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

                                    FORM 10-Q

     |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 2001

                                       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 000-31719

                                   POZEN Inc.
             (Exact name of registrant as specified in its charter)

           Delaware                                              62-1657552
 (State or other jurisdiction of                              (I.R.S. Employer
  incorporation or organization)                             Identification No.)

                              6330 Quadrangle Drive
                                    Suite 240
                        Chapel Hill, North Carolina 27514
          (Address of principal executive offices, including zip code)

                                 (919) 490-0012
              (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.
|X| Yes   |_| No

The number of shares outstanding of the registrant's common stock as of May 11,
2001 was 27,905,959.

<PAGE>


                                   POZEN Inc.
                          (A Development Stage Company)
                                    FORM 10-Q

                    For the Three Months Ended March 31, 2001

                                      INDEX
<TABLE>
<CAPTION>

PART I.         FINANCIAL INFORMATION                                                                           Page

<S>                                      <C>                                                                    <C>
Item 1.         Financial Statements (unaudited)

                Balance Sheets as of March 31, 2001 and December 31, 2000..................................       1

                Statements of Operations for the Three Months Ended
                March 31, 2001 and 2000 and Period From
                Inception (September 26, 1996) Through March 31, 2001......................................       2

                Statements of Cash Flows for the Three Months Ended
                March 31, 2001 and 2000 and Period From
                Inception (September 26, 1996) Through March 31, 2001......................................       3

                Notes to Financial Statements..............................................................       4

Item 2.         Management's Discussion and Analysis of Financial Condition
                and Results of Operations..................................................................       6

Item 3.         Quantitative and Qualitative Disclosures About Market Risk.................................      15


PART II.        OTHER INFORMATION

Item 2.         Changes in Securities and Use of Proceeds..................................................      16

Item 6.         Exhibits and Reports on Form 8-K...........................................................      16

Signature Page.............................................................................................      17

Exhibit Index..............................................................................................      18

</TABLE>

<PAGE>


PART I.  FINANCIAL INFORMATION


Item 1.  Financial Statements

                                   POZEN Inc.
                          (A Development Stage Company)
                                 Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                                                                 March 31,          December 31,
                                                                                                    2001                2000
                                                                                                    ----                ----
<S>                                                                                             <C>                  <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                                    $ 87,701,155         $ 92,350,583
   Prepaid expenses                                                                                  317,289              198,144
   Accrued interest receivable                                                                         5,764              113,160
   Other current assets                                                                                9,091                9,091
                                                                                               ---------------     ----------------
     Total current assets                                                                         88,033,299           92,670,978
Equipment, net of accumulated depreciation                                                           174,555              158,780
                                                                                               ---------------     ----------------
     Total assets                                                                               $ 88,207,854         $ 92,829,758
                                                                                               ===============     ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                               $  449,604            $ 128,329
   Accrued expenses                                                                                2,337,598            3,633,531
                                                                                               ---------------     ----------------
     Total current liabilities                                                                     2,787,202            3,761,860

Common stock, $0.001 par value, 90,000,000 shares authorized, issued and
   outstanding 27,872,276 and 27,732,213 shares at March 31, 2001 and
   December 31, 2000, respectively                                                                    27,872               27,732
Additional paid in capital                                                                       143,443,497          143,330,124
Common stock warrants                                                                                396,376              426,048
Deferred compensation                                                                             (5,815,086)          (6,617,459)
Deficit accumulated during the development stage                                                 (52,632,007)         (48,098,547)
                                                                                               ---------------     ----------------
   Total stockholders' equity                                                                     85,420,652           89,067,898
                                                                                               ---------------     ----------------
   Total liabilities and stockholders' equity                                                    $88,207,854          $92,829,758
                                                                                               ===============     ================

</TABLE>

See accompanying Notes to Financial Statements.


                                       1
<PAGE>


                                   POZEN Inc.
                          (A Development Stage Company)
                            Statements of Operations
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                                                                         Period From
                                                                                                          Inception
                                                                                                       (September 26,
                                                                      Three Months Ended                1996) Through
                                                                           March 31,                      March 31,
                                                               ----------------------------------    --------------------
                                                                    2001               2000                 2001
                                                                    ----               ----                 ----
<S>                                                             <C>               <C>                     <C>
Operating expenses:
   General and administrative                                   $ 1,502,518       $    897,497            $ 11,229,545
   Research and development                                       4,256,634          2,415,277              43,804,637
                                                               ---------------    ---------------    --------------------
Total operating expenses                                          5,759,152          3,312,774              55,034,182
Interest income, net                                              1,225,692             49,075               3,336,653
                                                               ---------------    ---------------    --------------------
Net loss                                                         (4,533,460)        (3,263,699)            (51,697,529)
                                                               ---------------    ---------------    --------------------

Non-cash preferred stock charge                                          --         16,875,115              27,617,105
Preferred stock dividends                                                --                 --                 934,478
                                                               ---------------    ---------------    --------------------

Net loss attributable to common stockholders                    $(4,533,460)      $(20,138,814)           $(80,249,112)
                                                               ===============    ===============    ====================

Basic and diluted net loss per common share                     $     (0.16)      $      (3.44)
                                                               ===============    ===============

Shares used in computing basic and diluted
   net loss per common share                                     27,838,577          5,856,422
                                                               ===============    ===============

Pro forma net loss per common share - basic and diluted                           $      (1.36)
                                                                                  ===============
Pro forma weighted average common shares
   outstanding - basic and diluted                                                  14,822,456
                                                                                  ===============
</TABLE>

See accompanying Notes to Financial Statements.


                                       2
<PAGE>


                                   POZEN Inc.
                          (A Development Stage Company)
                            Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                                                Period From
                                                                             Three Months Ended                  Inception
                                                                                  March 31,                (September 26, 1996)
                                                                                                             Through March 31,
                                                                       ---------------------------------    --------------------
                                                                           2001               2000                  2001
                                                                           ----               ----                  ----
<S>                                                                     <C>               <C>                   <C>
Operating activities
Net loss                                                                $ (4,533,460)      $ (3,263,699)         $(51,697,529)
Adjustments to reconcile net loss to net
   cash used in operating activities:
    Depreciation                                                              17,203              9,332               183,819
    Amortization of deferred compensation                                    802,373            656,891             5,113,575
    Non-cash financing charge                                                     --                 --               450,000
   Changes in operating assets and liabilities:
    Prepaid expenses and accrued interest receivable                         (11,749)           (17,582)             (323,053)
    Other assets                                                                  --                462                (9,091)
    Accounts payable and accrued expenses                                   (974,658)           254,441             2,787,202
                                                                       ---------------     --------------      ----------------
Net cash used in operating activities                                     (4,700,291)        (2,360,155)          (43,495,077)

Investment activities
Purchase of equipment                                                        (32,978)           (14,776)             (358,374)
                                                                       ---------------     --------------      ----------------
Net cash used in investing activities                                        (32,978)           (14,776)             (358,374)
                                                                       ---------------     --------------      ----------------

Financing activities
Proceeds from issuance of preferred stock                                         --         16,875,115            48,651,850
Proceeds from issuance of common stock                                        83,841                 25            79,060,741
Proceeds from notes payable                                                       --                 --             3,000,000
Proceeds from stockholders' receivables                                           --                 --             1,004,310
Payment of dividends                                                              --                 --              (162,295)
                                                                       ---------------     --------------     -----------------
Net cash provided by financing activities                                     83,841         16,875,140           131,554,606
                                                                       ---------------     --------------     -----------------
Net (decrease) increase in cash and cash equivalents                      (4,649,428)        14,500,209            87,701,155
Cash and cash equivalents at beginning of period                          92,350,583          4,171,086                    --
                                                                       ---------------     --------------     -----------------
Cash and cash equivalents at end of period                              $ 87,701,155        $18,671,295        $   87,701,155
                                                                       ===============     ==============     =================

Supplemental schedule of cash flow information
   Cash paid for interest                                               $         --        $        --        $      184,416
                                                                       ===============     ==============     =================

Supplemental schedule of non-cash investing
   and financing activities
   Conversion of notes payable to preferred stock                       $         --        $        --        $    3,000,000
                                                                       ===============     ==============     =================

   Preferred stock dividend                                             $         --        $        --        $      772,183
                                                                       ===============     ==============     =================


</TABLE>

See accompanying Notes to Financial Statements.


                                       3
<PAGE>

                                   POZEN Inc.
                          (A Development Stage Company)
                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)

1.   Organization

POZEN Inc. (the "Company") is a pharmaceutical company engaged in the
development of products in targeted therapeutic areas. Since its inception in
1996, the Company's business activities have been associated primarily with the
development and acquisition of four pharmaceutical product candidates for the
treatment of migraine. Its lead product candidate, MT 100, is intended to be a
first-line oral treatment. MT 300 is being developed for relief of severe
migraine. MT 400 is designed to provide fast and longer-lasting relief for
migraine sufferers, while MT 500 is a product candidate for the prophylactic
treatment of migraine. This portfolio serves distinct segments of the migraine
market.

2.   Summary of Significant Accounting Policies

Unaudited Interim Financial Statements--The accompanying unaudited interim
financial statements have been prepared in accordance with generally accepted
accounting principles and applicable Securities and Exchange Commission ("SEC")
regulations for interim financial information. These financial statements are
unaudited and, in the opinion of management, include all adjustments necessary
to present fairly the balance sheets, statements of operations, and statements
of cash flows for the periods presented in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. It is presumed that users of this interim financial information
have read or have access to the audited financial statements for the preceding
fiscal year contained in the Company's Annual Report on Form 10-K/A. Operating
results for the interim periods presented are not necessarily indicative of the
results that may be expected for the full year.

1.349-for-1 Stock Split--The accompanying financial statements for the three
months ended March 31, 2000 have been adjusted retroactively to reflect a
1.349-for-1 stock split, which was effected on October 5, 2000.

Non-cash Preferred Stock Charge--In accordance with Emerging Issues Task Force
Issue No. ("EITF") 98-5, the Company has recorded a deemed dividend to preferred
stockholders that represents the excess of the fair value of the underlying
common stock and warrants issued to the series E and series F convertible
preferred stockholders over the sales price of the securities, but with the
charge limited to the net proceeds received from the series E and series F
offerings, respectively.

Stock-based Compensation--The Company accounts for non-cash stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. ("APB") 25, "Accounting for Stock Issued to Employees," which states
that no compensation expense is recognized for stock options or other
stock-based awards that are granted to employees with an exercise price equal to
or above the estimated fair value of the Company's common stock on the grant
date. In the event that stock options are granted with an exercise price below
the estimated fair market value of the Company's common stock at the grant date,
the difference between the fair market value of the Company's common stock and
the exercise price of the stock option is recorded as deferred compensation.

In connection with the grant of stock options to employees, the Company recorded
no deferred compensation in the three months ended March 31, 2001 and recorded
$4.3 million in the three months ended March 31, 2000. Deferred compensation is
recorded as a component of stockholders' equity and is being amortized as
charges to operations over the vesting period of the options using the
straight-line method. The vesting period of the options is generally three or
four years. The Company recorded amortization of deferred compensation of
$802,373 and $656,891 in the three-month periods ended March 31, 2001 and 2000,
respectively.

Recently Issued Accounting Standards--In June 1998, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standard
No. ("SFAS") 133, "Accounting for Derivative Investments and Hedging
Activities." SFAS 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes several existing standards. SFAS 133, as
amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The adoption of SFAS 133 on January 1, 2001
did not have a material impact on its financial statements.

                                       4
<PAGE>

3.   Net Loss Per Share

Basic net loss per share is based on the weighted-average number of common
shares outstanding. Potentially dilutive securities, consisting of convertible
preferred stock, stock options and warrants, have been excluded from the
historical diluted earnings per share computations since their effect is
antidilutive.

In accordance with SFAS 128, basic and diluted net loss per common share has
been computed using the weighted-average number of shares of common stock
outstanding during the period. Pro forma basic and diluted net loss per common
share, as presented below and in the financial statements, has been computed for
the three months ended March 31, 2000 as described above, and also gives effect
to the conversion of the convertible preferred stock that automatically
converted to common stock upon the completion of the Company's initial public
offering from the original date of issuance.

A reconciliation of pro forma basic and diluted net loss per common share is as
follows:
<TABLE>
<CAPTION>

                                                                    Three Months Ended
                                                                        March 31,
                                                            ----------------------------------
                                                                 2001                2000
                                                                 ----                ----

<S>                                                            <C>              <C>
Net loss                                                       $(4,533,460)     $  (3,263,699)
Non-cash preferred stock charge                                         --         16,875,115
                                                            ----------------     --------------

Net loss attributable to common stockholders                   $(4,533,460)      $(20,138,814)
                                                            ================     ==============

Shares used in computing basic and diluted
   net loss per common share                                    27,838,577          5,856,422
                                                            ================     ==============
Basic and diluted net loss per common share                    $     (0.16)     $       (3.44)
                                                            ================     ==============

Pro Forma:
Shares used above                                                                   5,856,422
Adjustment to reflect weighted-average effect
   of conversion of preferred stock                                                 8,966,034
                                                                                 --------------
Pro forma weighted average common shares
   outstanding - basic and diluted                                                 14,822,456
                                                                                 ==============

Pro forma net loss per common share - basic
   and diluted                                                                  $       (1.36)
                                                                                 ==============
</TABLE>


4.   Redeemable Preferred Stock and Non-cash Preferred Stock Charge

In March 2000, the Company completed a private placement of series E convertible
preferred stock resulting in net proceeds of $16,875,115.

In connection with this offering, the Company recorded a non-cash preferred
stock charge of $16,875,115 during March 2000. The non-cash charge was related
to the beneficial conversion feature of the preferred stock that the Company
sold. The series E convertible preferred stock was sold at $6.95 per share. In
addition, the terms of conversion provided for a decrease in the conversion
price from $6.95 to $5.73 if the Company did not complete its initial public
offering by September 15, 2000. Subsequent to the commencement of the Company's
initial public offering process, the Company re-evaluated the deemed fair market
value of its common stock as of March 2000 and determined it to be $15.00 per
share. Accordingly, the incremental fair value is deemed to be the equivalent of
a preferred stock dividend. The deemed dividend was limited to the net proceeds
received from the series E offering. The Company recorded the deemed dividend at
the dates of issuance by an offsetting charge and credit to additional paid-in
capital of $16,875,115, without any effect on total stockholders' equity.


                                       5
<PAGE>

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

This discussion of our financial condition and the results of operations should
be read together with the financial statements and notes contained elsewhere in
this Form 10-Q and the financial statements (and notes thereto) appearing in our
Form 10-K/A, filed on March 23, 2001. Some of the statements contained in this
Quarterly Report on Form 10-Q are forward-looking statements concerning our
operations, economic performance and financial condition within the meaning of
the federal securities laws. These statements may be found in this section and
elsewhere in this report.

Forward-looking statements typically are identified by use of terms such as
"may," "will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
our actual results could differ materially from those contained in the
forward-looking statements, which are based on management's current expectations
and are subject to a number of risks and uncertainties, including, but not
limited to, those set forth below in "Factors That May Affect Our Results." We
do not intend to update any of these factors or to publicly announce the results
of any revisions to these forward-looking statements.

Overview

We are a pharmaceutical company engaged in the development of products in
targeted therapeutic areas. Since our inception in 1996, our business activities
have been associated primarily with the development and acquisition of four
pharmaceutical product candidates. Our lead product candidate, MT 100, is
intended to be a first-line oral treatment. MT 300 is being developed for relief
of severe migraine. MT 400 is designed to provide fast and longer-lasting relief
for migraine sufferers, while MT 500 is a product candidate for the prophylactic
treatment of migraine. This portfolio serves distinct segments of the migraine
market. Specifically, our business activities have included:

         o  product candidate research and development;
         o  designing and funding clinical trials for our product candidates;
         o  regulatory and clinical affairs;
         o  intellectual property prosecution and expansion; and
         o  business development including product acquisition or in-licensing.

Historically, we have financed our operations and internal growth primarily
through private placements of preferred stock and our initial public offering
rather than through collaborative or partnership agreements. Therefore, we have
no research funding or collaboration payments payable to us nor have we received
any payments that are refundable or subject to performance milestones.

Our results include non-cash compensation expense as a result of the issuance of
stock option grants. Compensation expense for options granted to employees
represents the difference between the fair value of our common stock and the
exercise price of the options at the date of grant. We account for stock-based
employee compensation arrangements in accordance with the provisions of APB 25,
"Accounting for Stock Issued to Employees," and comply with the disclosure
provisions of SFAS 123, "Accounting for Stock-Based Compensation." Compensation
for options granted to consultants has been determined in accordance with SFAS
123 as the fair value of the equity instruments issued. APB 25 has been applied
in accounting for fixed and milestone-based stock options to employees and
directors as allowed by SFAS 123. This amount is being recorded over the
respective vesting periods of the individual stock options. The expense is
included in the respective categories of expense in the statement of operations.

We have incurred significant losses since our inception and we have not
generated any revenue. As of March 31, 2001, our accumulated deficit was
$52,632,007. Our historical operating losses have resulted principally from our
research and development activities, including Phase 3 and Phase 2 clinical
trial activities for our product candidates MT 100 and MT 300, respectively, and
general and administrative expenses. We expect to continue to incur operating
losses over the next several years as we complete our development of MT 100,
apply for regulatory approval, continue development of our other migraine
therapeutic product candidates, and acquire and develop product candidate
portfolios in other therapeutic areas. Our results may vary depending on many
factors, including the progress of MT 100 and MT 300 in the regulatory process;
the acceleration of our other product candidates in the regulatory process; the
establishment of collaborations for the development and commercialization of any
of our migraine product candidates; and acquisition or in-licensing of other
therapeutic product candidates. Our ability to generate revenue is dependent
upon our ability, alone or with others, to successfully develop MT 100 or our
other migraine product candidates, obtain regulatory approvals and, alone or
with others, successfully manufacture

                                       6
<PAGE>


and market our future products.

Three months ended March 31, 2001 compared to the three months ended March 31,
2000

Net loss per share: Net loss for the quarter was $4,533,460, compared to a net
loss of $3,263,699, for the same period in 2000, after excluding the non-cash
preferred stock charge. In the three months ended March 31, 2000, we recorded a
non-cash preferred stock charge of $16,875,115 which resulted from the sale of
series E convertible preferred stock in March 2000 at a price per share below
the deemed fair value of our stock at the time of sale of the preferred stock.
Net loss attributable to common stockholders for the three months ended March
31, 2001 was $4,533,460, or $0.16 per share, and for the three months ended
March 31, 2000 was $20,138,814, or $3.44 per share. Pro forma net loss allocable
to common shareholders, giving effect to the conversion of such stock that
automatically converted to common stock upon the completion of our initial
public offering, was $1.36 per common share for the three months ended March 31,
2000.

Revenue: We generated no revenue during the three months ended March 31, 2001
and the three months ended March 31, 2000.

Research and development: Research and development expenses increased 76.2% to
$4,256,634 for the three months ended March 31, 2001 from $2,415,277 for the
three months ended March 31, 2000. This $1,841,000 increase was due primarily to
a $1,209,000 increase in the costs associated with the clinical trial for MT
400. A net increase of $483,000 resulted from the increased development costs
related to MT 100 and MT 300, offsetting decreased development costs for MT 500
as compared to the quarter for the prior year. Additional research and
development departmental costs increased $149,000, of which $25,000 represented
amortization of deferred stock compensation. Total amortization of deferred
compensation included in research and development expenses for the three months
ended March 31, 2001 was $366,000. Research and development expenses included
the personnel costs related to our research activities and clinical trial
preparations and monitoring expenses, and any regulatory matters.

General and administrative: General and administrative expenses increased 67.4%
to $1,502,518 for the three months ended March 31, 2001 from $897,497 for the
three months ended March 31, 2000. This $605,000 increase resulted from an
increase of $296,000 in fees, services and other costs related to our public
disclosure and investor communication activities. Personnel and related benefits
increased by $200,000, of which $120,000 represented increased amortization of
deferred compensation. Other costs related to the operational infrastructure
increased by $109,000. Total amortization of deferred compensation included in
general and administrative expenses for the three months ended March 31, 2001
was $437,000. General and administrative expenses consisted primarily of the
costs of administrative personnel and related facility costs along with legal,
accounting and professional fees.

Interest income: Interest income increased to $1,225,692 for the three months
ended March 31, 2001 from $49,075 for the three months ended March 31, 2000.
Interest income increased due to increased levels of cash and cash equivalents
available for investing.

Income Taxes

As of March 31, 2001, we had federal and state net operating loss carryforwards
of approximately $43,900,000 and research and development credit carryforwards
of approximately $1,900,000. These federal net operating loss carryforwards and
research and development credit carryforwards begin to expire in 2012. State net
operating loss carryforwards begin to expire in 2011. The utilization of the
loss carryforwards to reduce future income taxes will depend on our ability to
generate sufficient taxable income prior to the expiration of the net loss
carryforwards. In addition, the maximum annual use of net loss carryforwards is
limited in certain situations where changes occur in our stock ownership.

Liquidity and Capital Resources

Since our inception, we have financed our operations and internal growth
primarily through private placements of preferred stock and our public offering,
resulting in aggregate net proceeds to us of $131,554,606. As of March 31, 2001,
cash and cash equivalents totaled $87,701,155.

Financing activities since inception represent the net proceeds we received from
the sale of preferred and common stock and proceeds from notes payable. In March
2000, we closed a private placement of series E convertible preferred stock in
which we raised net proceeds of $16,875,115 after commission and expenses. In
connection with this offering, we recorded a non-

                                       7
<PAGE>

cash charge of $16,875,115 during March 2000 related to the beneficial
conversion feature of the preferred stock we sold in March 2000. The series E
convertible preferred stock was sold in March 2000 at $6.95 per share, which
represented the fair value of the preferred stock and was in excess of the
deemed fair value of our common stock at that time.

In August 2000, we closed a private placement of series F convertible preferred
stock in which we raised net proceeds of $10,742,000 after commission and
expenses. In connection with this offering, we recorded a non-cash charge of
$10,742,000 during August 2000 related to the beneficial conversion feature of
the preferred stock we sold in the series F offering. Similarly to the series E,
the series F convertible preferred stock was sold at $6.95 per share, which
represented the fair value of the preferred stock and was in excess of the
deemed fair value of our common stock at that time.

In October and November 2000, we received $78,265,552 in net proceeds from the
sale of 5,750,000 shares of our common stock in our initial public offering,
including through the exercise of the underwriters' over-allotment option. All
of our outstanding preferred shares were converted into shares of our common
stock upon the completion of our initial public offering.

Net cash used in investing activities included primarily additions of equipment.
Since inception through March 31, 2001, approximately $358,000 was spent on
equipment.

At March 31, 2001, cash and cash equivalents totaled $87,701,155, a decrease of
$4,649,428 as compared to December 31, 2000. The decrease in cash and cash
equivalents resulted primarily from the cash used in operating activities. Cash
used by operations of $4,700,291 during the three months ended March 31, 2001
represented a net loss of $4,533,460 offset by non-cash charges of $819,576, a
net increase in prepaid and other assets of $11,749 and a decrease in accounts
payable and accrued liabilities of $974,658. Cash used in investing activities
of $32,978 during the three months ended March 31, 2001 reflected the purchase
of equipment. Cash provided by financing activities during the three months
ended March 31, 2001, which totaled $83,841, was generated primarily by the
exercise of stock options.

Factors That May Affect Our Results

Our business is subject to certain risks and uncertainties. If any of these
risks eventuate, our business, financial condition, cash flows and results of
operations could be materially adversely affected.

We depend heavily on the success of our lead product candidate, MT 100, which
may never be approved for commercial use. If we are unable to develop, gain
approval of or commercialize MT 100, we may never be profitable.

Since our founding, we have invested a significant portion of our time and
financial resources in the development of MT 100 and anticipate that for the
foreseeable future our ability to achieve profitability will be dependent on its
successful development, approval and commercialization. Many factors could
negatively affect the success of our efforts to develop and commercialize MT
100, including:

         o  negative, inconclusive or otherwise unfavorable results from our
            toxicology, genotoxicity or carcinogenicity studies or from our
            other studies or clinical trials;

         o  an inability to obtain, or delay in obtaining, regulatory approval
            for the commercialization of MT 100;

         o  an inability to establish collaborative arrangements with third
            parties for the manufacture and commercialization of MT 100, or any
            disruption of any of these arrangements, if established;

         o  a failure to achieve market acceptance of MT 100;

         o  significant delays in our toxicology, genotoxicity and
            carcinogenicity studies;

         o  any demand by the FDA that we conduct additional clinical trials or
            other studies and the expenses relating thereto; and

         o  significant increases in the costs of toxicology, genotoxicity and
            carcinogenicity studies.

                                       8
<PAGE>

We have incurred losses since inception and anticipate that we will continue to
incur losses for the foreseeable future. We do not have a current source of
product revenue and may never be profitable.

We have incurred losses in each year since our inception and we currently have
no source of product revenue. As of December 31, 2000, we had an accumulated
deficit of approximately $48.1 million. We expect to incur significant and
increasing operating losses and do not know when or if we will generate product
revenue.

We expect that the amount of our operating losses will fluctuate significantly
from quarter to quarter as a result of increases and decreases in development
efforts, the timing of payments that we may receive from others, and other
factors. Our ability to achieve profitability is dependent on a number of
factors, including our ability to:

         o  develop and obtain regulatory approvals for our product candidates;

         o  receive upfront and milestone payments;

         o  successfully commercialize our product candidates, which may include
            entering into collaborative agreements; and

         o  secure contract manufacturing and distribution services.

If we, or our collaborators, do not obtain and maintain required regulatory
approvals, we will be unable to commercialize our product candidates.

Our product candidates under development are subject to extensive domestic and
foreign regulation. The FDA regulates, among other things, the development,
testing, manufacture, safety, efficacy, recordkeeping, labeling, storage,
approval, advertisement, promotion, sale and distribution of pharmaceutical
products. If we market our products abroad, they are also subject to extensive
regulation by foreign governments. None of our product candidates, including MT
100, has been approved for sale in the United States or any foreign market.
Generally, we will need to complete preclinical, toxicology, genotoxicity and
carcinogenicity studies, as well as clinical trials on these product candidates
before submitting an NDA to the FDA for approval to market the product
candidate. If we are unable to obtain and maintain FDA and foreign governmental
approvals for our product candidates, we will not be permitted to sell them.

Approval of a product candidate may be conditioned upon certain limitations and
restrictions as to the drug's use, or upon the conduct of further studies, and
is subject to continuous review. The FDA may also require us to conduct
additional post-approval studies. These post-approval studies may include
carcinogenicity studies in animals or further human clinical trials. The later
discovery of previously unknown problems with the product, manufacturer or
manufacturing facility may result in criminal prosecution, civil penalties,
recall or seizure of products, or total or partial suspension of production, as
well as other regulatory action against our product candidates or us. If
approvals are withdrawn for a product, or if a product is seized or recalled, we
would be unable to sell that product and our revenues would suffer.

We and our contract manufacturers are required to comply with the applicable FDA
current Good Manufacturing Practices regulations, which include requirements
relating to quality control and quality assurance, as well as the corresponding
maintenance of records and documentation. Further, manufacturing facilities must
be approved by the FDA before they can be used to manufacture our product
candidates, and are subject to additional FDA inspection. We, or our third-party
manufacturers, may not be able to comply with cGMP regulations or other FDA
regulatory requirements, resulting in delay or inability to manufacture the
products.

Labeling and promotional activities are subject to scrutiny by the FDA and state
regulatory agencies and, in some circumstances, the Federal Trade Commission.
FDA enforcement policy prohibits the marketing of approved products for
unapproved, or off-label, uses. These regulations and the FDA's interpretation
of them may impair our ability to effectively market products for which we gain
approval. Failure to comply with these requirements can result in regulatory
enforcement action by the FDA. Further, we may not obtain the labeling claims we
believe are necessary or desirable for the promotion of our product candidates.

We need to conduct preclinical, toxicology, genotoxicity and carcinogenicity
studies and clinical trials of all of our product candidates. Any unanticipated
costs or delays in these studies or trials, or the need to conduct additional
studies or trials, could reduce our revenues and profitability.

                                       9
<PAGE>
Generally, we must demonstrate the efficacy and safety of our product candidates
before approval to market can be obtained from the FDA. Our product candidates
are in various stages of clinical development. Depending upon the stage at which
a product candidate is in the development process, we will need to complete
preclinical, toxicology, genotoxicity and carcinogenicity studies, as well as
clinical trials on these product candidates before we submit marketing
applications in the United States and abroad. These studies and trials can be
very costly and time-consuming. In addition, we rely on third parties to perform
significant aspects of our studies and clinical trials, introducing additional
sources of risk into our development programs. Results from preclinical testing
and early clinical trials are not necessarily predictive of results obtained in
later clinical trials involving large scale testing of patients in comparison to
control groups.

The completion of clinical trials depends upon many factors, including the rate
of enrollment of patients. If we are unable to accrue sufficient clinical
patients during the appropriate period, we may need to delay our clinical trials
and incur significant additional costs. In addition, the FDA or Institutional
Review Boards may require us to conduct additional trials or delay, restrict or
discontinue our clinical trials on various grounds, including a finding that the
subjects or patients are being exposed to an unacceptable health risk. Even
though we have completed all planned Phase 3 pivotal clinical trials for MT 100
and even if we complete our clinical trials for our other product candidates, we
may be unable to submit an NDA to the FDA as scheduled because the FDA may
require us to conduct additional clinical trials and studies. Once submitted, an
NDA would require FDA approval before we could distribute or commercialize the
product described in the application.

Even if we determine that data from our clinical trials, toxicology,
genotoxicity and carcinogenicity studies are positive, we cannot assure you that
the FDA, after completing its analysis, will not determine that the trials or
studies should have been conducted or analyzed differently, and thus reach a
different conclusion from that reached by us, or request that further trials,
studies or analysis be conducted. For example, the FDA may require data in
certain subpopulations, such as pediatric use, or may require long-term
carcinogenicity studies, prior to NDA approval, unless we can obtain a waiver to
delay such studies.

Our costs associated with our human clinical trials vary based on a number of
factors, including:

         o  the order and timing of clinical indications pursued;

         o  the extent of development and financial support from collaborative
            parties, if any;

         o  the number of patients required for enrollment;

         o  the difficulty in obtaining sufficient patient populations and
            clinicians;

         o  the difficulty of obtaining clinical supplies of our product
            candidates; and

         o  governmental and regulatory delays.

Even if we obtain positive preclinical or clinical study results initially,
future clinical trial results may not be similarly positive.

We depend on collaborations with third parties, which may reduce our product
revenues or restrict our ability to commercialize products.

Our ability to develop, manufacture, commercialize and obtain regulatory
approval of our existing and any future product candidates depends upon our
ability to enter into and maintain contractual and collaborative arrangements
with others. We have and intend in the future to retain contract manufacturers
and clinical trial investigators. In addition, the identification of new
compounds or product candidates for development may require us to enter into
licensing or other collaborative agreements with others, including
pharmaceutical companies and research institutions. We currently intend to
market and commercialize our products through others, which will require us to
enter into sales, marketing and distribution arrangements with third parties.
These arrangements may reduce our product revenues.

Our third party contractual or collaborative arrangements may require us to
grant rights, including marketing rights, to one or more parties. These
arrangements may also contain covenants restricting our product development or
business efforts in the future, or other terms that are burdensome to us, and
may involve the acquisition of our equity securities. Collaborative agreements
for the acquisition of new compounds or product candidates may require us to pay
license fees, make milestone payments and/or pay royalties.
                                       10
<PAGE>

We cannot be sure that we will be able to maintain our existing or future
collaborative or contractual arrangements, or that we will be able to enter into
future arrangements with third parties on terms acceptable to us, or at all. If
we fail to maintain our existing arrangements or to establish new arrangements
when and as necessary, we could be required to undertake these activities at our
own expense, which would significantly increase our capital requirements and may
delay the development, manufacture and commercialization of our product
candidates.

We are subject to a number of risks associated with our dependence on
contractual and collaborative arrangements with others:

         o  We may not have day-to-day control over the activities of our
            contractors or collaborators.

         o  Third parties may not fulfill their obligations to us.

         o  We may not realize the contemplated or expected benefits from
            collaborative or other arrangements.

         o  Business combinations and changes in the contractual or
            collaborative party's business strategy may adversely affect its
            willingness or ability to complete its obligations to us.

         o  The contractor or collaborative party may have the right to
            terminate its arrangements with us on limited or no notice and for
            reasons outside of our control.

         o  The contractual or collaborative party may develop or have rights to
            competing products or product candidates and withdraw support or
            cease to perform work on our products.

         o  Disagreements may arise regarding breach of the arrangement,
            ownership of proprietary rights, clinical results or regulatory
            approvals.

These factors could lead to delays in the development or commercialization of
our product candidates, and disagreements with our contractors or collaborators
could require or result in litigation or arbitration, which would be
time-consuming and expensive. Our ultimate success may depend upon the success
and performance on the part of these third parties. If we fail to maintain these
relationships or establish new relationships as required, development and
commercialization of our product candidates will be delayed.

We currently depend and will in the future depend on third parties to
manufacture our product candidates. If these manufacturers fail to meet our
requirements or any regulatory requirements, the product development and
commercialization of our product candidates will be delayed.

We do not have, and have no plans to develop, the internal capability to
manufacture either clinical trial or commercial quantities of products that we
may develop or are under development. We rely upon third party manufacturers to
supply us with our product candidates. We also need supply contracts to sell our
products commercially. There is no guarantee that manufacturers that enter into
commercial supply contracts with us will be financially viable entities going
forward. If we do not have the necessary commercial supply contracts, or if our
current manufacturer is unable to satisfy our requirements or meet any
regulatory requirements, and we are required to find an alternative source of
supply, there may be additional costs and delays in product development and
commercialization of our product candidates or we may be required to comply with
additional regulatory requirements.

If we are unable to build sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will not
be able to commercialize any of our drug candidates.

We currently intend to enter into agreements with third parties to market and
sell any of our product candidates approved by the FDA for commercial sale. We
may not be able to enter into marketing and sales agreements with others on
terms acceptable to us, if at all. To the extent that we enter into marketing
and sales agreements with others, our revenues, if any, will be affected by the
sales and marketing efforts of others. We may also retain the right, where
possible, to co-promote our products in conjunction with our collaborative
parties. If we are unable to enter into third-party sales and marketing
agreements, or if we are exercising our rights to co-promote a product, then we
will be required to develop internal marketing and sales capabilities. We may
not successfully establish marketing and sales capabilities or have sufficient
resources to do so.

                                       11
<PAGE>

If our competitors develop and commercialize products faster than we do or if
their products are superior to ours, our commercial opportunities will be
reduced or eliminated.

Our product candidates will have to compete with existing and any newly
developed migraine therapies. There are also likely to be numerous competitors
developing new products to treat migraine and the other diseases and conditions
for which we may seek to develop products in the future, which could render our
product candidates or technologies obsolete or non-competitive. Our primary
competitors will likely include large pharmaceutical companies, biotechnology
companies, universities and public and private research institutions. We face,
and will continue to face, intense competition from other companies for securing
collaborations with pharmaceutical companies, establishing relationships with
academic and research institutions, and acquiring licenses to proprietary
technology. These competitors, either alone or with collaborative parties, may
succeed with technologies or products that are more effective than any of our
current or future technologies or products. Many of our actual or potential
competitors, either alone or together with collaborative parties, have
substantially greater financial resources, and almost all of our competitors
have larger numbers of scientific and administrative personnel than we do. Many
of these competitors, either alone or together with their collaborative parties,
also have significantly greater experience than we do in:

         o  developing product candidates;

         o  undertaking preclinical testing and human clinical trials;

         o  obtaining FDA and other regulatory approvals of product candidates;
            and

         o  manufacturing and marketing products.

Accordingly, our actual or potential competitors may succeed in obtaining patent
protection, receiving FDA approval or commercializing products before we do. Our
competitors may also develop products or technologies that are superior to those
that we are developing, and render our product candidates or technologies
obsolete or non-competitive. If we cannot successfully compete with new or
existing products, our marketing and sales will suffer and we may not ever be
profitable.

If we are unable to protect our patents or proprietary rights, or if we are
unable to operate our business without infringing the patents and proprietary
rights of others, we may be unable to develop our product candidates or compete
effectively.

The pharmaceutical industry places considerable importance on obtaining patent
and trade secret protection for new technologies, products and processes. Our
success will depend, in part, on our ability, and the ability of our licensors,
to obtain and to keep protection for our products and technologies under the
patent laws of the United States and other countries, so that we can stop others
from using our inventions. Our success also will depend on our ability to
prevent others from using our trade secrets. In addition, we must operate in a
way that does not infringe, or violate, the patent, trade secret, and other
intellectual property rights of other parties.

We cannot know how much protection, if any, our patents will provide or whether
our patent applications will issue as patents. The breadth of claims that will
be allowed in patent applications cannot be predicted and neither the validity
nor enforceability of claims in issued patents can be assured. If, for any
reason, we are unable to obtain and enforce valid claims covering our products
and technology, we may be unable to prevent competitors from using the same or
similar technology or to prevent competitors from marketing identical products.
In addition, due to the extensive time needed to develop and test our products,
any patents that we obtain may expire in a short time after commercialization.
This would reduce or eliminate any advantages that such patents may give us.

We may need to license rights to third party patents and intellectual property
to continue the development and marketing of our product candidates. If we are
unable to acquire such rights on acceptable terms, our development activities
may be blocked and we may be unable to bring our product candidates to market.

We may enter into litigation to defend ourselves against claims of infringement,
assert claims that a third party is infringing one or more of our patents,
protect our trade secrets or know-how, or determine the scope and validity of
other's patent or proprietary rights. As a result of such litigation, our patent
claims may be found to be invalid, unenforceable or not of sufficient scope to
cover the activities of an alleged infringer. If we are found to infringe the
patent rights of others, then we may be forced to pay damages sufficient to
irreparably harm the Company and/or be prevented from continuing our product

                                       12
<PAGE>

development and marketing activities. Regardless of its eventual outcome, any
lawsuit that we enter into may consume time and resources that will impair our
ability to develop and market our product candidates.

We have entered into confidentiality agreements with our employees, consultants,
advisors and collaborators. However, these parties may not honor these
agreements and, as a result, we may not be able to protect our rights to
unpatented trade secrets and know-how. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how. Also, many of our scientific and
management personnel were previously employed by competing companies. As a
result, such companies may allege trade secret violations and similar claims
against us.

If we fail to acquire, develop and commercialize additional products or product
candidates, or fail to successfully promote or market approved products, we may
never achieve profitability.

As part of our business strategy, we plan to identify and acquire product
candidates or approved products in areas in which we possess particular
knowledge. Because we do not directly engage in basic research or drug
discovery, we must rely upon third parties to sell or license product
opportunities to us. Other companies, including some with substantially greater
financial, marketing and sales resources, are competing with us to acquire such
products. We may not be able to acquire rights to additional products on
acceptable terms, if at all. In addition, we may acquire new products with
different marketing strategies, distribution channels and bases of competition
than those of our current products. Therefore, we may not be able to compete
favorably in those product categories.

Any of our future products, including MT 100, may not be accepted by the market,
which would limit the commercial opportunities for our products.

Even if our product candidates perform successfully in clinical trials and are
approved by the FDA and other regulatory authorities, our future products,
including MT 100, may not achieve market acceptance and may not generate the
revenues that we anticipate. The degree of market acceptance will depend upon a
number of factors, including:

         o  the receipt and timing of regulatory approvals;

         o  the availability of third-party reimbursement;

         o  the indications for which the product is approved;

         o  the rate of adoption by health care providers;

         o  the rate of product acceptance by target patient populations;

         o  the price of product relative to alternative therapies;

         o  the availability of alternative therapies;

         o  the extent of marketing efforts by us and third-party distributors
            and agents;

         o  the publicity regarding our products or similar products; and

         o  the extent and severity of side effects as compared to alternative
            therapies.

If we do not receive adequate third-party reimbursements for any of our future
products, our revenues and profitability will be reduced.

Our ability to commercialize our product candidates successfully will depend, in
part, on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, such as Medicare and Medicaid in the United States, private health
insurers and other organizations. Significant uncertainty exists as to the
reimbursement status of a newly approved health care product, particularly for
indications for which there is no current effective treatment or for which
medical care is typically not sought. Adequate third-party coverage may not be


                                       13
<PAGE>
available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product research and development. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of our products, our products may fail to achieve
market acceptance.

Our future revenues, profitability and access to capital will be affected by the
continuing efforts of governmental and private third-party payors to contain or
reduce the costs of health care through various means. We expect that a number
of federal, state and foreign proposals will seek to control the cost of drugs
through governmental regulation. We are unsure of the form that any health care
reform legislation may take or what actions federal, state, foreign and private
payors may take in response to the proposed reforms. Therefore, we cannot
predict the effect of any implemented reform on our business.

If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
product candidates.

The testing and marketing of pharmaceutical products entails an inherent risk of
product liability. Product liability claims might be brought against us by
consumers, health care providers, pharmaceutical companies or others selling our
future products. If we cannot successfully defend ourselves against such claims,
we may incur substantial liabilities or be required to limit the
commercialization of our product candidates. We have obtained limited product
liability insurance coverage only for our human clinical trials. However,
insurance coverage is becoming increasingly expensive, and no assurance can be
given that we will be able to maintain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against losses due to liability. We may
not be able to obtain commercially reasonable product liability insurance for
any products approved for marketing. If a plaintiff brings a successful product
liability claim against us in excess of our insurance coverage, if any, we may
incur substantial liabilities and our business may fail.

We may need substantial additional funding and may not have access to capital.
If we are unable to raise capital when needed, we may need to delay, reduce or
eliminate our product development or commercialization efforts.

We may need to raise additional funds to execute our business strategy. We have
incurred losses from operations since inception and we expect to incur
additional operating losses. In particular, we believe that we will require
additional capital to fund the acquisition of new product candidates. Our actual
capital requirements will depend upon numerous factors, including:

         o  the progress of our research and development programs;

         o  the progress of preclinical studies and clinical testing;

         o  the time and cost involved in obtaining regulatory approvals;

         o  the costs of filing, prosecuting, defending and enforcing any patent
            claims and other intellectual property rights;

         o  the effect of competing technological and market developments;

         o  the effect of changes and developments in our collaborative,
            licensing and other relationships; and

         o  the terms and timing of any new collaborative, licensing and other
            arrangements that we may establish.

We may be unable to raise sufficient funds to execute our business strategy. In
addition, we may not be able to find sufficient debt or equity funding on
acceptable terms. If we cannot, we may need to delay, reduce or eliminate
research and development programs. The sale by us of additional equity
securities or the expectation that we will sell additional equity securities may
have an adverse effect on the price of our common stock. In addition,
collaborative arrangements may require us to grant product development programs
or licenses to third parties for products that we might otherwise seek to
develop or commercialize ourselves.

We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our research and
development efforts.

We are highly dependent on the efforts of our key management and scientific
personnel, especially John R. Plachetka, Pharm.D., our Chairman, President and
Chief Executive Officer. Dr. Plachetka signed an employment agreement with us on
April 1, 1999, for a three-year term with automatic one-year renewal terms. We
do not have employment agreements with our

                                       14
<PAGE>

other key management personnel. If we lose the services of Dr. Plachetka or the
services of any of our other key personnel, or fail to recruit key scientific
personnel, we may be unable to achieve our business objectives. There is intense
competition for qualified scientific personnel. Since our business is very
science-oriented, we need to continue to attract and retain such people. We may
not be able to continue to attract and retain the qualified personnel necessary
for developing our business. Furthermore, our future success will also depend in
part on the continued service of our other key management personnel.


Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Our proceeds from our initial public offering and private placements have been
invested in money market funds that invest primarily in short-term, highly rated
investments, including U.S. Government securities, commercial paper and
certificates of deposit guaranteed by banks. Under our current policies, we do
not use interest rate derivative instruments to manage our exposure to interest
rate changes. Because of the short-term maturities of our investments, we do not
believe that a decrease in market rates would have significant negative impact
on the value of our investment portfolio. Declines in interest rates will,
however, reduce our interest income while increases in interest rates will
increase our interest income.


                                       15
<PAGE>


PART II. OTHER INFORMATION


Item 2.  Changes in Securities and Use of Proceeds

(f)  Use of Proceeds

We raised $78,265,552 of net proceeds in our initial public offering that was
completed in October and November 2000. We have invested the net proceeds from
our initial public offering in short-term money market accounts. During the
three months ended March 31, 2001, these proceeds, as well as proceeds from our
earlier private placements, were used to fund our cash operating expenses and
investment activities, including, among other things, research and development
efforts, employee compensation, the purchase of equipment and the payment of
accounts payable.


Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

The following exhibits are filed as part of, or incorporated by reference into,
this Report on Form 10-Q.

No.      Description of Exhibit
---      ----------------------

10.1     Supply Agreement dated January 17, 2001 by and between the Registrant
         and Catalytica Pharmaceuticals, Inc.*+

10.2     First Amendment to the Executive Employment Agreement with John R.
         Plachetka, Pharm.D., dated as of April 25, 2001*

         * Filed herewith.
         + Confidential treatment requested.

(b) Reports on Form 8-K

We filed no reports on Form 8-K during the quarter ended March 31, 2001.


                                       16
<PAGE>


                                   SIGNATURES

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


                                 POZEN Inc.
                                 -----------------------------------
                                 (Registrant)


     May 14, 2001                /s/ JOHN R. PLACHETKA
                                 -----------------------------------
                                 John R. Plachetka, Pharm.D.
                                 Chairman, President and Chief Executive Officer

     May 14, 2001                /s/ MATTHEW E. CZAJKOWSKI
                                 -----------------------------------
                                 Matthew E. Czajkowski
                                 Chief Financial Officer
                                 (Principal Financial Officer)

     May 14, 2001                /s/ JOHN E. BARNHARDT
                                 -----------------------------------
                                 John E. Barnhardt
                                 Vice President, Finance and Administration
                                 (Principal Accounting Officer)



                                       17
<PAGE>


                                  EXHIBIT INDEX


Exhibit
Number                               Description
------                               -----------

10.1     Supply Agreement dated January 17, 2001 by and between the Registrant
         and Catalytica Pharmaceuticals, Inc.*+

10.2     First Amendment to the Executive Employment Agreement with John R.
         Plachetka, Pharm.D., dated as of April 25, 2001*


* Filed herewith.
+ Confidential treatment requested.


                                       18