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, 2003

                                       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 1, 2003:
----------------------------                      ------------------------------
Common Stock, $.01 par value                                 28,248,643
<PAGE>

                              MACROCHEM CORPORATION

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


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

Item 1    Financial Statements

            Condensed Balance Sheets (Unaudited)
            June 30, 2003 and December 31, 2002                      3

            Condensed Statements of Operations for the
            Three and Six Months Ended June 30, 2003                 4
            and 2002 (Unaudited)

            Condensed Statements of Cash Flows for the
            Six Months Ended June 30, 2003
            and 2002 (Unaudited)                                     5

            Notes to Unaudited Condensed Financial
            Statements                                              6-10


Item 2    Management's Discussion and Analysis of
          Financial Condition and Results of Operations             10-13

Item 3    Quantitative and Qualitative Disclosures
          About Market Risk                                          14

Item 4    Control and Procedures                                     14

PART II   OTHER INFORMATION

Item 6    Exhibits and Reports on Form 8-K                           15

SIGNATURES                                                           16

EXHIBIT INDEX                                                        17



                                       2
<PAGE>
ITEM 1.       FINANCIAL STATEMENTS

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

                                                                               June 30,             December 31,
                                                                                 2003                   2002
                                                                             -----------           --------------

                                                                ASSETS
<S>                                                                            <C>                   <C>
Current assets:
       Cash and cash equivalents                                               $  1,006               $    771
       Short-term investments                                                     6,151                  8,118
       Accounts receivable                                                           12                     40
       Receivable due from related party                                             25                     25
       Prepaid expenses and other current assets                                    455                    166
                                                                                 ------                 ------
           Total current assets                                                   7,649                  9,120
                                                                                 ------                 ------

Property and equipment, net                                                         295                    376
                                                                                 ------                 ------

Other assets:
       Patents, net                                                                 638                    607
       Deposit                                                                       29                     29
                                                                                 ------                 ------
           Total other assets                                                       667                    636
                                                                                 ------                 ------

Total assets                                                                   $  8,611               $ 10,132
                                                                                 ======                 ======

                                                              LIABILITIES
Current liabilities:
       Accounts payable                                                        $    237               $     19
       Accrued expenses                                                             215                    395
                                                                                 ------                 ------
           Total current liabilities                                                452                    414

Deferred rent                                                                        42                     48
                                                                                 ------                 ------

Total liabilities                                                                   494                    462
                                                                                 ------                 ------

Commitments and contingencies

                                                          STOCKHOLDERS' EQUITY
Preferred stock, authorized and unissued, 6,000,000 shares                          ---                    ---
Common stock, $.01 par value, 60,000,000 shares authorized;
       28,390,654 and 28,163,054
       shares issued at June 30, 2003
       and December 31, 2002, respectively                                          284                    282
Additional paid-in capital                                                       72,888                 72,949
Accumulated deficit                                                             (64,605)               (62,888)
Less treasury stock, at cost, 142,011 and 185,264
       shares at June 30, 2003 and
       December 31, 2002, respectively                                          (   450)               (   673)
                                                                                 ------                 ------
           Total stockholders' equity                                             8,117                  9,670
                                                                                 ------                 ------
Total liabilities and stockholders' equity                                     $  8,611               $ 10,132
                                                                                 ======                 ======
</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, 2003 and 2002
                                   (Unaudited)
             (Amounts in thousands except share and per share data)


                                           For the three months ended June 30,   For the six months ended June 30,
                                           -----------------------------------   ---------------------------------
                                               2003            2002                2003                2002
                                               ----            ----                ----                ----

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

Revenues                                  $      1,010     $        ---       $      1,010       $        43
                                            ----------       ----------         ----------         ----------


Operating expenses:
    Research and development                       652              964              1,192              2,199
    Marketing, general and administrative          921            1,222              1,566              2,286
    Consulting fees with related parties           ---               15                  6                 30
                                            ----------       ----------         ----------         ----------
       Total operating expenses                  1,573            2,201              2,764              4,515
                                            ----------       ----------         ----------         ----------

Loss from operations                       (       563)     (     2,201)       (     1,754)       (     4,472)
                                            ----------       ----------         ----------         ----------

Other income (expense):
    Interest income                                 16               53                 37                120
                                            ----------       ----------         ----------         ----------
       Total other income                           16               53                 37                120
                                            ----------       ----------         ----------         ----------

Net loss                                  $(       547)    $(     2,148)      $(     1,717)      $(     4,352)
                                            ==========       ==========         ==========         ==========

Net loss per share -
    basic and diluted                     $(      0.02)    $(      0.08)      $(      0.06)      $(      0.16)
                                            ==========       ==========         ==========         ==========

Weighted average shares                     28,239,000       27,920,000         28,121,000         27,914,000
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, 2003 and 2002
                                   (Unaudited)
                             (Amounts in thousands)

                                                            For the six months ended June 30,
                                                            ---------------------------------
                                                                2003                 2002
                                                                ----                 ----
<S>                                                           <C>                  <C>

Cash flows from operating activities:
       Net loss                                               $(1,717)             $(4,352)
       Adjustments to reconcile net loss to net cash
         used by operating activities:
           Depreciation and amortization                           99                  109
           Stock-based compensation                                38                  185
           401(k) contribution in Company common stock             26                   55
           Deferred rent                                       (    6)                   1
       Changes in assets and liabilities:
           Accounts receivable                                     28                  375
           Prepaid expenses and other current assets           (  290)              (  183)
           Accounts payable and accrued expenses                   38               (  563)
                                                                -----                -----


Net cash used by operating activities                          (1,784)              (4,373)
                                                                -----                -----

Cash flows from investing activities:
       Sales of short-term investments                          1,967                4,783
       Expenditures for property and equipment                    ---               (   28)
       Additions to patents                                    (  47)               (   39)
                                                                ----                 -----
Net cash provided by investing activities                       1,920                4,716
                                                                -----                -----

Cash flows from financing activities:
       Proceeds from exercise of common stock options              99                  ---
                                                                -----                -----
Net cash provided by financing activities                          99                  ---
                                                                -----                -----

Net change in cash and cash equivalents                           235                  343
Cash and cash equivalents at beginning of period                  771                  697
                                                                -----                -----

Cash and cash equivalents at end of period                    $ 1,006              $ 1,040
                                                                =====                =====
</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 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 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, 2002.

     The results disclosed in the Statement of Operations for the three and six
     months ended June 30, 2003 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 Enhancer 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 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.


                                       6
<PAGE>

     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
     if 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,
                                                   ---------------------------       -------------------------
                                                     2003             2002             2003            2002
                                                     ----             ----             ----            ----

     <S>                                        <C>               <C>             <C>              <C>
     Net loss as reported                       $(  547,000)      $(2,148,000)    $(1,717,000)     $(4,352,000)

     Additional stock compensation
       measured using the fair value method      (  790,000)       (  545,000)     (1,258,000)      (1,161,000)
                                                  ---------         ---------       ---------        ---------

     Proforma net loss                          $(1,337,000)      $(2,693,000)    $(2,975,000)     $(5,513,000)
                                                  =========         =========       =========        =========

     Basic and diluted net loss per share -
       as reported                              $(     0.02)      $(     0.08)    $(     0.06)     $(     0.16)
                                                  =========         =========       =========        =========

     Basic and diluted net loss per share -
       proforma                                 $(     0.05)      $(     0.10)    $(     0.11)     $(     0.20)
                                                  =========         =========       =========        =========
</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,
                                           ---------------------------              -------------------------
                                              2003              2002                  2003             2002
                                              ----              ----                  ----             ----

     <S>                                  <C>               <C>                    <C>              <C>
     Risk-free interest rate                 2.62%          4.08%-4.53%               2.62%         4.08%-4.53%
     Expected life of option
        grants                              6 years           6 years                6 years          6 years
     Expected volatility of
        underlying stock                     184%              154%                   184%             154%
     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.

(3)  REVENUE RECOGNITION

     Revenues 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.

                                       7
<PAGE>

(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,
                                            ---------------------------         -------------------------
                                              2003             2002              2003             2002
                                              ----             ----              ----             ----

     <S>                                <C>              <C>                <C>              <C>
     Numerator for basic and diluted
     loss per share:
        Net loss                        $(   547,000)    $( 2,148,000)      $( 1,717,000)    $( 4,352,000)
                                          ==========       ==========         ==========       ==========

     Denominator for basic
     and diluted loss per share:
        Weighted average shares
        outstanding                       28,239,000       27,920,000         28,121,000       27,914,000
                                          ==========       ==========         ==========       ==========

     Net loss per share - basic and
     diluted                            $(     0.02)     $(      0.08)      $(      0.06)    $(      0.16)
                                          =========        ==========         ==========       ==========
</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 three and six months ended June 30, 2003 and 2002 were 4,406,536 and
     5,075,485, respectively.

(5)  STOCKHOLDERS' EQUITY

     During the six months ended June 30, 2003, no options were granted or
     exercised under the 2001 Incentive Plan (the "Plan"). During the same
     period, 505,868 options were canceled under the Plan.

     Under the 1994 Equity Incentive Plan (the "1994 Plan"), no options were
     granted or exercised during the six-month period ended June 30, 2003.
     During the same period, 172,083 options were canceled under the 1994 Plan.

     During the six months ended June 30, 2003, 227,600 options were exercised
     and 192,400 options were canceled under the 1984 Non Qualified Plan.

     During the six months ended June 30, 2003, an option to purchase 500,000
     shares of common stock was granted to Robert J. DeLuccia, the Company's new
     Chief Executive Officer, a portion of which vests immediately, with the
     remainder vesting over two years, with an exercise price of $1.06 per
     share.

     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. Through June 30, 2003, none of the $5.90 warrants had been
     exercised. The placement agent received a warrant to purchase 108,999
     shares of common stock at a purchase price of $7.43 for five years. Through
     June 30, 2003, 50,000 of the $7.43 warrants had been exercised. None were
     exercised in the six months ended June 30, 2003.


                                       8
<PAGE>

     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. 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, 2003, none of the $8.995 warrants had
     been exercised.

(6)  COMPREHENSIVE INCOME

     The Company reports comprehensive income in accordance with Statement of
     Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
     Income", which requires businesses to disclose comprehensive income and its
     components in their general-purpose financial statements. Comprehensive
     loss is equal to the Company's net loss for the three and six months ended
     June 30, 2003 and 2002.

(7)  RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2002, the Emerging Issues Task Force ("EITF") issued EITF Issue
     No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
     00-21"), which provides guidance on the timing and method of revenue
     recognition for sales arrangements that include the delivery of more than
     one product or service. EITF 00-21 is effective prospectively for
     arrangements entered into in fiscal periods beginning after June 15, 2003.
     The Company will adopt the provisions of EITF 00-21 for new contracts
     entered into beginning in the third quarter of 2003.

(8)  SUBSEQUENT EVENTS

     On March 31, 2003, the Company received a notification from Nasdaq
     indicating that, as of December 31, 2002, the Company's stockholders'
     equity did not comply with the minimum $10,000,000 stockholders' equity
     requirement for continued inclusion on The Nasdaq National Market. On May
     28, 2003, the Company received a further notification from Nasdaq
     indicating that as a result of continued non-compliance with this rule, the
     Company's Common Stock would be delisted from The Nasdaq National Market at
     the opening of business on June 6, 2003 unless the Company filed a hearing
     request with the Nasdaq Listing Qualifications Panel before the end of
     business on June 4, 2003. The Company filed the request for a hearing to
     appeal the Nasdaq determination. The hearing was held on July 17, 2003 and
     the Company is awaiting the decision of the Nasdaq Listing Qualifications
     Panel. There can be no assurance that the Company will be able to regain
     compliance with this listing requirement nor can there be any assurance
     that the Nasdaq Listing Qualifications Panel will decide to allow the
     Company to remain listed on The Nasdaq National Market. If the Company is
     unable to regain compliance, the Company will consider other potential
     actions, including applying to transfer its common stock to The Nasdaq

                                       9
<PAGE>

     SmallCap Market. A delisting of the Company's common stock from the Nasdaq
     National 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL
-------

MacroChem's primary business is the development of specialty pharmaceutical
products for commercialization by employing SEPA(R) (Soft Enhancer of
Percutaneous Absorption), its 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. The Company is currently developing
investigational new drugs for the treatment of erectile dysfunction
(Topiglan(R)), testosterone deficiency (Opterone(TM)) and fungal infections of
the toenails (EcoNail(TM)). The Company currently derives no significant revenue
from product sales, royalties or license fees. The Company is developing
specific SEPA formulations for use with proprietary and non-proprietary drugs
manufactured by other pharmaceutical companies, and seeks to commercialize these
products through the formation of partnerships, strategic alliances and
licensing arrangements with those companies.

The Company's results of operations can vary significantly from year to year and
quarter to quarter, and depend, among other factors, on the signing of new
licenses and product development agreements, the timing of revenues recognized
pursuant to license agreements, the achievement of milestones by licensees, the
progress of clinical trials conducted by licensees and the Company, and the
degree of research, marketing and administrative effort. The timing of the
Company's revenues may not match the timing of the Company's associated product
development expenses. To date, research and development expenses have generally
exceeded revenues in any particular period and/or fiscal year.

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

Note 1 of the consolidated financial statements included within the Company's
Form 10-K for the year ended December 31, 2002, includes a summary of the
significant accounting policies and methods used in the preparation of our
consolidated financial statements. The following is a brief discussion of the
more significant accounting policies and methods used by the Company.

The Company's discussion and analysis of its financial condition and results of
operations are based upon its 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 the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses.

                                       10
<PAGE>

The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements. As more fully described in the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002, we derive revenue from research and development
programs. 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 counter-party is obligated to pay, and when
no future performance obligation exists. Research and development revenue is
billed on a cost reimbursement basis, which includes direct costs incurred in
connection with research activities and an allocation of certain other costs
incurred by the Company. Revenues 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.

Costs and expenses incurred in connection with pending patent applications are
deferred. Costs related to successful patent applications are amortized over the
estimated useful lives of the patents using the straight-line method.
Accumulated patent costs and deferred patent application costs related to
patents that are considered to have limited future value are charged to
operations.

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

Revenues, consisting primarily of proceeds from the sale of a patent, totaled
$1,010,000 for the three-month period ended June 30, 2003, compared to no
revenues for the three-month period ended June 30, 2002. Revenues were
$1,010,000 for the six-month period ended June 30, 2003 compared to $43,000 in
the same period of the prior year. The increase for both periods is the result
of the Company having obtained a payment in connection with the sale of a
patent.

Research and development expenses decreased $312,000, or 32%, to $652,000 in the
three-month period ended June 30, 2003 from $964,000 in the three-month period
ended June 30, 2002. The decrease is primarily attributable to a reduction in
personnel expenses of approximately $320,000 relating to the reduction of
research staff levels in November of 2002. For the six-month period ended June
30, 2003 research and development expenses decreased $1,007,000, or 46%, from
$2,199,000 in the prior year. The decrease is primarily attributable to a
reduction in personnel expenses of $725,000 relating to the reduction in
research staff levels in November 2002 and approximately $300,000 more being
spent on clinical trials in the first half of 2002 than in 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. The spending is expected to increase slightly
over the remainder of the year as we initiate new clinical trials and the
ongoing European clinical trial of Topiglan progresses.

Marketing, general and administrative expenses decreased $301,000, or 25%, to
$921,000 in the three months ended June 30, 2003 from $1,222,000 in the
three-month period ended June 30, 2002 and decreased $720,000, or 31%, to
$1,566,000 in the six-month period ended June 30, 2003 from $2,286,000 in the
same period in the prior year. The decrease is primarily attributable to the
reduction in staff implemented in November of 2002, resulting in a savings of
approximately $279,000 and $630,000, respectively, in the three and six month
periods ended June 30, 2003. The spending is expected to increase slightly over
the remainder of the year due to increased travel and related expenses
associated with business development and investor relations activities.

                                       11
<PAGE>

Other income decreased $37,000, or 70%, to $16,000 in the three-month period
ended June 30, 2003 from $53,000 in the three-month period ended June 30, 2002.
The decrease is due to an average lower invested balance of cash, cash
equivalents and short-term investments resulting from funds used in Company
operations and a decrease in overall return rates.

For the reasons described above, net loss decreased $1,601,000, or 75%, to
$547,000 in the three-month period ended June 30, 2003 from $2,148,000 in the
three-month period ended June 30, 2002 and decreased $2,635,000, or 61%, to
$1,717,000 in the six-month period ended June 30, 2003 from $4,352,000 in the
same period of the prior year.

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

Since inception, the primary source of funding for the Company's operations has
been the private and public sale of its securities, and to a lesser extent, the
licensing of its proprietary technology and products, government grants and the
limited sales of products and test materials. During the first six months of
2003, the Company received net proceeds from the exercise of stock options of
approximately $99,600 and there were no stock options exercised for the six
months ended June 30, 2002. Also, the Company recognized revenue of $1,010,000
for the six months ended June 30, 2003, primarily from the sale of U.S.Patent
No. 6,495,124 B1. During the first six months of 2002, the Company recognized
$43,000 of revenues.

At June 30, 2003, working capital was approximately $7,197,000, compared to
$8,706,000 at December 31, 2002. The decrease in the Company's working capital
was due primarily to the use of funds for operations and resulted in a lower
balance of cash, cash equivalents and short-term investments. Until such time as
the Company obtains agreements with third-party licensees or partners to provide
funding for the Company's anticipated business activities or the Company is able
to obtain additional funds through the private or public sale of its securities,
the Company's working capital will be utilized primarily to fund its operating
activities.

There were no capital expenditures and $47,000 of patent development costs for
the six months ended June 30, 2003. The Company anticipates additional capital
and patent expenditures of approximately $150,000 for the remainder of the
current year.

On July 10, 2003, the Board of Directors approved retention payments for certain
key employees in order to enhance retention of certain key employees. Payments
of up to $80,000 will be paid on January 1, 2004 and up to $155,000 on July 1,
2004. As of the date of this Quarterly Report on Form 10-Q, the documentation of
these arrangements had not been finalized.

On November 11, 2002, the Company received a notification from Nasdaq indicating
that, for the previous thirty consecutive trading days, the Company's common
stock had not satisfied the minimum bid price requirement of $1.00 per share
required for continued inclusion on The Nasdaq National Market. On April 29,
2003, the Company received a notification from Nasdaq indicating that the
closing bid price of the Company's common stock had been at $1.00 per share or
greater for at least ten consecutive trading days prior to May 12, 2003, and
that, as a result, the Company had regained compliance with the minimum bid
price requirement.

                                       12
<PAGE>
On March 31, 2003, the Company received a notification from Nasdaq indicating
that, as of December 31, 2002, the Company's stockholders' equity did not comply
with the minimum $10,000,000 stockholders' equity requirement for continued
inclusion on The Nasdaq National Market. On May 28, 2003, the Company received a
further notification from Nasdaq indicating that as a result of continued
non-compliance with this rule, the Company's Common Stock would be delisted from
The Nasdaq National Market at the opening of business on June 6, 2003 unless the
Company filed a hearing request with the Nasdaq Listing Qualifications Panel
before the end of business on June 4, 2003. The Company filed the request for a
hearing to appeal the Nasdaq determination. The hearing was held on July 17,
2003 and the Company is awaiting the decision of the Nasdaq Listing
Qualifications Panel. There can be no assurance that the Company will be able to
regain compliance with this listing requirement nor can there be any assurance
that the Nasdaq Listing Qualifications Panel will decide to allow the Company to
remain listed on the Nasdaq National Market. If the Company is unable to regain
compliance, the Company will consider other potential actions, including
applying to transfer its common stock to The Nasdaq SmallCap Market. A delisting
of the Company's common stock from The Nasdaq National 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.

The Company's long term capital requirements will depend upon numerous factors,
including the progress of the Company's research and development programs; the
resources that the Company devotes to self-funded clinical testing, proprietary
manufacturing methods and advanced technologies; the ability of the Company to
enter into licensing arrangements or other strategic alliances; the ability of
the Company to manufacture products under those arrangements and the demand for
its products or the products of its licensees or strategic partners if and when
approved for sale by regulatory authorities. In any event, substantial
additional funds may be required before the Company is able to generate revenues
sufficient to support its operations. There is no assurance that the Company
will be able to obtain such additional funds on favorable terms, if at all. The
Company's inability to raise sufficient funds could require it to delay, scale
back or eliminate certain research and development programs.

The Company believes that its existing cash, cash equivalents and short term
investments will be sufficient to meet its operating expenses and capital
expenditure requirements for the next twelve months. The Company's cash
requirements may vary materially from those now planned because of changes in
focus and direction of the Company's research and development programs,
competitive and technical advances, patent developments or other developments.
It is not believed that inflation will have any significant effect on the
results of the Company's operations.

RECENT ACCOUNTING PRONOUNCEMENT
-------------------------------

In November 2002, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"), which
provides guidance on the timing and method of revenue recognition for sales
arrangements that include the delivery of more than one product or service. EITF
00-21 is effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company will adopt the provisions of EITF
00-21 for new contracts entered into beginning in the third quarter of 2003.

                                       13
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

As of June 30, 2003, the Company is exposed to market risks which relate
primarily to changes in U.S. interest rates. The Company's 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 to interest rates would not
have a material effect upon the Company's 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, 2003.

ITEM 4. CONTROL AND PROCEDURES

(a)  EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
     Officer and Chief Financial Officer evaluated 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. The officers concluded that these controls and
     procedures are operating in an effective manner as of June 30, 2003.

(b)  CHANGES IN INTERNAL CONTROLS.  There were no changes in our internal
     control over financial reporting that occurred during the quarter ended
     June 30, 2003 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; THE COMPANY'S NEED FOR
SIGNIFICANT ADDITIONAL PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING;
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 LACK OF SUCCESS OF THE COMPANY'S PRIOR DEVELOPMENT
EFFORTS; UNCERTAINTIES RELATING TO GOVERNMENT REGULATION AND REGULATORY
APPROVALS; THE COMPANY'S DEPENDENCE ON THIRD PARTIES FOR THE FDA APPLICATION
PROCESS; THE COMPANY'S LACK OF EXPERIENCED MARKETING PERSONNEL AND DEPENDENCE ON
THIRD PARTIES FOR MARKETING AND DISTRIBUTION; THE COMPANY'S DEPENDENCE ON THIRD
PARTIES FOR MANUFACTURING; 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;
UNCERTAINTIES RELATING TO RISKS OF PRODUCT LIABILITY CLAIMS, LACK OF PRODUCT
LIABILITY INSURANCE, AND EXPENSE AND DIFFICULTY OF OBTAINING ADEQUATE INSURANCE
COVERAGE; 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, 2002 AND, IN PARTICULAR, THE
SECTION ENTITLED "RISK FACTORS".


                                       14
<PAGE>
PART II - OTHER INFORMATION

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

(a)  The following exhibits are filed herewith:

     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 10, 2003 containing a press release
announcing the resignation of Robert Palmisano as the Company's Chief
Executive Officer and director and the appointment of Robert J. DeLuccia as
Vice Chairman and interim Chief Executive Officer. A report on Form 8-K was
filed on April 10, 2003 containing a press release concerning the release
of the clinical hold imposed by the Food and Drug Administration in October
2002.

                                       15
<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 8, 2003                             /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)

                                       16
<PAGE>

                                  EXHIBIT INDEX


The following designated exhibits are filed herewith:

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.


                                       17
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