and achieve profitable operations, as to
         which no assurances can be given. However, the Company believes that
         its financial resources are sufficient to meet planned operating
         activities for at least the next twelve months.

         The results disclosed in the Statement of Operations for the three and
         six months ended June 30, 2004 are not necessarily indicative of the
         results to be expected for the full year.

         MacroChem is a specialty pharmaceutical company engaged in the
         development and commercialization of a portfolio of products through
         the application of SEPA(R) (Soft Enhancement of Percutaneous
         Absorption), its patented topical drug delivery technology.

(2)      STOCK BASED COMPENSATION
         ------------------------

         The Company applies the intrinsic value method of accounting for stock
         options and awards granted to employees. The Company accounts for stock
         options and awards to non-employees using the fair value method.

         Under the intrinsic value method, compensation associated with stock
         awards to employees is determined as the difference, if any, between
         the current fair value of the underlying common stock on the date
         compensation is measured and the price an employee must pay to exercise
         the award. The measurement date for employee awards is generally the

                                       6
<PAGE>

         date of grant. Under the fair value method, compensation associated
         with stock awards to non-employees is determined based on the estimated
         fair value of the award itself, measured using either current market
         data or an established option pricing model. The measurement date for
         non-employee awards is generally the date performance of services is
         complete.

         The Company intends to continue to use the intrinsic value method to
         account for stock-based compensation to employees and directors. The
         following table illustrates the effect on net loss and net loss per
         share assuming the Company had applied the fair value method to
         stock-based employee and director compensation:
<TABLE>
<CAPTION>

                                                     Three Months Ended June 30,      Six Months Ended June 30,
                                                     ---------------------------      -------------------------
                                                         2004             2003          2004             2003
                                                         ----             ----          ----             ----
         <S>                                        <C>               <C>          <C>               <C>

         Net loss as reported                       $(2,454,000)      $(547,000)   $(4,672,000)      $(1,717,000)

         Add: Stock-based employee compensation
          expense included in reported net loss             ---          19,000          7,000           38,000


         Deduct: Total stock employee compensation
           measured using the fair value method        (197,000)       (393,000)      (444,000)         (860,000)
                                                      ---------        --------      ---------         ---------

         Pro forma net loss                         $(2,651,000)      $(921,000)   $(5,109,000)      $(2,539,000)
                                                      =========        ========      =========         =========

         Basic and diluted net loss per share -
           as reported                              $     (0.06)      $   (0.02)   $     (0.13)      $     (0.06)
                                                      =========        ========      =========         =========

         Basic and diluted net loss per share -
           pro forma                                $     (0.07)      $   (0.03)   $     (0.14)      $     (0.09)
                                                      =========        ========      =========        ==========
</TABLE>


         The fair value of options on their grant date was measured using the
         Black-Scholes option pricing model. Key assumptions used to apply this
         pricing model are as follows:
<TABLE>
<CAPTION>

                                               Three Months Ended June 30,             Six Months Ended June 30,
                                               ---------------------------             -------------------------
                                                 2004              2003                   2004             2003
                                                 ----              ----                   ----             ----
         <S>                                 <C>                 <C>                  <C>                 <C>

         Risk-free interest rate             3.05% - 4.04%         2.62%              3.05% - 4.04%        2.62%
         Expected life of option
            grants                              6 years           6 years                6 years          6 years
         Expected volatility of
            underlying stock                      97%               99%                    97%              99%
         Expected dividend payment
            rate, as a percentage of the
            stock price on the date of grant      ---               ---                    ---              ---

</TABLE>

         The option pricing model used was designed to value readily tradable
         stock options with relatively short lives. The options granted to
         employees are not tradable and have contractual lives of up to ten
         years.

                                       7
<PAGE>

(3)      REVENUE RECOGNITION
         -------------------

         The Company's business seeks to generate revenues through the
         development, commercialization and licensing of drug products based
         upon the Company's intellectual property. Revenues derived or expected
         to be derived from the sale, assignment, transfer, or licensing of
         patents or other intellectual property are recognized over various
         periods based upon the terms of the relevant agreement. Research
         contract revenues consist of non-refundable research and development
         funding under collaborative agreements with various corporate or
         government organizations. Research and development funding is generally
         recognized as revenue at the time the research and development
         activities are performed under the terms of the related agreements,
         when the corporate partner is obligated to pay and when no future
         performance obligations exist. Payments received in advance of services
         provided result in the deferral of revenue recognition to future
         periods.

 (4)     BASIC AND DILUTED LOSS PER SHARE
         --------------------------------

         The following table sets forth the computation of basic and diluted
         loss per share:
<TABLE>
<CAPTION>

                                                 Three Months Ended June 30,         Six Months Ended June 30,
                                                 ---------------------------         -------------------------
                                                   2004             2003              2004             2003
                                                   ----             ----              ----             ----
           <S>                                <C>              <C>               <C>              <C>
           Numerator for basic and diluted
           loss per share:
              Net loss                        $( 2,454,000)    $(   547,000)     $( 4,672,000)    $( 1,717,000)
                                                ==========       ==========        ==========       ==========

           Denominator for basic
           and diluted loss per share:
              Weighted average shares
              outstanding                       38,621,000       28,239,000        36,508,000       28,121,000
                                                ==========       ==========        ==========       ==========

           Net loss per share - basic and
           diluted                            $(      0.06)    $(      0.02)     $(      0.13)    $      (0.06)
                                                ==========       ==========        ==========       ==========
</TABLE>
         Potential common shares are not included in the per share calculations
         for diluted EPS, because the effect of their inclusion would be
         anti-dilutive. Anti-dilutive potential shares not included in per share
         calculations for the six months ended June 30, 2004 and 2003 were
         6,553,611 and 4,406,536, respectively.

          (5) PATENTS
              -------

          On April 14, 2004, the Company announced that preliminary data from
          its Phase 2 pharmacodynamic study of Topiglan(R), a topical cream for
          erectile dysfunction, demonstrated that Topiglan did not meet the
          study's primary clinical endpoints. The Company has conducted a more
          complete review of the data and has no plans for further clinical
          studies of Topiglan at this time. Accordingly, the Company has
          recorded a reduction of approximately $125,000 to the carrying value
          of certain patent assets related to Topiglan.


                                       8
<PAGE>
(6)      STOCKHOLDERS' EQUITY
         --------------------
         During the six months ended June 30, 2004, 31,000 options were granted
         and no options were exercised or cancelled under the 2001 Incentive
         Plan (the "Plan").

         Under the 1994 Equity Incentive Plan (the "1994 Plan"), 353,000 options
         were granted and none were exercised during the six-month period ended
         June 30, 2004. During the same period, 483,000 options were canceled or
         expired under the 1994 Plan.

         In October 2000, warrants to purchase common stock were issued in
         connection with a private placement to two institutional investors. The
         warrants issued consist of warrants to purchase an aggregate of 363,322
         shares of common stock at a purchase price of $5.90 per share for five
         years. As a result of subsequent financing transactions, the exercise
         price of these warrants has been adjusted to $4.64 in accordance with
         the terms of the warrants. Through June 30, 2004, none of these
         warrants had been exercised. The placement agent for this transaction
         received a warrant to purchase 108,999 shares of common stock at a
         purchase price of $7.43 for five years. As a result of subsequent
         financing transactions, the exercise price of these warrants has been
         adjusted to $5.74 in accordance with the terms of the warrants. As of
         June 30, 2004, 50,000 of these warrants had been exercised. None were
         exercised in the six months ended June 30, 2004.

         In July 2001, the Company sold 1,566,047 shares of its common stock for
         approximately $10,148,000 in gross proceeds ($9,406,000 net of issuance
         costs) in a private placement to institutional investors. The investors
         in the July 2001 common stock transaction received warrants to purchase
         an aggregate of 313,209 shares of common stock at a purchase price of
         $8.995 per share. As a result of subsequent financing transactions, the
         exercise price of these warrants has been adjusted to $6.94 in
         accordance with the terms of the warrants. These warrants expire five
         years from the closing date and are callable by the Company if the
         closing price of the stock is higher than $17.99 for 15 consecutive
         trading days at any time before expiration. As of June 30, 2004, none
         of these warrants had been exercised.

         In September 2003, the Company sold 4,553,680 shares of its common
         stock for approximately $3,246,000 in gross proceeds ($2,972,000 net of
         issuance costs) in a private placement to primarily institutional
         investors. The investors in the September 2003 common stock transaction
         received warrants to purchase an aggregate of 910,736 shares of common
         stock at a purchase price of $1.173 per share for a period of three
         years. As of June 30, 2004, 378,360 of these investor warrants had been
         exercised. The placement agent for this transaction received a warrant
         to purchase 150,000 shares of common stock at a purchase price of
         $1.173 for a period of three years. As of June 30, 2004, none of these
         placement agent warrants had been exercised.

         On March 9, 2004, the Company sold 5,402,000 shares of its common stock
         for $7,292,700 in gross proceeds ($6,681,275 net of issuance costs) in
         a private placement to institutional investors. The investors also
         received warrants to purchase an aggregate of 1,080,400 shares of
         common stock at a purchase price of $2.09 per share expiring five years
         from the closing date. As of June 30, 2004, none of these warrants had
         been exercised.

                                       9
<PAGE>
         On June 23, 2004, at the Company's Annual Meeting of Stockholders, the
         Company's stockholders approved amendments to the Company's 2001
         Incentive Plan to increase the number of shares of Common Stock
         authorized for issuance under the Incentive Plan by 4,000,000,
         resulting in a total amount of 4,185,800 shares available for grant
         under the Incentive Plan as of the June 30, 2004. The Company's
         stockholders also approved a Certificate of Amendment to the Company's
         Certificate of Incorporation, as amended, to increase the number of
         authorized shares of capital stock from 60,000,000 shares of Common
         Stock and 6,000,000 shares of Preferred Stock to 100,000,000 shares of
         Common Stock and 6,000,000 shares of Preferred Stock. On August 6,
         2004, the Company filed the Certificate of Amendment to its Certificate
         of Incorporation with the Secretary of State of the State of Delaware.

(7)      COMPREHENSIVE LOSS
         ------------------
         Comprehensive loss is equal to the Company's net loss for the three
         and six months ended June 30, 2004 and 2003.

                                       10
<PAGE>

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

GENERAL
-------
Our primary business is the development of specialty pharmaceutical products for
commercialization by employing SEPA(R) (Soft Enhancement of Percutaneous
Absorption), our patented drug delivery technology. SEPA compounds, when
properly combined with drugs, provide pharmaceutical formulations (creams, gels,
lacquers, solutions, etc.) that enhance the transdermal delivery of drugs into
the skin or into the bloodstream. We are currently developing investigational
new drugs for the endocrinology/urology and dermatology specialties:
Opterone(R), for the treatment of testosterone deficiency, and EcoNail(TM), for
fungal infections of the nails.

Our technologies are currently in discovery or developmental stages and must
undergo a rigorous regulatory approval process, which includes extensive
preclinical and clinical testing, to demonstrate safety and efficacy before any
resulting product can be marketed. To date, neither the Food and Drug
Administration, or FDA, nor any of its international equivalents has approved
any of our technologies for marketing. We currently derive no significant
revenue from product sales, royalties or license fees.

We are developing specific SEPA formulations for use with proprietary and
non-proprietary drugs that are manufactured by other pharmaceutical companies.
We seek to commercialize these products either through the creation, when
appropriate, of our own sales force to market directly to specialist doctors
and/or through the formation of partnerships, strategic alliances and licensing
arrangements with third parties. If we are unable to attract and retain
effective sales personnel and/or form any strategic alliances, partnerships or
licensing arrangements, our business may be materially adversely affected. In
addition, if strategic relationships are formed, we may not be able to control
the resources and attention that our partners devote to the products.

Our results of operations can vary significantly from year to year and quarter
to quarter, and depend, among other factors, on the progress of clinical trials
we and our licensees conduct, the degree of our research, marketing and
administrative efforts, the development, when appropriate, of our own sales
force, the signing of new licenses and product development agreements, the
timing of revenues recognized pursuant to license agreements, and the
achievement of milestones by licensees. The timing of our revenues may not match
the timing of our associated product development expenses. To date, our research
and development expenses have generally exceeded our revenues in any particular
period or fiscal year.

We do not track a significant portion of our research and development expenses
(including employee payroll and related benefits, laboratory supplies, travel,
dues and subscriptions, clinical trial costs, temporary help costs, consulting
costs and allocable costs such as occupancy and depreciation) by project as they
benefit multiple projects or our drug delivery technologies in general. For the
three months ended June 30, 2004, research and development costs were
approximately $1,185,000, of which approximately $553,000 was not specifically
tracked and approximately $38,000, $468,000, and $126,000 represent costs
associated with clinical trials for Topiglan(R), Opterone(TM) and EcoNail(TM),
respectively. For the three months ended June 30, 2003, research and development
costs were approximately $652,000, of which approximately $545,000 was not
                                       11
<PAGE>
specifically tracked and $107,000 represents costs associated with a clinical
trial related to Topiglan(R). Neither Opterone nor EcoNail was in clinical
trials in the first three months of 2003. For the six months ended June 30,
2004, research and development costs were approximately $2,506,000, of which
approximately $1,183,000 was not specifically tracked and approximately
$386,000, $708,000, and $229,000 represent costs associated with clinical trials
for Topiglan, Opterone and EcoNail, respectively. For the six months ended June
30, 2003, research and development costs were approximately $1,192,000, of which
approximately $1,084,000 was not specifically tracked and approximately $107,000
represent costs associated with a clinical trial for Topiglan. Neither Opterone
nor EcoNail was in clinical trials in the first six months of 2003. Each of our
research and development programs are subject to risks and uncertainties,
including the requirement to seek regulatory approval, that are outside of our
control. Moreover, the product candidates identified in these research and
development programs, which are currently in discovery or developmental stages,
must overcome significant technological, manufacturing and marketing challenges
before they can be successfully commercialized. As a result of these risks and
uncertainties, we are unable to predict with any certainty the period in which
material net cash inflows from such projects could be expected to commence or
the completion date of these programs.

These risks and uncertainties also prevent us from estimating with any certainty
the specific timing and future costs of our clinical development programs,
although historical trends at similarly situated companies indicate that
expenses tend to increase in later stages of development. Our failure to obtain
requisite governmental approvals timely or at all will delay or preclude us from
licensing or marketing our products or limit the commercial use of our products,
which could adversely affect our business, financial condition and results of
operations.

CRITICAL ACCOUNTING POLICIES
----------------------------

Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. Note 1 of the consolidated financial statements included within our
Form 10-K for the year ended December 31, 2003, 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 that we use. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our financial statements. As more fully
described in the notes to the consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2003, our business
seeks to generate revenues through the development, commercialization and
licensing of drug products based upon our intellectual property.

Generally, we recognize research and development funding as revenue at the time
the research and development activities are performed under the terms of the
related agreements, when the counter-party is obligated to pay, and when no
future performance obligation exists. We make estimates of the status of
performance with respect to research and development contracts. In the past, we
have found such estimates to be sufficiently accurate for revenue recognition
                                       12
<PAGE>
purposes. We bill research and development revenue on a cost reimbursement
basis, which includes direct costs incurred in connection with research
activities and an allocation of certain other costs incurred by us.

We defer costs and expenses incurred in connection with pending patent
applications. We amortize costs related to successful patent applications over
the estimated useful lives of the patents using the straight-line method. We
charge accumulated patent costs and deferred patent application costs related to
patents that are considered to have limited future value to operations.
Estimates used to determine the future value of deferred patent costs include
analysis of potential market size, time and cost to complete clinical trials,
anticipated interest in our products and potential value for licensing or
partnering opportunities. We recognize revenues derived or expected to be
derived from the sale, assignment, transfer, or licensing of patents or other
intellectual property over various periods based upon the terms of the relevant
agreement.

RESULTS OF OPERATIONS
---------------------

We had no revenues for the three or six-month periods ended June 30, 2004.
Revenues for the three- and six-month periods ended June 30, 2003 were
$1,010,000 (all of which occurred in the three-month period ended June 30,
2003), consisting primarily of proceeds from the sale of a patent (U.S. Patent
No. 6,549,124), which related to antifungal topical compositions but which did
not use our SEPA(R) platform technology.

Research and development expenses increased by $533,000, or 82%, to $1,185,000
in the three-month period ended June 30, 2004 from $652,000 in the three-month
period ended June 30, 2003. The increase is primarily attributable to an
increase in employee compensation of $104,000 associated with the addition of
four new research and development employees in late 2003 as well as an increase
of approximately $525,000 spent on clinical trials (which increase was partially
offset by a decrease of approximately $130,000 in preclinical study costs) in
the three month period ended June 30, 2004 compared with the same three-month
period of 2003. For the six-month period ended June 30, 2004, research and
development expenses increased $1,314,000, or 110%, to $2,506,000 from
$1,192,000 in the prior year. The increase is primarily attributable to an
increase in employee compensation of $175,000 associated with the addition of
four new research and development employees in late 2003 as well as an increase
of approximately $1,126,000 spent on clinical trials (which increase was
partially offset by a decrease of approximately $130,000 in preclinical study
costs) in the first six months of 2004 compared with the same six-month period
of 2003. The level of research and development expenses is highly dependent on
the timing and extent of new and ongoing research performed in our in-house
laboratories as well as outside contract laboratories. Research and development
spending over each of the next two quarters is expected to approximate the same
level seen in the first two quarters of 2004 as a result of our ongoing clinical
trials of EcoNail and Opterone, and the initiation of new studies with respect
to these products.

Marketing, general and administrative expenses increased $380,000, or 41%, to
$1,301,000 in the three months ended June 30, 2004 from $921,000 in the
three-month period ended June 30, 2003. The increase is primarily attributable
to an increase in employee compensation of $214,000 during the three month
period ended June 30, 2004, including approximately $153,000 of retention
payments to key employees described elsewhere in this Quarterly Report on Form
10-Q. The increase is also attributable to an increase in consulting fees
relating to investor relations and business development of $84,000 during the
three months ended June 30, 2004 (which increase was calculated by excluding the
                                       13
<PAGE>
$55,000 in consulting fees paid to Robert J. DeLuccia in his role as interim
Chief Executive Officer during the three months ended June 30, 2003) compared
with the same period of the prior year. The increase is further attributable to
a reduction of approximately $125,000 to the carrying value of certain patent
assets related to Topiglan during the three month period ended June 30, 2004.
For the six-month period ended June 30, 2004, marketing, general and
administrative expenses increased $654,000, or 42%, to $2,220,000 from
$1,566,000 in the six-month period ended June 30, 2003. The increase is
primarily attributable to an increase of $261,000 in employee compensation and
an increase of $167,000 in consulting fees relating to investor relations and
business development during the six months ended June 30, 2004 (which increase
was calculated by excluding the $55,000 in consulting fees paid to Robert J.
DeLuccia in his role as interim Chief Executive Officer during the six months
ended June 30, 2003) compared with the same period of the prior year. The
increase is further attributable to a reduction of approximately $125,000 to the
carrying value of certain patent assets related to Topiglan during the six month
period ended June 30, 2004. Marketing, general and administrative spending over
each of the next two quarters is expected to approximate the same level as seen
in the first two quarters of 2004.

Other income increased $16,000, or 100%, to $32,000 in the three-month period
ended June 30, 2004 from $16,000 in the three-month period ended June 30, 2003.
Other income increased $17,000, or 46%, to $54,000 in the six-month period ended
June 30, 2004 from $37,000 in same period in the prior year. The increase for
both periods is due to higher cash balances available for investment.

For the reasons described above, net loss increased $1,907,000, or 349%, to
$2,454,000 in the three-month period ended June 30, 2004 from $547,000 in the
three-month period ended June 30, 2003, and increased $2,955,000 or 172%, to
$4,672,000 in the six-month period ended June 30, 2004 from $1,717,000 in the
same period of the prior year.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Since inception, the primary source of funding for our operations has been the
private and public sale of our securities, and, to a lesser extent, the
licensing of our proprietary technology and products, research collaborations,
feasibility studies, government grants and the limited sales of products and
test materials. During the first six months of 2004, we received net proceeds of
$444,000 from the exercise of warrants, and proceeds of $6,681,000 (net of
issuance costs) as a result of the sale of common stock in a private placement
financing transaction. During the first six months of 2003, we received net
proceeds from the exercise of stock options of approximately $99,600 and no
proceeds from the exercise of warrants or from the sale of common stock.

At June 30, 2004, working capital was approximately $9.0 million, compared to
$6.3 million at December 31, 2003. The increase in our working capital reflects
the receipt of private placement proceeds and net proceeds from the exercise of
warrants, reduced by the use of funds in operations. On March 9, 2004, the
Company sold 5,402,000 shares of its common stock for $7,292,700 in gross
proceeds ($6,681,275 net of issuance costs) in a private placement to
institutional investors. The investors also received warrants to purchase an
aggregate of 1,080,400 shares of common stock at a purchase price of $2.09 per
share expiring five years from the closing date. Until such time as we obtain
agreements with third-party licensees or partners to provide funding for our
                                       14
<PAGE>

anticipated business activities, or otherwise generate revenue from the
commercialization of our products, our working capital will be utilized to fund
our operating activities.

Pursuant to a plan approved by our Board of Directors in 1998, we are authorized
to repurchase 1,000,000 shares of our common stock to be held as treasury shares
for future use. During the six month period ended June 30, 2004, we did not
repurchase any shares of Common Stock. At June 30, 2004, 92,103 repurchased
shares remain available for future use and 679,587 shares remain available for
repurchase under the plan.

Capital expenditures were approximately $14,000 and patent development costs
were approximately $31,000 for the first six months of 2004. We anticipate
additional capital and patent expenditures will be approximately $40,000 for the
remainder of the fiscal year ending December 31, 2004.

On July 10, 2003, the Board of Directors approved retention payments for certain
key employees, including certain executive officers, in order to enhance
retention of those employees. Payments of approximately $80,000 were paid on
January 8, 2004 and payments of approximately $153,000 were paid on July 2,
2004.

We believe that our existing cash and cash equivalents will be sufficient to
meet our operating expenses and capital expenditure requirements for the next
twelve months. Our cash requirements may vary materially from those now planned
because of changes in focus and direction of our research and development
programs, competitive and technical advances, patent developments or other
developments. We will require additional financing to continue our long term
plans for clinical trials and new product development and we are currently
considering our options with respect to a financing.

Currently, we do not enter into financial instrument transactions for trading or
speculative purposes. We do not intend to establish any special purpose entity
and do not have any material off balance sheet financing transactions. It is not
believed that inflation has or will have any significant effect on the results
of our operations.

The following summarizes our contractual obligations at December 31, 2003, and
the effect that such obligations are expected to have on future cash flows and
liquidity:
<TABLE>
<CAPTION>

                                                                                   Due In
                                                          --------------------------------------------------------
<S>                                       <C>             <C>            <C>            <C>           <C>
                                                             1 Year or                                 5 Years or
Obligations:                               Total Amount         Less       1-3 Years      3-5 Years        More


Lease Commitment (through February 2005)  $    543,700    $    465,300   $    78,400    $         0   $         0

Employment Agreements (per year)             1,008,600       1,008,600             0              0             0
                                          ------------    ------------   -----------    -----------   -----------


Total Contractual Cash Obligations        $  1,552,300    $  1,473,900   $    78,400    $         0   $         0
                                          ============    ============   ===========    ===========   ===========
</TABLE>
                                       15
<PAGE>
Excluded from the above contractual obligation summary are clinical trial
contracts which may approximate $1,200,000 in 2004. These contracts range in
duration from six (6) weeks to five (5) months and may be terminated by the
Company at its discretion.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         ----------------------------------------------------------

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

As of June 30, 2004, we are exposed to market risks which relate primarily to
changes in U.S. interest rates. Our cash equivalents and short-term investments
are subject to interest rate risk and will decline in value if interest rates
increase. Due to the short duration of these financial instruments, generally
one year or less, changes in interest rates would not have a material effect
upon our financial position. A hypothetical 10% change in interest rates would
not have a material effect on our Statement of Operations or Cash Flows for the
six months ended June 30, 2004.

ITEM 4.  CONTROL AND PROCEDURES
         ----------------------

As of the end of the period covered by this report, we carried out a review,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures (as defined in the SEC rules promulgated
under the Securities Exchange Act of 1934, as amended), which are designed to
ensure that information required to be disclosed in our Securities and Exchange
Commission reports is properly and timely recorded, processed, summarized and
reported. Based upon that review, our Chief Executive Officer and Chief
Financial Officer concluded that these controls and procedures are operating in
an effective manner as of June 30, 2004.

There were no changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2004 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN
FORWARD-LOOKING STATEMENTS MADE FROM TIME TO TIME BY THE COMPANY ON THE BASIS OF
MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THE FOLLOWING: THE COMPANY'S HISTORY
OF OPERATING LOSSES AND NEED FOR CONTINUED WORKING CAPITAL; TECHNOLOGICAL
UNCERTAINTY RELATING TO TRANSDERMAL DRUG DELIVERY SYSTEMS AND THE EARLY STAGE OF
DEVELOPMENT OF THE COMPANY'S PROPOSED PRODUCTS; UNCERTAINTIES RELATING TO
GOVERNMENT REGULATION AND REGULATORY APPROVALS; UNCERTAINTIES RELATED TO
CLINICAL TRIALS OF THE COMPANY'S PROPOSED PRODUCTS; THE COMPANY'S DEPENDENCE ON
THIRD PARTIES FOR COMMERCIALIZATION; NO ASSURANCE OF LICENSE ARRANGEMENTS; THE
COMPANY'S DEPENDENCE ON THIRD PARTIES FOR THE FDA APPLICATION PROCESS; THE LACK
OF SUCCESS OF THE COMPANY'S PRIOR DEVELOPMENT EFFORTS; THE COMPANY'S NEED FOR
SIGNIFICANT ADDITIONAL PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING; THE
COMPANY'S RELIANCE ON KEY EMPLOYEES, THE LIMITED PERSONNEL OF THE COMPANY AND
ITS DEPENDENCE ON ACCESS TO SCIENTIFIC TALENT; UNCERTAINTIES RELATING TO
COMPETITION, PATENTS AND PROPRIETARY TECHNOLOGY; THE COMPANY'S LACK OF MARKETING
RESOURCES AND DEPENDENCE ON THIRD PARTIES FOR MARKETING AND DISTRIBUTION; THE
COMPANY'S DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING; UNCERTAINTIES RELATING
TO RISKS OF PRODUCT LIABILITY CLAIMS, LACK OF PRODUCT LIABILITY INSURANCE, AND
EXPENSE AND DIFFICULTY OF OBTAINING ADEQUATE INSURANCE COVERAGE; THE COMPANY'S
RELIANCE ON THIRD PARTY SUPPLIERS; THE HIGHLY COMPETITIVE NATURE OF THE
                                       16
<PAGE>
COMPANY'S INDUSTRY; UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS;
AND OTHER FACTORS. ADDITIONAL INFORMATION ON THESE AND OTHER FACTORS WHICH COULD
AFFECT THE COMPANY'S ACTUAL RESULTS AND EXPERIENCE ARE INCLUDED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003 AND, IN
PARTICULAR, THE SECTION ENTITLED "RISK FACTORS".
                                      17
<PAGE>
PART II - OTHER INFORMATION

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

The Company's Annual Meeting of Stockholders was held on June 23, 2004. At the
meeting (i) all five director nominees were elected, (ii) the appointment of
Deloitte & Touche LLP as the Company's independent auditors was ratified, (iii)
amendments to the Company's 2001 Incentive Plan to increase the number of shares
of Common Stock authorized for issuance under the Incentive Plan by 4,000,000,
resulting in a total amount of 4,185,800 shares available for grant under the
Incentive Plan as of the June 30, 2004, were approved and (iv) amendments to the
Company's Certificate of Incorporation, as amended, to increase the number of
authorized shares of capital stock from 60,000,000 shares of Common Stock and
6,000,000 shares of Preferred Stock to 100,000,000 shares of Common Stock and
6,000,000 shares of Preferred Stock were approved.

     (i)   The following directors were elected for one year terms by the votes
           indicated:

           John L. Zabriskie, 33,563,516 for, 763,133 against or withheld;
           Peter G.Martin, 33,624,238 for, 702,411 against or withheld;
           Michael A. Davis, 33,560,270 for, 766,379 against or withheld;
           Robert J. DeLuccia, 33,642,063 for, 684,586 against or withheld; and
           Paul S. Echenberg, 33,613,563 for, 713,086 against or withheld

     (ii)  The appointment of Deloitte & Touche LLP was ratified by a vote of
           33,983,581 for, 226,349 against and 116,719 abstaining.

     (iii) Amendments to the Company's 2001 Incentive Plan to increase the
           number of shares of Common Stock authorized for issuance under the
           Incentive Plan by 4,000,000, resulting in a total amount of 4,185,800
           shares available for grant under the Incentive Plan as of the June
           30, 2004, were approved by vote of 7,781,799 for, 2,242,225 against
           and 142,308 abstaining.

     (iv)  Amendments to the Company's Certificate of Incorporation, as amended,
           to increase the number of authorized shares of capital stock from
           60,000,000 shares of Common Stock and 6,000,000 shares of Preferred
           Stock to 100,000,000 shares of Common Stock and 6,000,000 shares of
           Preferred Stock were approved by a vote of 32,368,702 for, 1,820,193
           against and 137,754 abstaining.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)  The following is a list of exhibits to this Quarterly Report on Form 10-Q:

     3.1  Certificate of Incorporation of MacroChem Corporation, as amended.

                                       18
<PAGE>

     3.2  Amended and Restated By-Laws of the Company, incorporated by reference
     to Exhibit 5 to the Company's Current Report on Form 8-K dated August 13,
     1999 (File No. 0-13634).

     10.1 Amendment to Employment Agreement between the Company and
     Robert J. DeLuccia.

     31.1 Certification of Principal Executive Officer Pursuant to Section 302
     of the Sarbanes-Oxley Act of 2002.

     31.2 Certification of Principal Financial Officer Pursuant to Section 302
     of the Sarbanes-Oxley Act of 2002.

     32.1 Certification of Principal Executive Officer Pursuant to Section
     1350, Chapter 63 of Title 18, United States Code, as Adopted Pursuant
     to Section 906 of the Sarbanes-Oxley Act of 2002.

     32.2 Certification of Principal Financial Officer Pursuant to Section
     1350, Chapter 63 of Title 18, United States Code, as Adopted Pursuant
     to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)  A report on Form 8-K was filed on April 15, 2004 disclosing a press
     release discussing preliminary results of a Phase 2 pharmacodynamic
     study of patients treated with Topiglan(R).


                                       19
<PAGE>
                                   SIGNATURES


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


                           MacroChem Corporation
                           (Registrant)



August 16, 2004            /s/  Robert J. DeLuccia
                           -----------------------------------------------------
                           Robert J. DeLuccia
                           President and Chief Executive Officer
                           (Principal Executive Officer)

                           /s/  Bernard R. Patriacca
                           -----------------------------------------------------
                           Bernard R. Patriacca
                           Vice President, Chief Financial Officer and Treasurer
                           (Principal Financial Officer)



                                       20
<PAGE>
                                  EXHIBIT INDEX


The following is a list of exhibits to this Quarterly Report on Form 10-Q:

         3.1   Certificate of Incorporation of MacroChem Corporation, as
         amended.

         3.2   Amended and Restated By-Laws of the Company, incorporated by
         reference to Exhibit 5 to the Company's Current Report on Form 8-K
         dated August 13, 1999 (File No. 0-13634).

         10.1  Amendment to Employment Agreement between the Company and
         Robert J. DeLuccia.

         31.1  Certification of Principal Executive Officer Pursuant to Section
         302 of the Sarbanes-Oxley Act of 2002.

         31.2  Certification of Principal Financial Officer Pursuant to Section
         302 of the Sarbanes-Oxley Act of 2002.

         32.1  Certification of Principal Executive Officer Pursuant to Section
         1350, Chapter 63 of Title 18, United States Code, as Adopted Pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002.

         32.2  Certification of Principal Financial Officer Pursuant to Section
         1350, Chapter 63 of Title 18, United States Code, as Adopted Pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002.


                                       21