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 September 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 November 1, 2004:
----------------------------                   --------------------------------
Common Stock, $.01 par value                            38,826,683


                                       1
<PAGE>
                              MACROCHEM CORPORATION

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


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

Item 1    Financial Statements

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

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

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

            Notes to Unaudited Condensed Financial
            Statements                                                6-11

Item 2    Management's Discussion and Analysis of
          Financial Condition and Results of Operations               12-18

Item 3    Quantitative and Qualitative Disclosures About Market Risk   18

Item 4    Control and Procedures                                      18-19


PART II   OTHER INFORMATION

Item 6    Exhibits                                                     20

SIGNATURES                                                             21

EXHIBIT INDEX                                                          22

                                       2
<PAGE>
Item 1.  Financial Statements
<TABLE>
<CAPTION>

                              MACROCHEM CORPORATION
                            CONDENSED BALANCE SHEETS
                                   (Unaudited)

                                                                           September 30,          December 31,
                                                                                2004                  2003
                                                                           --------------        -------------
<S>                                                                        <C>                   <C>

                                     ASSETS
Current assets:
       Cash and cash equivalents                                           $    6,736,194        $   3,839,772
       Short-term investments                                                   1,180,397            3,169,523
       Prepaid expenses and other current assets                                  333,674              316,066
                                                                            -------------         ------------
           Total current assets                                                 8,250,265            7,325,361
                                                                            -------------         ------------

Property and equipment, net                                                       186,156              227,659
                                                                            -------------         ------------

Other assets:
       Patents, net                                                               510,880              667,435
       Deposit                                                                        ---               29,193
                                                                            -------------         ------------
           Total other assets                                                     510,880              696,628
                                                                            -------------         ------------

Total assets                                                               $    8,947,301        $   8,249,648
                                                                            =============         ============

                                   LIABILITIES
Current liabilities:
       Accounts payable                                                    $      385,767        $     358,097
       Accrued expenses                                                           531,301              621,868
                                                                            -------------         ------------
           Total current liabilities                                              917,068              979,965

Deferred rent                                                                      13,771               33,363
                                                                            -------------         ------------

Total liabilities                                                                 930,839            1,013,328
                                                                            -------------         ------------

Commitments and contingencies

                              STOCKHOLDERS' EQUITY
Preferred stock, authorized and unissued, 6,000,000 shares                            ---                  ---
Common stock, $.01 par value, 100,000,000 shares authorized;
       38,903,983 and 32,944,334
       shares issued at September 30, 2004
       and December 31, 2003, respectively                                        389,040              329,443
Additional paid-in capital                                                     82,970,771           75,778,945
Unearned compensation                                                                 ---               (2,451)
Accumulated deficit                                                           (75,133,578)         (68,549,996)
Less treasury stock, at cost, 77,300 and 116,302
       shares at September 30, 2004 and
       December 31, 2003, respectively                                           (209,771)            (319,621)
                                                                            -------------         ------------
           Total stockholders' equity                                           8,016,462            7,236,320
                                                                            -------------         ------------
Total liabilities and stockholders' equity                                 $    8,947,301        $   8,249,648
                                                                            =============         ============
</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 nine months ended September 30, 2004 and 2003
                                   (Unaudited)

                                          For the three months ended Sept. 30,  For the nine months ended Sept. 30,
                                          ------------------------------------  -----------------------------------
                                                    2004             2003             2004               2003
                                                    ----             ----             ----               ----

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

Revenues:
    Sale of patent                             $       ---     $        ---      $        ---       $  1,000,000
    Research contracts                                 ---              ---               ---             10,031
                                                ----------       ----------        ----------         ----------
       Total revenues                                  ---              ---               ---          1,010,031
                                                ----------       ----------        ----------         ----------

Operating expenses:
    Research and development                     1,003,510          687,142         3,509,769          1,878,329
    Marketing, general and administrative          934,438          935,845         3,153,167          2,501,832
    Consulting fees with related parties               ---              ---               ---              6,000
                                                ----------       ----------        ----------         ----------

       Total operating expenses                  1,937,948        1,622,987         6,662,936          4,386,161
                                                ----------       ----------        ----------         ----------

Loss from operations                           ( 1,937,948)     ( 1,622,987)      ( 6,662,936)       ( 3,376,130)
                                                ----------       ----------        ----------         ----------

Other income:
    Interest income                                26,464           13,539             79,354             50,054
    Total other income
                                                ----------       ----------        ----------         ----------
                                                    26,464           13,539            79,354             50,054
                                                ----------       ----------        ----------         ----------

Net loss                                      $( 1,911,484)    $( 1,609,448)     $( 6,583,582)      $( 3,326,076)
                                                ==========       ==========        ==========         ==========

Net loss per share -
    basic and diluted                         $(      0.05)    $(      0.05)     $(      0.18)      $(      0.12)
                                                ==========       ==========        ==========         ==========

Weighted average shares                         38,788,748       29,299,636        37,273,118         28,512,783
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 nine months ended September 30, 2004 and 2003
                                   (Unaudited)

                                                                            For the nine months ended September 30,
                                                                            ---------------------------------------
                                                                                   2004                 2003
                                                                                   ----                 ----
<S>                                                                           <C>                 <C>

Cash flows from operating activities:
       Net loss                                                               $(6,583,582)        $(3,326,076)
       Adjustments to reconcile net loss to net cash
         used in operating activities:
           Depreciation and amortization                                          150,390             142,841
           Stock-based compensation                                               190,552              57,147
           401(k) contribution made in Company common stock                        48,082              37,322
           Deferred rent                                                       (   19,592)         (    9,489)
           Reduction to capitalized patents                                       124,853                 ---
       Changes in assets and liabilities:
           Accounts receivable                                                        ---              29,508
           Receivable due from related party                                          ---              25,057
           Prepaid expenses and other current assets                           (   17,608)         (  192,486)
           Accounts payable and accrued expenses                               (   62,897)            160,666
Deposits                                                                           29,193                 ---
                                                                                ---------           ---------

Net cash used in operating activities                                          (6,140,609)         (3,075,510)
                                                                                ---------           ---------

Cash flows from investing activities:
       Purchases of short-term investments                                     (   10,873)         (   43,247)
       Sales of short-term investments                                          2,000,000           3,000,000
       Expenditures for patents                                                (   30,707)         (    3,462)
       Expenditures for property and equipment                                 (   46,479)         (   68,741)
                                                                                ---------           ---------
Net cash provided by investing activities                                       1,911,941           2,884,550
                                                                                ---------           ---------

Cash flows from financing activities:
       Proceeds from sale of common stock (net of offering costs)               6,681,274           2,971,505
       Proceeds from exercise of common stock options                                 ---              99,575
       Proceeds from exercise of warrants                                         443,816                 ---
                                                                                ---------           ---------
Net cash provided by financing activities                                       7,125,090           3,071,080
                                                                                ---------           ---------

Net change in cash and cash equivalents                                         2,896,422           2,880,120
Cash and cash equivalents at beginning of period                                3,839,772             771,046
                                                                                ---------           ---------

Cash and cash equivalents at end of period                                    $ 6,736,194         $ 3,651,166
                                                                                =========           =========

</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
         September 30, 2004, the Company's accumulated deficit was approximately
         $75.1 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 cash, cash equivalents and short-term investments of $7,916,591 at
         September 30, 2004, will be sufficient to fund operations under the
         Company's current plan into June 2005. To continue to operate, the
         Company will require significant additional funding. The Company is
         assessing opportunities to raise capital and expects to continue
         financing operations through sales of securities, strategic alliances
         and other financing vehicles, if any, that might become available to
         the Company on terms that it deems acceptable.

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


(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.

                                       6
<PAGE>
         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
         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 Sept. 30,      Nine Months Ended Sept. 30,
                                                     ----------------------------      ---------------------------
                                                         2004             2003             2004            2003
                                                         ----             ----             ----            ----
         <S>                                        <C>               <C>             <C>              <C>

         Net loss as reported                       $(1,911,484)      $(1,609,448)    $(6,583,582)     $(3,326,076)

         Add: Stock-based employee compensation
          expense included in reported net loss             ---            18,892           7,325           56,676


         Deduct: Total stock-based employee
           compensation measured using the
           fair value method                         (  125,290)       (  308,266)     (  569,635)      (1,168,520)
                                                      ---------         ---------       ---------        ---------

         Pro forma net loss                         $(2,036,774)      $(1,898,822)    $(7,145,892)     $(4,437,920)
                                                      =========         =========       =========        =========

         Basic and diluted net loss per share -
           as reported                              $(     0.05)      $(     0.05)    $(     0.18)     $(     0.12)
                                                      =========         =========       =========        =========

         Basic and diluted net loss per share -
           pro forma                                $(     0.05)      $(     0.06)    $(     0.19)     $(    0. 16)
                                                      =========         =========       =========        =========
</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 Sept. 30,             Nine Months Ended Sept. 30,
                                             -----------------------------            ----------------------------
                                                 2004              2003                   2004             2003
                                                 ----              ----                   ----             ----
         <S>                                 <C>               <C>                    <C>              <C>

         Risk-free interest rate             3.05% - 4.14%     2.62% - 3.17%          3.05% - 4.14%    2.62% - 3.17%
         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>

                                       7
<PAGE>
         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.

(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 Sept. 30,         Nine Months Ended Sept. 30,
                                                ----------------------------         ---------------------------
                                                   2004              2003                2004             2003
                                                   ----              ----               ----             ----
         <S>                                   <C>               <C>                <C>               <C>

         Numerator for basic and diluted
         loss per share:
           Net loss                            $( 1,911,484)     $( 1,609,448)      $( 6,583,582)     $( 3,326,076)
                                                 ==========        ==========         ==========        ==========

         Denominator for basic
         and diluted loss per share:
           Weighted average shares
           outstanding                           38,788,748        29,299,636         37,273,118        28,512,783
                                                 ==========        ==========         ==========        ==========

         Net loss per share - basic and
           diluted                             $(      0.05)     $(      0.05)      $(      0.18)     $(      0.12)
                                                 ==========        ==========         ==========        ==========
</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 nine months ended September 30, 2004 and 2003 were
         6,553,611 and 5,076,671, respectively.

                                       8
<PAGE>

(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 recorded a
         reduction of $124,853 to the carrying value of certain patent assets
         related to Topiglan in June 2004.

(6)      STOCKHOLDERS' EQUITY
         --------------------
         During the nine months ended September 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 nine-month period ended
         September 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 363,332
         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 September 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
         September 30, 2004, 50,000 of these warrants had been exercised. None
         were exercised in the nine months ended September 30, 2004.

         In July 2001, the Company sold 1,566,047 shares of its common stock for
         approximately $10,148,000 in gross proceeds ($9,406,291 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 September 30, 2004,
         none of these warrants had been exercised.

                                       9
<PAGE>
         In September 2003, the Company sold 4,553,680 shares of its common
         stock for approximately $3,246,000 in gross proceeds ($2,971,505 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 September 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 September 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 ($6,681,274 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 September 30, 2004, none of these warrants
         had been exercised.

         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 September 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
         nine months ended September 30, 2004 and 2003.

(8)      SUBSEQUENT EVENT
         ----------------

         On October 18, 2004, the Company received written notice from Nasdaq
         stating that for the previous 30 consecutive business days the bid
         price of the Company's common stock had closed below the minimum $1.00
         per share requirement for continued inclusion in The Nasdaq SmallCap
         Market under Marketplace Rule 4310(c)(4). In accordance with
         Marketplace Rule 4310(c)(8), the Company was provided 180 calendar
         days, or until April 18, 2005, to regain compliance. In order to regain
         compliance, the company must demonstrate a closing bid price for its
         common stock of $1.00 per share or more for a minimum of 10 consecutive
         business days.

                                       10
<PAGE>

         The written notice further provided that if compliance with the $1.00
         minimum bid price requirement cannot be demonstrated by the company by
         April 18, 2005, the Nasdaq Staff will grant the Company an additional
         180 calendar days to regain compliance if, at that time, the Company
         meets The Nasdaq SmallCap Market initial listing requirements as set
         forth in Marketplace Rule 4310(c), except for the $1.00 minimum bid
         price requirement. The written notice provided that if the Company has
         not regained compliance with the $1.00 minimum bid price requirement
         during the second 180 day compliance period, but again satisfies The
         Nasdaq SmallCap Market initial listing requirements as set forth in
         Marketplace Rule 4310(c), except for the $1.00 minimum bid price
         requirement, the Company may be afforded an additional compliance
         period, up to its next shareholder meeting, provided that the Company
         commits: (1) to seek shareholder approval for a reverse stock split at
         or before its next shareholder meeting and (2) to promptly thereafter
         effect the reverse stock split. Such shareholder meeting must occur no
         later than October 18, 2006. If the Company fails to regain compliance
         with the $1.00 minimum bid price requirement and is not eligible for an
         additional compliance period, the Nasdaq Staff would notify the Company
         at that time that its securities would be delisted. The Company would
         have the right to appeal such delisting to the Nasdaq Listing
         Qualifications Panel.

                                       11
<PAGE>


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

GENERAL
-------

     We are a specialty pharmaceutical company that develops and seeks to
commercialize topically delivered pharmaceutical products by employing SEPA
(Soft Enhancement of Percutaneous Absorption), our patented topical drug
delivery technology. SEPA enhances the efficiency and rate of diffusion of drugs
into and through the skin. SEPA, when properly combined with active
pharmaceutical ingredients, can provide for a variety of convenient and
easy-to-apply formulations, including creams, gels, ointments, lacquers and
solutions for the treatment of a variety of systemic and localized conditions.
Currently, we are developing investigational new drugs for the endocrinology,
urology, dermatology and podiatry specialties: Opterone(R), for the treatment of
testosterone deficiency, and EcoNail(TM), for fungal infections of the nails. We
believe that products incorporating SEPA may allow selected drugs to be
administered more effectively and with improved patient compliance compared to
alternative methods of drug administration, such as ingestion and injection.

     Since inception, we have been engaged primarily in research and
development. We have not generated any meaningful revenues from operations and
we have sustained significant operating losses. We anticipate that we will
continue to incur significant losses for the foreseeable future. We cannot
guarantee that we will be successful in commercializing our products, or that we
will ever become profitable. As of September 30, 2004, we had an accumulated
deficit of approximately $75.1 million. Our product candidates are in discovery
or developmental stages and must undergo a rigorous regulatory approval process,
which includes costly and extensive pre-clinical and clinical testing, to
demonstrate safety and efficacy before we can market any resulting product. To
date, neither the FDA nor any of its international equivalents has approved any
of our product candidates for marketing.

     Our results of operations can vary significantly from year to year and
quarter to quarter, and depend, among other factors, on:

        o  the progress of clinical trials we conduct;

        o  the degree of our research, marketing and administrative efforts;

        o  the development, when appropriate, of our own sales force;

        o  the signing of licenses and product development agreements;

        o  the timing of revenues recognized pursuant to license agreements; and

        o  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
generally have exceeded our revenues in any particular period or fiscal year.

                                       12
<PAGE>
     We expect to continue to spend significant amounts on developing and
seeking regulatory approval of Opterone and EcoNail. Ultimately, if we receive
regulatory approval for Opterone and EcoNail, we will incur significant expenses
in connection with their commercialization. In addition, we also plan to
identify and develop, either internally or through collaborative arrangements,
additional product candidates and technologies that complement our existing
technologies and that fit within our growth strategy. If we identify potential
product candidates, we will incur additional costs in connection with testing
and seeking regulatory approval of those product candidates.

     RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist of:

        o  salaries and expenses for our research and development personnel;

        o  payments to consultants, investigators, contract research
           organizations and manufacturers in connection with our
           pre-clinical and clinical trials;

        o  costs associated with conducting our clinical trials;

        o  costs of developing and obtaining regulatory approvals; and

        o  allocable costs, including occupancy and depreciation.

     Because a significant portion of our research and development expenses
(including employee payroll and related benefits, laboratory supplies, travel,
dues and subscriptions, temporary help costs, consulting costs and allocable
costs such as occupancy and depreciation) benefit multiple projects or our drug
delivery technologies in general, we do not track these expenses by project. For
the three months ended September 30, 2004, we spent $1,003,510 on research and
development, including $1,549, $298,779, and $174,574 in costs associated with
clinical trials for Topiglan, Opterone and EcoNail, respectively, and $528,608
in costs not specifically tracked to a project. For the three months ended
September 30, 2003, we spent $687,142 on research and development, including
$150,388 and $40,718 in costs associated with clinical trials related to
Topiglan and Opterone, respectively, and $496,036 in costs not specifically
tracked to a project. EcoNail was not in clinical trials during the three month
period ended September 30, 2003. For the nine months ended September 30, 2004,
we spent $3,509,769 on research and development, including $387,892, $1,007,142,
and $403,547 in costs associated with clinical trials for Topiglan, Opterone and
EcoNail, respectively, and $1,711,188 in costs not specifically tracked to a
project. For the nine months ended September 30, 2003, we spent $1,878,329 on
research and development, including $257,922 and $40,718 in costs associated
with clinical trials for Topiglan and Opterone, respectively, and $1,579,689 in
costs not specifically tracked to a project. EcoNail was not in clinical trials
during the first nine months of 2003.

     Each of our research and development programs is 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 currently are in developmental stages,
must overcome significant technological, manufacturing and marketing challenges
before they can be successfully commercialized. As a result of these risks and

                                       13
<PAGE>
uncertainties, we are unable to predict with any certainty the period in which
material net cash inflows from these projects could be expected to commence or
the completion date of these programs. In addition, 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 research and
development expenses tend to increase in later stages of clinical 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.

     MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses consist primarily of salaries and other related costs
for personnel, marketing and promotion, professional fees and facilities costs.
We anticipate that marketing, general and administrative expenses will increase
over the next several years as we begin, when appropriate, to build our own
sales force to market our product candidates following their regulatory
approval.

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

     Our discussion and analysis of our financial condition and results of
operations are based on 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 to our 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 we use in the preparation of our
financial statements. The following is a brief discussion of the more
significant accounting policies and methods that affect the judgments and
estimates used in the preparation of our financial statements.

     RESEARCH AND DEVELOPMENT. 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 counterparty 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 purposes. We bill research and development revenue on a
cost reimbursement basis, which includes direct costs we incur in connection
with research activities and an allocation of certain other costs we incur.

     PATENT ASSETS. 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 we use 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.

                                       14
<PAGE>
RESULTS OF OPERATIONS
---------------------

     We had no revenues for the three or nine-month periods ended September 30,
2004. There were no revenues for the three month period ended September 30,
2003. Revenues for the nine-month period ended September 30, 2003 were
$1,010,031 (all of which we received in the three-month period ended June 30,
2003), consisting primarily of proceeds from the sale of a patent (U.S. Patent
No. 6,459,124), which related to antifungal topical compositions but which did
not use our SEPA platform technology.

     For the three-month period ended September 30, 2004, research and
development expenses increased by $316,368, or 46%, to $1,003,510 from $687,142
in the three-month period ended September 30, 2003. The increase is primarily
attributable to an increase in employee compensation of $37,219 associated with
the addition of four new research and development employees in late 2003 as well
as an increase of $253,146 spent on clinical trials in the three-month period
ended September 30, 2004 compared with the same three-month period of 2003. For
the nine-month period ended September 30, 2004, research and development
expenses increased by $1,630,440, or 87%, to $3,509,769 from $1,879,329 in the
nine-month period ended September 30, 2003. The increase is primarily
attributable to an increase in employee compensation of $212,024 associated with
the addition of four new research and development employees in late 2003 as well
as an increase of $1,312,324 spent on clinical trials (which increase was
partially offset by a decrease of approximately $130,000 in pre-clinical study
costs) in the first nine months of 2004 compared with the same nine-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 the next quarter is expected to approximate the same level seen in
each of the first three 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 were essentially unchanged
at $934,438 in the three months ended September 30, 2004 compared to $935,845 in
the three-month period ended September 30, 2003. For the nine-month period ended
September 30, 2004, marketing, general and administrative expenses increased by
$651,335, or 26%, to $3,153,167 from $2,501,832 in the nine-month period ended
September 30, 2003. The increase is primarily attributable to an increase of
$240,671 in employee compensation and an increase of $247,919 in consulting fees
relating to investor relations and business development during the nine months
ended September 30, 2004 (which increase was calculated by excluding $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 $124,853 to the carrying value of certain patent assets related to
Topiglan during the nine month period ended September 30, 2004. Marketing,
general and administrative spending over the next quarter is expected to
approximate the same level as seen in each of the first three quarters of 2004.

     Other income increased by $12,925, or 95%, to $26,464 in the three-month
period ended September 30, 2004 from $13,539 in the three-month period ended
September 30, 2003. Other income increased $29,300, or 59%, to $79,354 in the
nine-month period ended September 30, 2004 from $50,054 in same


                                       15
<PAGE>

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 by $302,036, or 19%, to
$1,911,484 in the three-month period ended September 30, 2004 from $1,609,448 in
the three-month period ended September 30, 2003, and increased by $3,257,506, or
98%, to $6,583,582 in the nine-month period ended September 30, 2004 from
$3,326,076 in the same period of the prior year.

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

     Since inception, our 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 nine months of 2004, we received net proceeds
of $443,816 from the exercise of warrants, and proceeds of $6,681,274 (net of
issuance costs) as a result of the sale of common stock in a private placement
financing transaction. During the first nine months of 2003, we received net
proceeds from the exercise of stock options of $99,575 and no proceeds from the
exercise of warrants or from the sale of common stock.

     At September 30, 2004, working capital was approximately $7.3 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 ($6,681,274 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
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 nine month period ended September 30,
2004, we did not repurchase any shares of common stock. At September 30, 2004,
77,300 repurchased shares remain available for future use and 679,587 shares
remain available for repurchase under the plan.

     Capital expenditures were $46,479 and patent development costs were $30,707
for the first nine months of 2004. We anticipate additional capital and patent
expenditures will be approximately $90,000 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.

                                       16
<PAGE>
     As of September 30, 2004, we had $7,916,591 in cash, cash equivalents and
short-term investments. We believe that our existing cash, cash equivalents and
short-term investments will be sufficient to meet our current operating plan and
capital expenditure requirements into June 2005. Our cash requirements may vary
materially from those now planned because of changes in the 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 operations after our current capital resources are exhausted and to
continue our long-term plans for clinical trials and new product development. We
are assessing opportunities to raise capital and expect to continue financing
our operations through sales of securities, strategic alliances or other
financing vehicles, if any, that might become available to us on terms that we
deem acceptable.

     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. We do not
believe 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
                                                          -------------------------------------------------------
Obligations:                                Total Amount     1 Year or      1-3 Years    3-5 Years    5 Years or
                                                               Less                                      More
<S>                                          <C>            <C>              <C>          <C>           <C>

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>

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 we may terminate them at our
discretion. Also excluded from the above contractual obligation summary is the
six month extension of our existing lease for office and laboratory space,
through August 31, 2005, in the total amount of $235,228 ($39,205 per month for
six months).

     On October 18, 2004, the Company received written notice from Nasdaq
stating that for the previous 30 consecutive business days the bid price of the
Company's common stock had closed below the minimum $1.00 per share requirement
for continued inclusion in The Nasdaq SmallCap Market under Marketplace Rule
4310(c)(4). In accordance with Marketplace Rule 4310(c)(8), the Company was
provided 180 calendar days, or until April 18, 2005, to regain compliance. In
order to regain compliance, the company must demonstrate a closing bid price for
its common stock of $1.00 per share or more for a minimum of 10 consecutive
business days.

     The written notice further provided that if compliance with the $1.00
minimum bid price requirement cannot be demonstrated by the company by April 18,
2005, the Nasdaq Staff will grant the Company an additional 180 calendar days to


                                       17
<PAGE>

regain compliance if, at that time, the Company meets The Nasdaq SmallCap Market
initial listing requirements as set forth in Marketplace Rule 4310(c), except
for the $1.00 minimum bid price requirement. The written notice provided that if
the Company has not regained compliance with the $1.00 minimum bid price
requirement during the second 180 day compliance period, but again satisfies The
Nasdaq SmallCap Market initial listing requirements as set forth in Marketplace
Rule 4310(c), except for the $1.00 minimum bid price requirement, the Company
may be afforded an additional compliance period, up to its next shareholder
meeting, provided that the Company commits: (1) to seek shareholder approval for
a reverse stock split at or before its next shareholder meeting and (2) to
promptly thereafter effect the reverse stock split. Such shareholder meeting
must occur no later than October 18, 2006. If the Company fails to regain
compliance with the $1.00 minimum bid price requirement and is not eligible for
an additional compliance period, the Nasdaq Staff would notify the Company at
that time that its securities would be delisted. The Company would have the
right to appeal such delisting to the Nasdaq Listing Qualifications Panel. A
delisting of the Company's common stock from the The Nasdaq SmallCap Market
could reduce the liquidity of an investment in the Company's common stock and
affect the Company's ability to raise additional funds in the future.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
-------------------------------------------------

     As of September 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 nine months ended September 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 September 30, 2004.

     There were no changes in our internal control over financial reporting that
occurred during the quarter ended September 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. OUR 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 US ON THE BASIS OF
MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A


                                       18
<PAGE>

DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO THE FOLLOWING: OUR HISTORY OF
OPERATING LOSSES AND NEED FOR CONTINUED WORKING CAPITAL; OUR NEED FOR
SIGNIFICANT ADDITIONAL PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING;
TECHNOLOGICAL UNCERTAINTY RELATING TO TRANSDERMAL DRUG DELIVERY SYSTEMS; THE
EARLY STAGE OF DEVELOPMENT OF OUR PROPOSED PRODUCTS; THE LACK OF SUCCESS OF OUR
PRIOR DEVELOPMENT EFFORTS; UNCERTAINTIES RELATED TO CLINICAL TRIALS OF OUR
PROPOSED PRODUCTS; UNCERTAINTIES RELATING TO GOVERNMENT REGULATION AND
REGULATORY APPROVALS; OUR DEPENDENCE ON THIRD PARTIES FOR THE FDA APPLICATION
PROCESS; UNCERTAINTIES REGARDING MARKET ACCEPTANCE OF OUR PRODUCT CANDIDATES; NO
ASSURANCE OF OUR ENTERING INTO LICENSE ARRANGEMENTS; OUR ABILITY TO IDENTIFY AND
OBTAIN RIGHTS TO PRODUCTS OR TECHNOLOGIES IN ORDER TO BUILD OUR PORTFOLIO OF
PRODUCT CANDIDATES; OUR DEPENDENCE ON THIRD PARTIES FOR MARKETING AND
DISTRIBUTION; OUR RELIANCE ON KEY EMPLOYEES; OUR LIMITED PERSONNEL AND OUR
DEPENDENCE ON CONTINUED ACCESS TO SCIENTIFIC TALENT; UNCERTAINTIES RELATING TO
COMPETITION, PATENTS AND PROPRIETARY TECHNOLOGY; OUR 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 COMPANY'S INDUSTRY; UNCERTAINTY OF
PHARMACEUTICAL PRICING AND RELATED MATTERS; THE VOLATILITY OF OUR STOCK PRICE;
OUR ABILITY TO COMPLY WITH THE MINIMUM LISTING QUALIFICATIONS OF THE NASDAQ
SMALLCAP MARKET; 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".

                                       19
<PAGE>


<PAGE>


PART II - OTHER INFORMATION

ITEM 6.  EXHIBITS.

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

         3.1   Certificate of Incorporation as amended, incorporated by
         reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
         for the quarter ended June 30, 2004 (File No. 0-13634).

         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).

         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.


                                       20
<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)



November 8, 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)



                                       21
<PAGE>

                                 EXHIBIT INDEX


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

         3.1   Certificate of Incorporation as amended, incorporated by
         reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
         for the quarter ended June 30, 2004 (File No. 0-13634).

         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).

         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.


                                       22
<PAGE>