MACROCHEM CORP
NOTE REGARDING FORWARD LOOKING STATEMENTS: THIS ANNUAL REPORT ON FORM 10-K CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS OR PHRASES SUCH AS "ANTICIPATE," "BELIEVE," "COULD," "EXPECT," "INTEND," "LOOK FORWARD," "MAY," "PLANNED," "POTENTIAL," "SHOULD," "WILL," AND "WOULD." THESE FORWARD-LOOKING STATEMENTS REFLECT OUR CURRENT EXPECTATIONS AND ARE BASED ON CURRENTLY AVAILABLE DATA. THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE HARBOR" FOR SUCH FORWARD-LOOKING STATEMENTS. FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO IN THE SECTION ENTITLED "RISK FACTORS". READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THESE CAUTIONARY STATEMENTS. READERS ARE ALSO URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY, IN THIS DOCUMENT, AS WELL AS THE COMPANY'S PERIODIC REPORTS ON FORMS 10-K, 10-Q AND 8-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC").       MacroChem's Internet address is www.macrochem.com, and the Company maintains a website at that address. MacroChem makes available, on or through its Internet website, without charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after filing them electronically with the SEC.       The business of MacroChem Corporation is further described in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation", which should be read in conjunction with the accompanying financial statements and related footnotes.       In this Annual Report on Form 10-K, we use the terms "MacroChem", the "Company", "we", "us" and "our" to refer to MacroChem Corporation. We were organized and commenced operations as a Massachusetts corporation in 1981 and we were reincorporated as a Delaware corporation on May 26, 1992. Our principal executive offices are located at 110 Hartwell Avenue, Lexington, Massachusetts 02421-3134 and our phone number is (781) 862-4003.       SEPA(R), Opterone(R) and Topiglan(R) are registered trademarks of MacroChem Corporation. EcoNail(TM), MacroDerm(TM) and DermaPass(TM) are trademarks of MacroChem Corporation.                                          3        On December 30, 2005 we implemented a 1-for-7 reverse stock split of our common stock and on February 9, 2006 we implemented a subsequent 1-for-6 reverse stock split of our common stock. Unless otherwise noted, data used throughout this Annual Report on Form 10-K has been adjusted to reflect these reverse splits.  OVERVIEW       We are a specialty pharmaceutical company that develops and seeks to commercialize pharmaceutical products. Currently, our portfolio of product candidates is based on our proprietary drug delivery technologies: SEPA, MacroDerm and DermaPass. Our patented SEPA topical drug delivery technology (SEPA is an acronym for "Soft Enhancement of Percutaneous Absorption," where "soft" refers to the reversibility of the skin effect of the technology, and "percutaneous" means "through the skin") enhances the efficiency and rate of diffusion of drugs into and through the skin. We own a composition of matter patent on the SEPA family of compounds, which will expire in November 2006. We also own five composition of matter and use patents, with expiration dates ranging from 2015 to 2019, for the combination of SEPA with numerous existing classes of drugs, including antifungals and human sex hormones. Our patented MacroDerm drug delivery technology encompasses a family of low to moderate molecular weight polymers that impede dermal drug or chemical penetration, which may be usable, for example, to prevent chemicals in insect repellant from penetrating the skin. We own three patents covering the composition of matter and methods of use of our MacroDerm polymers that expire in 2015. We have also filed a patent application for our DermaPass family of transdermal absorption enhancers that have a different drug delivery profile than SEPA, which we believe could be used with a wider range of active pharmaceutical ingredients.       Our lead product candidate is EcoNail, a topically applied SEPA-based econazole lacquer for the treatment of onychomycosis, a condition commonly known as nail fungus. Econazole, a commercially available topical antifungal agent most commonly used to treat fungal skin infections, inhibits in vitro growth of the fungi most commonly implicated in onychomycosis. When used in EcoNail, SEPA works by allowing more rapid and complete release of econazole from the lacquer into and through the nail plate. In a pre-clinical study using human cadaver nails, EcoNail delivered through the nail more than 14,000 times the minimum concentration of econazole needed to inhibit the fungi most commonly associated with onychomycosis. Following our laboratory studies, we conducted a randomized, double blind controlled Phase 1 tolerance/human exposure trial of EcoNail in eighteen patients with onychomycosis of the toenails. In this study, EcoNail was well tolerated, and investigators reported no serious drug-related adverse events. Serum assays used to determine the level of drug in the bloodstream showed no detectable levels of econazole, further supporting EcoNail's systemic safety profile. Full data from the 18-week trial were presented in May 2005 at the annual meeting of the Society for Investigative Dermatology. We have a composition of matter and use patent covering EcoNail that will expire in 2019.       We expect to commence a Phase 2 efficacy study of EcoNail in the second quarter of 2006. We contemplate that this study will be conducted through a contract research organization with significant experience in onychomycosis trials.                                         4        Our other clinical stage product candidate, Opterone, is a topically applied SEPA-based testosterone cream designed to treat male hypogonadism. Male hypogonadism is a condition in which men have levels of circulating testosterone below the normal range and may exhibit one or more associated symptoms, including low energy levels, decreased sexual performance, loss of sex drive, increased body fat or loss of muscle mass. We believe Opterone has significant advantages over other testosterone delivery methods and that its formulation as a cream should avoid an oily feel as well as application and cosmetic concerns reported by some users of gel formulations. To the best of our knowledge, Opterone is the first and only clinical development stage testosterone cream. In August 2004, we announced the completion of a pharmacokinetics study of Opterone in hypogonadal males. In May 2005, we announced results from a bioavailability study of Opterone. In that study, patients using a 2.5 gram dose of Opterone applied to the upper arms and shoulders reached the natural physiologic range of testosterone levels over a 24-hour period. In December 2005, we received a letter from the Division of Reproductive and Urologic Products of the U.S. Food and Drug Administration, or FDA, in response to questions posed by us regarding a proposed Phase 3 clinical program for Opterone. In the letter, the FDA requested that we conduct additional investigation into multiple dose safety and pharmacokinetics before beginning any eventual Phase 3 protocol. The additional investigation and Phase 3 revisions will increase the time and expense associated with the development of Opterone. The next step in the development process for Opterone is a Phase 2 trial. We are seeking a partner to advance development of this product candidate. We may elect not to develop Opterone further if we cannot find a partner. We have a composition of matter and use patent covering Opterone that will expire in 2017.       In addition to EcoNail and Opterone, we are evaluating several earlier stage product candidates. We have developed and tested SEPA-based formulations to deliver other active pharmaceutical ingredients including topical anesthetic and topical non-steroidal anti-inflammatory drugs (NSAIDs). We have also tested application of our MacroDerm polymers for use with cosmetics, pharmaceuticals and consumer products like insect repellants and sunscreens to decrease skin penetration and/or improve persistence on the skin. For example, our laboratory data demonstrated that, when formulated with the insect repellant DEET, increasing concentrations of MacroDerm reduces the amount of DEET that is absorbed through human skin. We have performed initial laboratory experiments to test the ability of DermaPass to improve transdermal delivery of various active pharmaceutical ingredients.       Since inception, our primary source of funding for our operations has been the private and public sale of our securities. On August 31, 2005, due to our financial condition at the time and our inability to raise sufficient capital to maintain operations, we discontinued all research and development activities and terminated substantially all of our non-management personnel. In December 2005 and February 2006, we raised an aggregate of $8.25 million in a private placement of our securities to institutional investors. As a result of this private placement, we have begun to resume operations with a focus on advancing clinical development of our lead product, EcoNail. Our ability to continue operations after our current capital resources are exhausted depends on our ability to secure additional financing and to become profitable, which we cannot guarantee.                                         5   OUR STRATEGY       Our strategy is to become a leading provider of specialty pharmaceuticals by innovating, developing and commercializing a portfolio of products through the use of our proprietary drug delivery technologies, strategic partnering, or in-licensing other products or technologies. Key elements of our strategy include:    o  CONTINUE CLINICAL DEVELOPMENT OF OUR LEAD PRODUCT CANDIDATE, ECONAIL.      In the near-term, we intend to focus most of our resources on      conducting and completing clinical trials of our EcoNail product      candidate.   o  CREATE VALUE THROUGH STRATEGIC PARTNERSHIPS. Where appropriate, we      intend to seek partners to facilitate the development and      commercialization of our product candidates. In the near term, we plan      to seek a partner to advance development of our Opterone product      candidate.   o  IN-LICENSE SELECTED PRODUCTS AND TECHNOLOGIES. We intend to identify      and inlicense products and technologies to complement and expand our      portfolio of product candidates.   o  LEVERAGE AND EXPAND OUR EXISTING TECHNOLOGIES TO DEVELOP NEW PRODUCTS.      We believe pharmaceuticals and certain other commercial products used      on the skin may be formulated using our proprietary drug delivery      technologies and could have applications in the treatment of other      diseases and conditions. We will seek to identify new product      candidates by selecting and developing additional pharmaceuticals and      skin products that can be combined effectively with our technologies.  OUR DRUG DELIVERY TECHNOLOGIES       To be effective, drugs must reach an intended site in the body, at an effective concentration, and for an appropriate length of time. Currently, the vast majority of drugs are administered either orally or by injection. However, there are numerous drugs for which these modes of administration are not well suited. For example, oral administration of certain drugs may result in irritation of the gastro-intestinal tract or undesirable rapid first pass metabolism. First pass metabolism, which refers to the chemical breakdown of compounds in the liver and gastro-intestinal tract, can result in a significant reduction in the amount of drug reaching its intended site of activity in the body. In some cases, liver damage may occur due to the toxicities associated with the breakdown of a particular drug. In the case of injectable drugs, administration may be painful and in many cases requires frequent and costly office visits to treat chronic conditions.       One alternative method of administering drugs is topical delivery. Topical delivery works by either introducing drugs into the skin (dermal delivery) for the treatment of dermatologic or localized conditions and diseases, or through the skin (transdermal delivery) and into the bloodstream for the treatment of systemic conditions and diseases. Topical drug delivery has several advantages. For example, topical drug delivery:        o  helps to avoid inactivation of a drug caused by first pass metabolism          in the liver and gastro-intestinal tract;       o  can provide local delivery of appropriate concentrations of a drug to          the intended site of action without systemic exposure;                                          6         o  helps avoid gastro-intestinal distress caused by ingesting a drug; and       o  simplifies drug administration to patients who have difficulty          swallowing oral dosage forms or who do not wish to endure the          discomfort of injections.  SEPA DRUG DELIVERY TECHNOLOGY       Delivering drug molecules through the skin is challenging. The skin naturally serves as the primary barrier that prevents outside organisms, chemicals and toxins from easily entering the body. Human skin is made up of two layers: the outer layer or epidermis (which includes the stratum corneum) and the inner layer or dermis. The stratum corneum acts as the main barrier to drug delivery. The stratum corneum consists of corneocytes, which are dead, flattened skin cells filled with keratin, and a lipid matrix, which is made up of multi-layered oily molecules that hold the corneocytes together in a sheet.       Our SEPA drug delivery technology is a family of patented compounds that can enhance the transport, penetration and controlled delivery of a wide range of drugs through the skin. We have chosen SEPA 0009, a member of the SEPA family, for clinical development. SEPA enhances transdermal drug delivery by temporarily and reversibly disrupting the alignment of the lipid bilayer within the lipid matrix in the stratum corneum. This disruption renders the skin temporarily permeable, allowing a drug to diffuse through the stratum corneum in the epidermis, and then into and through the dermis, where it can enter the bloodstream through the capillaries.       SEPA possesses the following attributes:            o REVERSIBLE: The alignment of the lipid bilayer within the lipid             matrix in the stratum corneum reverts back to normal after SEPA has             diffused through it without causing permanent changes to the skin.            o RAPIDLY METABOLIZED: The human body rapidly metabolizes SEPA into             ethylene glycol and decanoic acid, two metabolites well understood             by regulatory agencies.            o CHEMICALLY NON-REACTIVE: SEPA does not react chemically with most             other organic molecules and, as a result, is compatible with a wide             range of active pharmaceutical ingredients.            o VERSATILE: The rate and amount of drug absorbed by the skin or body             in a SEPA-based formulation can be controlled by varying the             components in the formulation.       SEPA, when properly combined with active pharmaceutical ingredients, may provide for a variety of convenient and easy-to-apply formulations, including creams, gels, ointments, lacquers and solutions for the treatment of a wide range of systemic and localized conditions. We believe that products incorporating SEPA may allow selected drugs to be administered more effectively and with improved patient compliance compared to alternative methods of drug administration, such as ingestion and injection.                                         7   MACRODERM DRUG DELIVERY TECHNOLOGY       For chemicals that penetrate the skin too readily or that can be toxic if significantly absorbed into the bloodstream, it may be desirable to retard the rate of drug absorption to achieve an optimal delivery profile. For these chemicals, we have developed our second drug delivery technology, called MacroDerm, encompassing a series of low to moderate molecular weight polymers that impede drug penetration through the skin. We believe MacroDerm may have uses in cosmetics, personal care products and selected pharmaceuticals. Potential applications include their formulation with sunscreens, moisturizers and insect repellents to decrease skin penetration and improve persistence on the skin. We have synthesized MacroDerm prototypes and we are seeking strategic partners to evaluate, manufacture and market specific MacroDerm products.  NEW TRANSDERMAL DRUG DELIVERY TECHNOLOGY       We have also filed a patent application for DermaPass, a new family of enhancers that we believe can be used with a wider variety of active pharmaceutical ingredients than SEPA. We have performed initial laboratory experiments to test the ability of DermaPass to improve transdermal delivery of various active pharmaceutical ingredients.  OUR LEAD PRODUCT CANDIDATE: ECONAIL FOR ONYCHOMYCOSIS       Onychomycosis, a fungal infection of the nail, is predominantly an infection of the toe nail bed and nail plate underlying the surface of a nail. Typical symptoms of onychomycosis can include:        o  nail discoloration;       o  nail thickening;       o  cracking and fissuring of the nail plate; and       o  in severe cases, inflammation, pain and secondary infection of the nail          bed and adjacent skin.       According to FITZPATRICK'S DERMATOLOGY IN GENERAL MEDICINE (SIXTH EDITION), onychomycosis is a common disease, the prevalence of which varies by geographic region and ranges from approximately 2% to 18% of the worldwide population, with up to 48% of the population experiencing onychomycosis at least once by age 70. According to an article published in 2000 in the JOURNAL OF THE AMERICAN ACADEMY OF DERMATOLOGY, a large scale study found that the prevalence of onychomycosis in the normal population of North America was approximately 14%.       CURRENT TREATMENTS AND THEIR SHORTCOMINGS       Current treatment options for onychomycosis include oral drugs, debridement (filing, trimming and scraping), nail avulsion (surgical or chemical excision of the infected nail plate) and topical drug therapies. There are two oral therapies marketed for the treatment of onychomycosis in the U.S.: Lamisil and Sporanox. The leading oral treatment, Lamisil, has a complete cure rate of approximately 38%, but also has a 15% relapse rate. Sporanox has a complete cure rate of approximately 14%. Complete cure refers to mycological cure, or                                          8   simultaneous occurrence of a negative KOH (a potassium hydroxide staining method for direct microscopic examination of nail scrapings) and a negative fungal culture, plus clinical cure, or clearance of all signs of infection. One risk associated with each of the oral treatments, both of which undergo substantial first pass metabolism by the liver, is liver disease. As a result, patients must continually monitor their liver function for signs of failure, including fatigue, anorexia, nausea and/or vomiting, jaundice, dark urine or pale stools. Such monitoring typically requires blood tests and associated office visits, which can impact patient compliance. In the rare case that liver failure occurs, it can result in death or the need for a liver transplant. Mechanical debridement, which is a traditional podiatric approach to onychomycosis that reduces the thickness of the nail, is not a cure for onychomycosis and requires time, specialized instruments and experience. Nail avulsion, which requires surgical or chemical removal of the nail plate causes discomfort and traumatizes the nail bed.       TOPICAL ADMINISTRATION       The only topical onychomycosis drug currently marketed in the U.S. is Penlac(R), a nail lacquer which has a complete cure rate of less than 10% and requires up to 48 weeks of treatment, including periodic removal of any unattached infected nail by a health care professional.       THE ECONAIL APPROACH       Topically delivered lacquer formulations, like EcoNail, have specific advantages over other existing treatments because they are applied like nail polish, treat fungal nail infections locally, and facilitate close and extended contact between an antifungal drug and the outer, or dorsal, nail surface. Developers of topical nail lacquers for onychomycosis face two major challenges. First, lacquers with acceptable hardness, durability and drying time tend not to release antifungal drugs from the lacquer matrix readily. Second, most antifungal drugs do not penetrate into the deep, or ventral, nail plate adequately when applied to the outer, or dorsal, nail surface, which results in insufficient antifungal concentrations at the site of infection.       EcoNail is a topically applied lacquer formulation containing econazole and SEPA for the topical treatment of onychomycosis. Econazole, a topical antifungal agent, effectively inhibits IN VITRO growth of the fungi most commonly implicated in onychomycosis. In contrast to SEPA's action in disrupting the lipid bilayer of the skin, SEPA as used in EcoNail works to soften the lacquer in which econazole is contained, thereby allowing for more rapid and complete release of econazole from the lacquer into and through the nail. A 14-day study of lacquers containing radioactively labeled econazole on human non-diseased cadaver nails demonstrated that EcoNail delivered approximately seven times more econazole to the ventral nail and 200 times more econazole to the nail bed than a similar lacquer without SEPA. In this study, EcoNail delivered to the ventral nail more than 14,000 times the minimum concentration of econazole needed to inhibit the two most common fungi associated with onychomycosis. In addition, we believe that EcoNail, as a locally applied lacquer, will have a reduced risk of systemic side effects compared with oral treatments for onychomycosis.                                          9   CLINICAL DEVELOPMENT       Following our laboratory studies, we conducted a Phase 1 tolerance/human exposure clinical trial of EcoNail in patients with onychomycosis and released six week safety and tolerance data from that trial in November 2004. The trial was a randomized, double-blind, controlled Phase 1 trial conducted at two U.S. clinical sites. Eighteen patients with onychomycosis of the toenails completed the safety-tolerability segment of the study, in which all fingernails and toenails were treated twice daily for six weeks with either EcoNail or a control nail lacquer. The six week safety-tolerability segment was followed by an open-label segment of the trial in which all patients received EcoNail applied once daily to all nails for an additional 12 weeks to extend patient exposure experience.       The main objectives of this Phase 1 study were to test the safety and local tolerability of EcoNail in patients with onychomycosis and to determine systemic exposure to econazole. In this study, EcoNail was well tolerated, and investigators reported no serious drug-related adverse events. Serum assays showed no detectable levels of econazole, further supporting EcoNail's systemic safety profile.       Full data from the 18 week trial were presented in May 2005 at the annual meeting of the Society for Investigative Dermatology. As the next step in the clinical development of EcoNail, we plan to commence a Phase 2 efficacy study in the second quarter of 2006.  OTHER PRODUCT CANDIDATES  OPTERONE FOR HYPOGONADISM       Hypogonadism is a condition in which the testes produce insufficient amounts of testosterone, a hormone responsible for normal growth and development of the male sex organs and for maintenance of secondary male sex characteristics. Hypogonadism is generally characterized by serum testosterone levels of less than 300 nanograms per deciliter together with one or more of the following signs or symptoms:       o low energy levels;      o decreased sexual performance;      o loss of sex drive;      o increased body fat;      o loss of muscle mass;      o reduced bone density; and      o mild depression.       According to the Endocrine Society, this disorder affects an estimated four to five million men in the United States, approximately 200,000 of whom receive hormone replacement therapy. According to a 2001 article published in THE JOURNAL OF CLINICAL ENDOCRINOLOGY & METABOLISM, the incidence of hypogonadal testosterone levels in U.S. males increases from approximately 20% in men over the age of 60 to approximately 50% in men over the age of 80.                                          10        Diagnosis of testosterone-deficiency often occurs when a patient seeks treatment for other conditions or symptoms. Routine testing of testosterone levels has become a more common part of men's health evaluations by specialists, although testosterone testing is still relatively new among the majority of primary care physicians.       CURRENT TREATMENTS AND THEIR SHORTCOMINGS       Currently available treatment options for hypogonadism in the U.S. include testosterone delivered via intramuscular injections, transdermal patches, buccal tablets that are placed between the cheek and gum, and topical gels. Each of these treatments, however, has certain disadvantages. Intramuscular injections are often painful, require a medical office visit, and cause rapid increases in circulating testosterone to supraphysiological levels within days of administration, followed by rapid decreases. Patients often report severe acne, unwanted hair growth, and increased aggression shortly after a testosterone injection. Testosterone patches may be inconvenient to apply, can cause severe skin irritation and require frequent rotation of the application site to avoid skin lesions. The resulting discomfort can potentially reduce patient compliance with the treatment. Buccal tablets, which must be applied twice daily between the cheek and gum, can become displaced or swallowed and can cause taste perversion and gum irritation. Topical gels, while more convenient to use than other treatments, can require application of a large volume of product to the patient's body, often drip during application or run when applied to the skin and can produce an oily feel on the skin.       THE OPTERONE APPROACH       Opterone is our topically applied cream formulation of 1% testosterone and SEPA. To the best of our knowledge, Opterone is the first and only clinical development stage testosterone cream. In both laboratory and clinical settings, we demonstrated that SEPA enhances the absorption of testosterone through the skin. IN VITRO studies using human cadaver skin showed that our enhanced cream formulation delivered two to three times more testosterone transdermally over a 24-hour period when compared to equivalent doses of the currently marketed gel products. These IN VITRO studies also suggested that our enhanced cream formulation may deliver comparable amounts of testosterone in smaller dose volumes than currently marketed gel products. In addition, we believe that the creamy texture and consistency, the non-oily feel and the other physical attributes of Opterone cream will provide a more cosmetically pleasing application than available gel treatments.       CLINICAL DEVELOPMENT       In August of 2004, we announced the top-line results of a pharmacokinetics study of Opterone. The trial was designed to study the pharmacokinetics of testosterone following administration of Opterone to hypogonadal adult males. Thirty-two patients were randomized to receive one of three dose volumes of Opterone, with all patients completing the assigned dosing regimen. In this study, Opterone delivered testosterone into the bloodstream within the first few hours of application and also provided a more sustained delivery of testosterone over 24 hours compared to our prior gel formulation. We also observed that Opterone was generally well tolerated with no patients dropping out of the study due to adverse events. Local application site symptoms, when observed, were mild to moderate and transient. Full data from the study were presented in June 2005                                          11   at the 8th International Congress of Andrology in Seoul, Korea. The results of this dose proportionality study guided the design of a bioavailability study, the next step in the clinical development plan.       In December 2004, we initiated a bioavailability study of Opterone. Results from this trial were announced in May 2005. In the study, patients receiving a 2.5 gram dose of Opterone applied to the upper arms and shoulders, half the amount of the recommended starting dose of currently marketed gel products, reached the natural physiologic range of testosterone levels over a 24-hour period. Within the trial, the treatment group receiving 2.5 grams of Opterone applied to the upper arms and shoulders reached an average maximum circulating total testosterone level of 577 ng/dL, while the three treatment groups in the study ranged from 408 to 577 ng/dL. Typical circulating total testosterone levels range from 300 to 1000 ng/dL. Opterone was well tolerated in the trial with only mild adverse events, the most common being headache and mild application site reaction.       On December 5, 2005, we received a response from the Division of Reproductive and Urologic Products at the FDA to questions posed by us regarding the proposed Phase 3 clinical program for Opterone. In the response, the FDA reiterated its concerns regarding the skin irritation potential of SEPA related to pre-clinical studies of SEPA, including without limitation, a 26-week transgenic-mouse (Tg.AC) carcinogenicity study of SEPA. To address these concerns as well as other issues related to Opterone's safety and efficacy program, the FDA requested that we conduct additional investigation into multiple dose safety and pharmacokinetics before beginning any eventual Phase 3 study. The FDA also requested that we revise our proposed Phase 3 protocol to include additional patients and to extend patient exposure and safety follow-up. The additional investigation and Phase 3 revisions will increase the time and expense associated with the development of Opterone. Accordingly, the next step in the development process for Opterone is a Phase 2 trial. We are seeking a partner to advance development of this product candidate. We may elect not to develop Opterone further if we cannot find a partner.  EARLIER STAGE PRODUCT CANDIDATES       We have also tested a number of formulations containing our proprietary drug delivery technologies combined with various active pharmaceutical ingredients. As we continue to build our product candidate portfolio, we review our pre-clinical-stage product opportunities to identify those that show sufficient promise to be advanced into clinical development. We evaluate each new product candidate on its potential for success based on both scientific and commercialization criteria. These criteria include:       o  technical feasibility (formulation, product stability and laboratory         results);      o  likelihood of laboratory results translating into a meaningful clinical         benefit;      o  expected clinical studies needed and the regulatory pathway required to         obtain marketing approval;      o  determination of the product candidate's expected competitive advantage         in the marketplace;      o  duration of development timeline leading to commercialization;                                          12        o  financial investment needed for development and availability of         necessary financial resources; and      o  expected sales and profitability.  COMPETITION       We compete with a number of companies, many of which are large, multi-national organizations with worldwide distribution. We believe that our major competitors in the drug delivery sector of the health care industry include Bentley Pharmaceuticals, Inc., Biosante Pharmaceuticals, Inc., NexMed, Inc., ALZA Corporation, Connetics Corporation, Antares Pharma, Inc. and Barrier Therapeutics, Inc. Established competitors in the therapeutic areas that our clinical stage product candidates seek to address include, with respect to onychomycosis, Novartis AG, Johnson & Johnson and Sanofi Aventis (Dermik Laboratories), and with respect to male hypogonadism, Solvay Pharmaceuticals, Inc., Auxilium Pharmaceuticals, Inc., Watson Pharmaceuticals, Inc. and Columbia Laboratories, Inc. Compared with us, these companies have or may have substantially greater capital resources, research and development and technical staff, facilities and experience in obtaining regulatory approvals, as well as in manufacturing, marketing and distribution of products.       With respect to onychomycosis, Novartis AG and Johnson & Johnson each offer an orally administered antifungal therapy and Sanofi Aventis (Dermik Laboratories) offers a topical nail lacquer therapy for treating fungal infections of the nail. A number of other companies, including Nexmed, Inc. and MediQuest Therapeutics, Inc., are also developing topical and oral therapies for these infections.       With respect to male hypogonadism, Solvay Pharmaceuticals, Inc. and Auxilium Pharmaceuticals, Inc. each offer a topically administered testosterone gel, Watson Pharmaceuticals, Inc. offers a testosterone patch, and Columbia Laboratories, Inc. offers a testosterone buccal film product. A number of other companies are also developing topical testosterone products.       We expect any products approved for sale to compete primarily on the basis of efficacy, safety, patient compliance, reliability, convenience, price and patent position. Generally, the first pharmaceutical product to reach the market in a therapeutic or preventive area often has a significant commercial advantage compared with later entrants to the market. Our competitive position will also depend on our ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, implement production and marketing plans, obtain patent protection and secure adequate capital resources.  GOVERNMENT REGULATION       The production and marketing of our drug delivery systems and pharmaceutical products are subject to regulation for safety, efficacy and quality by numerous federal, state and local agencies and comparable agencies in foreign countries.       In the United States, the Federal Food, Drug and Cosmetics Act, the Public Health Service Act, the Controlled Substances Act and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of our proposed products and technologies.                                         13       Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions including recalls and criminal prosecutions based on violation of statutory requirements by products, promotional practices, clinical practices or manufacturing practices. In addition, administrative remedies can involve voluntary recalls or cessation of sale of products, administrative detention, public notice, voluntary changes in labeling, manufacturing or promotional practices, as well as refusal of the government to approve New Drug Applications (NDAs). The FDA also has the authority to withdraw approval of drugs in accordance with statutory procedures.       The FDA approval procedure involves completion of certain pre-clinical and manufacturing/stability studies and the submission of the results of these studies to the FDA in an Investigational New Drug (IND) application in support of performing clinical trials. IND allowance is then followed by performance of human clinical trials, and additional pre-clinical and manufacturing quality control studies, supporting safety, efficacy and manufacturing quality control. The safety, chemistry, manufacturing and stability and clinical studies developed under the IND are generally compiled into an NDA or Abbreviated New Drug Application (ANDA) and submitted to the FDA for approval to market.       Pre-clinical studies involve laboratory evaluation of product characteristics and animal studies to assess the efficacy and safety of the product. Human clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase 1 trials typically consist of testing of the product in a small number of normal volunteers primarily for safety. In Phase 2, in addition to safety, the efficacy of the product is typically evaluated in a small patient population. Phase 3 trials typically involve multicenter testing for safety and clinical efficacy in an expanded population of patients at geographically dispersed test sites. A clinical plan, or "protocol," accompanied by the identification of the institutions participating in the trials, must be submitted to the FDA prior to commencement of each clinical trial. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time if adverse events that endanger patients in the trials are observed. In addition, the FDA may request Phase 4 clinical trials, to be performed after marketing approval, to resolve any lingering questions.       A 30-day waiting period after the filing of each IND application is required by the FDA prior to the commencement of clinical testing in human subjects. If the FDA does not comment on or question the IND application within 30 days, initial clinical studies may begin. However, any FDA comments or questions must be answered to the satisfaction of the FDA before initial clinical testing can begin. In some instances, this process can result in substantial delay and expense.       The results of the pre-clinical and clinical studies on new drugs are submitted to the FDA in the form of NDAs for approval to commence commercial sales. Following extensive review, the FDA may grant marketing approval, require additional testing or information, or deny the application. All products must continue to comply with all FDA requirements and the conditions in an approved application, including product specifications, manufacturing process and labeling requirements. Failure to comply, or the occurrence of unanticipated                                          14   adverse events during commercial marketing, could lead to the need for labeling changes, product recall, seizure, injunctions against distribution or other FDA-initiated action, which could delay further marketing until the products are brought into compliance.       In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA relies on bioequivalency tests that compare the applicant's drug with an already approved reference drug, rather than on clinical trials. For example, an ANDA may be available for a new topical formulation of a drug which has already been approved by the FDA in other topical dosage forms.       The NDA itself is a complicated and detailed document and must include the results of extensive animal, clinical and other testing, the cost of which is substantial. Although the FDA is required to review applications within 180 days of filing, in the process of reviewing applications the FDA frequently requests that additional information be submitted and restarts the 180-day regulatory review period when the requested additional information is submitted. The effect of such requests and subsequent submissions can significantly extend the time for the NDA review process. Until an NDA is actually approved, no assurance can be given that the information requested and submitted will be considered adequate by the FDA to justify approval.       In addition, packaging and labeling of our proposed products are subject to FDA regulation. We must get FDA approval for all labeling and packaging prior to marketing of a regulated product.       Whether or not FDA approval has been obtained, approval of a product by a comparable regulatory authority must be obtained in most foreign countries before marketing of the product in that country. The approval procedure varies from country to country and may involve additional testing, and the time required may differ from that required for FDA approval. Although some procedures for unified filings exist for certain European countries, in general each country has its own procedure and requirements, many of which are time consuming and expensive. Thus, substantial delays in obtaining required approvals from foreign regulatory authorities can result after the relevant applications are filed. After such approvals are obtained, further delays may be encountered before the products become commercially available. Moreover, differing reimbursement regulations in various foreign countries may affect pricing of our drug candidates.       We cannot guarantee that any required FDA or other governmental approval will be granted or, if granted, will not be withdrawn. Governmental regulation may prevent or substantially delay the marketing of our proposed products, cause us to undertake costly procedures and furnish a competitive advantage to the more substantially capitalized companies with which we plan to compete. In addition, we cannot predict the extent of potentially adverse government regulations that may arise from future administrative action or legislation.  RESEARCH AND DEVELOPMENT       In August 2005, at the direction of our board of directors, we discontinued all research and development activities and terminated substantially all of our non-management personnel. Following this staff reduction, in order to conduct research and development activities, including stability studies, tests of our                                          15   unique formulations and the design of manufacturing processes for our drug delivery technologies, we will need to contract with third parties to perform this work. We believe that there are numerous third party contractors who would be able to perform such research and development activities.       Prior to the staff reduction in August 2005, we conducted our research and development activities through our own staff and facilities, and also through collaborative arrangements with universities, contract research organizations and independent consultants. Research and developmental expenditures were $2,938,026, $4,221,039 and $2,291,721 during the years ended December 31, 2003, 2004 and 2005, respectively. We also rely upon third parties to conduct clinical studies and to obtain FDA and other regulatory approvals.  PATENTS, TRADEMARKS AND LICENSE RIGHTS       We own a composition of matter patent on the SEPA family of compounds, which will expire in November 2006. We also own five composition of matter and use patents, with expiration dates ranging from 2015 to 2019, for the combination of SEPA with numerous existing classes of drugs, including antifungals and human sex hormones. The patent for SEPA combined with antifungals covers the combination of SEPA and econazole in EcoNail, and the patent for SEPA combined with human sex hormones covers the combination of SEPA and testosterone in Opterone.       With respect to our MacroDerm technology, we have three U.S. patents covering the chemical composition and use of the MacroDerm polymers, which expire in 2015.       We intend to seek other composition of matter and use patents regarding various formulations based on our drug delivery technologies and for new technologies. In 2005, we filed two new U.S. patent applications: one for the combination of absorption enhancers with certain active pharmaceutical ingredients for treatment of skin disorders and the other for improved delivery of testosterone.       In addition to the patent activity, we have trademarks for the marks SEPA and Opterone. We also have pending trademark applications for the marks MacroDerm and EcoNail.       We believe that patent protection of our technologies, processes and products is important to our future operations. The success of our proposed products may depend, in part, upon our ability to obtain patent and trademark protection. We intend to enforce our patent position and intellectual property rights vigorously. The cost of enforcing our patent rights in lawsuits, if necessary, may be significant and could interfere with our operations.  EMPLOYEES       As of December 31, 2005, we had four full time employees, none of whom are dedicated to research and development and regulatory affairs. None of our employees are covered by a collective bargaining agreement, and we consider relations with our employees to be good.                                          16   MANUFACTURING       In order to manufacture our product candidates for clinical trials and for commercial distribution following FDA approval, we will need to contract with a third party manufacturer to produce the product. We believe that there are numerous third party manufacturers who would be able to manufacture our product candidates for clinical trial purposes and on a commercial scale.
INVESTING IN OUR COMMON STOCK IS RISKY. IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K, YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN EVALUATING US AND OUR BUSINESS. IF ANY OF THE EVENTS DESCRIBED IN THE FOLLOWING RISK FACTORS WERE TO OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS LIKELY WOULD SUFFER. IN THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR A PART OF YOUR INVESTMENT.                            RISKS RELATED TO OUR BUSINESS                           -----------------------------  WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT TO CONTINUE TO INCUR LOSSES AND RELY EXTENSIVELY ON EXTERNAL FINANCING TO MAINTAIN OUR OPERATIONS. IF WE ARE UNABLE TO OBTAIN EXTERNAL FINANCING, WE WOULD BE REQUIRED TO FURTHER LIMIT, SCALE BACK OR CEASE OUR OPERATIONS ENTIRELY.       Since 1981, we have been engaged primarily in research and development and have derived limited revenues from feasibility studies and the licensing of our technology. We have not generated any material revenues from the sale of any products. In addition, we have incurred net losses every year since we began doing business and we anticipate that we will continue to incur losses for the foreseeable future. As of December 31, 2005, we had an accumulated deficit of approximately $82,584,992. For the fiscal years ended December 31, 2003, 2004 and 2005, we had a net loss of $5,661,694, $8,274,521, and $5,760,475, respectively.       On August 31, 2005, due to our financial condition at the time and our inability to raise sufficient capital to maintain operations, we discontinued all research and development activities and terminated substantially all of our non-management personnel. In December 2005 and February 2006, we raised an aggregate of $8.25 million in a private placement of our securities to institutional investors. As a result of this private placement, we have begun to resume operations with a focus on advancing clinical development of our lead product, EcoNail. Our ability to continue operations after our current capital resources are exhausted depends on our ability to secure additional financing and to become profitable, which we cannot guarantee.       Before we or any of our potential licensees may market any of our product candidates, significant additional development efforts and substantial testing will be necessary. We will require substantial additional financing to fund clinical studies on our product candidates. We may not be able to secure financing on favorable terms or at all. If we are unable to obtain external financing, we would have to reduce, delay or eliminate our clinical studies.                                          17   OUR PRODUCT CANDIDATES ARE IN THE EARLY STAGES OF DEVELOPMENT AND ARE SUBJECT TO THE RISK OF FAILURE INHERENT IN THE DEVELOPMENT OF INNOVATIVE TECHNOLOGIES.       Various pharmaceutical companies have developed systems to enhance the topical delivery of specific drugs, but relatively limited research has been conducted about using topical delivery systems for a wider range of pharmaceutical products. Topical delivery systems currently are used only in a limited number of products. In addition, some topical delivery systems have demonstrated adverse side effects for users, including skin irritation and delivery difficulties.       Our product candidates are in the early stages of development and will require significant further research, development, testing and regulatory clearances. Our product candidates are subject to the risks of failure inherent in the development of products based on innovative technologies. These risks include the possibilities that any or all of our product candidates may be found to be ineffective or toxic, or otherwise may fail to receive necessary regulatory clearances.  OUR PRODUCT CANDIDATES MUST UNDERGO A RIGOROUS REGULATORY APPROVAL PROCESS, WHICH INCLUDES EXTENSIVE PRE-CLINICAL AND CLINICAL TESTING, TO DEMONSTRATE SAFETY AND EFFICACY BEFORE WE CAN MARKET THEM. IF THE RESULTS OF OUR PRE-CLINICAL AND CLINICAL TESTING INDICATE THAT OUR PRODUCT CANDIDATES ARE NOT SAFE OR EFFECTIVE, OUR BUSINESS WILL SUFFER.       Each of our product candidates, including EcoNail and Opterone, must undergo a rigorous regulatory approval process, including significant pre-clinical and clinical testing to demonstrate that they are safe and effective for human use, before we can market them. Conducting clinical trials is a lengthy, expensive and uncertain process. Completion of clinical trials may take several years or more. In addition, our clinical trials may be delayed by many factors, including:        o  inability to fund clinical trials;        o  slow or insufficient patient enrollment;        o  failure of the FDA to approve our clinical trial protocols;        o  inability to manufacture significant amounts of our product candidates          for use in a trial;        o  safety issues; and        o  government or regulatory delays.       In addition, the results of pre-clinical studies and early clinical trials may not accurately predict results that we will obtain in later testing. A number of other companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after they achieved promising results in earlier trials. If we, the FDA or physicians do not believe that our clinical trials demonstrate that our product candidates are safe and effective, our business, financial condition and results of operations will be materially adversely affected.                                          18   OUR PRODUCT CANDIDATES ARE SUBJECT TO SIGNIFICANT FDA SUPERVISION AND MAY NOT SUCCESSFULLY COMPLETE THE EXTENSIVE REGULATORY APPROVAL PROCESS REQUIRED PRIOR TO THE MARKETING OF ANY PHARMACEUTICAL PRODUCT.       Our activities are regulated by a number of government authorities in the United States and other countries, including the FDA. The FDA regulates pharmaceutical products, including their manufacture and labeling. Before obtaining regulatory approval to market any product candidate under development, we must demonstrate to the FDA that the product is safe and effective for use in each proposed indication through, among other things, pre-clinical studies and clinical trials. Data obtained from testing is subject to varying interpretations which can delay, limit or prevent FDA approval.       On October 11, 2002, the FDA advised us that further clinical trials of our drugs containing SEPA had been placed on clinical hold pending review of questions surrounding a 26-week transgenic-mouse (Tg.AC) carcinogenicity study of SEPA we performed in 1999. On April 10, 2003, the FDA lifted this clinical hold. In releasing the hold, the FDA requested additional information on that 1999 study, which we have provided.       On December 5, 2005, we received a response from the Division of Reproductive and Urologic Products at the FDA to questions posed by us regarding the proposed Phase 3 clinical program for Opterone, a topical cream for male testosterone deficiency containing our patented enhancer SEPA. In the response, the FDA reiterated its safety concerns regarding the skin irritation potential of SEPA related to pre-clinical studies of SEPA, including without limitation, the 26-week transgenic-mouse (Tg.AC) carcinogenicity study of SEPA. The FDA also expressed concern regarding skin irritation observed in some patients in recently completed Opterone clinical studies. To address these concerns as well as other issues related to Opterone's safety and efficacy program, the FDA requested that we, if we intend to pursue clinical development of Opterone, conduct additional investigation into multiple dose safety and pharmacokinetics before beginning any eventual Phase 3 study. The FDA also confirmed the requirement for other clinical pharmacology studies prior to any NDA submission and requested that we revise our proposed Phase 3 protocol to include additional patients and to extend patient exposure and safety follow-up. If we decide to pursue the clinical development of Opterone, the additional investigation and Phase 3 revisions will increase the time and expense associated with the development of Opterone and may materially adversely affect our ability to find a partner to advance the development of Opterone. Furthermore, there can be no assurance that the results of the studies, if conducted, will address the FDA's safety concerns or justify further development of Opterone or that any SEPA-based product will be approved by the FDA.       To date, neither the FDA nor any of its international equivalents has approved any of our technologies or product candidates for marketing. If the FDA does not approve our product candidates for marketing, we will be materially adversely affected.       We face additional risks associated with the regulatory approval process, including:        o  Changes in existing regulatory requirements could prevent or affect our          regulatory compliance. Federal and state laws, regulations and policies          may be changed with possible retroactive effect. In addition, how these                                          19            rules actually operate can depend heavily on administrative policies          and interpretations over which we have no control. We also may lack the          experience with these policies and interpretations to assess their full          impact upon our business.        o  Obtaining FDA clearances is time-consuming and expensive and we cannot          guarantee that such clearances will be granted or, if granted, will not          be withdrawn.        o  The FDA review process may prevent us from marketing our product          candidates or may involve delays that significantly and negatively          affect our product candidates. We also may encounter similar delays in          foreign countries.        o  Regulatory clearances may place significant limitations on the uses for          which any approved products may be marketed.        o  Any marketed product and its manufacturer are subject to periodic          review by the FDA. Any discovery of previously unrecognized problems          with a product or a manufacturer could result in suspension or          limitation of previously obtained or new approvals.  BECAUSE THE REGULATORY APPROVAL PROCESS IS COMPLEX, WE CANNOT ACCURATELY PREDICT THE REGULATORY APPROVAL TIMELINE FOR OUR PRODUCT CANDIDATES.       The laws and regulations administered by the FDA are complex, and compliance with these laws and regulations requires substantial time, effort and expense. Because of this complexity, and because the regulatory approval path for our product candidates has not yet been confirmed by the FDA, we cannot guarantee that our efforts will be sufficient to ensure compliance with all applicable laws and regulations, nor can we accurately predict the regulatory approval timeline for our product candidates.  IF OUR PRODUCT CANDIDATES ARE NOT ACCEPTED BY PHYSICIANS AND PATIENTS, WE MAY NEVER BE PROFITABLE.       Even if our product candidates receive regulatory approval, we may not be able to market them effectively, they may be uneconomical to market or third parties may market equivalent or superior products. We will need to expend significant effort to educate physicians and patients regarding any product candidate that receives regulatory approval. Consequently, unless our product candidates obtain market acceptance, we may never be profitable.  IF PHYSICIANS OR PATIENTS PERCEIVE THAT TESTOSTERONE REPLACEMENT THERAPIES CREATE HEALTH RISKS, THE VIABILITY OF OPTERONE MAY BE QUESTIONED, AND OUR BUSINESS AND THE PRICE OF OUR STOCK MAY BE NEGATIVELY AFFECTED.       Recent studies of female hormone replacement therapy products have reported an associated increase in health risks. As a result of these studies, some companies that sell or develop female hormone replacement products have experienced decreased sales of these products, and in some cases, a decline in their stock. From time to time, publications have suggested potential health risks associated with testosterone replacement therapy, including fluid retention, sleep apnea, breast tenderness or enlargement, increased red blood                                          20   cells, development of clinical prostate disease, increased cardiovascular disease risk and the suppression of sperm production. It is possible that studies on the effect of testosterone replacement therapy could demonstrate these or other adverse health risks. This, along with the negative publicity surrounding hormone replacement therapy in general, could negatively impact market acceptance of Opterone, which could adversely affect our business and the price of our stock.  WE DEPEND ON PATENTS TO PROTECT OUR TECHNOLOGIES AND IF OUR CURRENT PATENTS ARE INEFFECTIVE OR WE ARE UNABLE TO SECURE AND MAINTAIN ADEQUATE PATENT PROTECTION, OUR ABILITY TO COMPETE WITH OTHER PHARMACEUTICAL COMPANIES MAY BE NEGATIVELY AFFECTED.       We believe that patent protection of our technologies, processes and products is important to our future operations. The success of our product candidates depends, in part, on our ability to secure and maintain adequate patent protection.       Although we have filed and intend to file additional patent applications, the patent application process is lengthy and expensive and there is no guarantee that a patent will be issued or, if issued, that it will be of commercial benefit to us. In addition, it is impossible to anticipate the breadth or degree of protection that any patents we obtain may afford us. Further, products that we develop could infringe patents held by third parties. In these cases, we may have to obtain licenses from third parties, which may not be available on commercially acceptable terms, if at all. We do not maintain separate insurance to cover intellectual property infringement.       Our composition of matter patent covering SEPA expires in November 2006. The expiration of that patent will enable competitors to develop SEPA-based product candidates covering applications for which we have not obtained composition and use patents. As a result, our competitive position may be adversely affected.       Currently, we are not involved in any litigation, settlement negotiations or other legal action regarding patent issues and are not aware of any patent litigation threatened against us. We may, however, become involved in patent litigation against third parties to enforce our patent rights, to invalidate patents held by those third parties or to defend against claims of those third parties. We intend to enforce our patent position and defend our intellectual property rights vigorously. The cost to us of any patent litigation or similar proceeding could be substantial and it may absorb significant management time. In the event of an unfavorable resolution of any infringement litigation against us, we may be enjoined from manufacturing or selling any products without a license from a third party.  IF WE ARE NOT ABLE TO PROTECT THE CONFIDENTIALITY OF OUR PROPRIETARY INFORMATION AND KNOW-HOW, THE VALUE OF OUR TECHNOLOGIES MAY BE ADVERSELY AFFECTED.       In addition to patent protection, we utilize significant unpatented proprietary technology and rely on unpatented trade secrets and proprietary know-how to protect certain aspects of our technologies. To the extent that we rely on unpatented proprietary technology, we cannot guarantee that others will not independently develop or obtain substantially equivalent or superior technologies or otherwise gain access to our trade secrets, that any obligation of confidentiality will be honored or that we will be able to effectively protect our rights to our proprietary technologies.                                         21   IF WE ARE NOT ABLE TO RETAIN OUR KEY PERSONNEL AND/OR RECRUIT ADDITIONAL KEY PERSONNEL IN THE FUTURE, OUR BUSINESS MAY SUFFER.       The success of our business depends on our ability to attract, retain and motivate qualified senior management personnel and qualified scientific personnel. We consider Robert J. DeLuccia, our President and Chief Executive Officer, to be a key employee and we have entered into an employment agreement with him. We do not maintain key person life insurance on any of our employees. In our industry, the competition for experienced personnel is intense and can be expected to increase. From time to time we may face, and in the past have faced, difficulties in attracting and retaining employees with the requisite experience and qualifications. If we fail to retain or attract this type of personnel, it could have a significant negative effect on our ability to develop our technologies.  OUR FAILURE TO IDENTIFY PHARMACEUTICALS THAT ARE COMPATIBLE WITH OUR DRUG DELIVERY TECHNOLOGIES OR ADDITIONAL PRODUCT CANDIDATES OR TECHNOLOGIES WOULD IMPAIR OUR ABILITY TO GROW.       Our growth depends on our ability to identify drugs suitable for delivery using our proprietary drug delivery technologies, our ability to identify other product candidates or technologies, and our ability, financially or otherwise, to obtain such product candidates and technologies. Identifying suitable drugs or product candidates is a lengthy and complex process. Even if identified, the drugs or product candidates may not be available to us or we may otherwise be unable to enter into licenses or other agreements for their use. Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the licensing or acquisition of drugs and product candidates and we may not be able to enter into licenses or other agreements on acceptable terms, or at all. If we are unable to identify and license or acquire drugs that are compatible with our drug delivery technologies or additional product candidates or technologies, our ability to grow our portfolio of product candidates and our prospects would be adversely affected.  WE DO NOT HAVE ANY LABORATORY FACILITIES OR SCIENTIFIC PERSONNEL AND DEPEND ON THIRD PARTIES TO CONDUCT RESEARCH AND DEVELOPMENT ACTIVITIES FOR OUR TECHNOLOGIES AND PRODUCT CANDIDATES.       We do not have laboratory facilities or scientific personnel capable of conducting research and development activities for our technologies and product candidates and currently we do not have plans to obtain such facilities and personnel. Accordingly, our ability to conduct research and development activities is and will be limited and we will depend to a significant extent on third-party contractors for such research and development activities. If any of our third-party contractors fails to perform its obligations in a timely fashion or in accordance with applicable regulations, it may adversely affect our business. If we decide to establish internal research and development capabilities, we would need to hire and retain significant additional personnel, locate and acquire appropriate laboratory facilities, comply with extensive government regulations, and obtain additional capital, which may not be available on acceptable terms, or at all.                                         22   WE DO NOT HAVE ANY MANUFACTURING FACILITIES AND DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCT CANDIDATES.       We do not have facilities capable of manufacturing any of our product candidates and we do not have plans to obtain these facilities. Accordingly, we will depend on third-party contractors, licensees, or corporate partners to manufacture our products. If any of our third-party manufacturers fails to perform its obligations in a timely fashion or in accordance with applicable regulations, it may delay clinical trials, the commercialization of our product candidates or our ability to supply our product candidates for sale. If we decide to establish a commercial manufacturing facility, we would need to hire and retain significant additional personnel, comply with extensive government regulations, and obtain significant amounts of additional capital, which may not be available on acceptable terms, or at all.  WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS, AND WE MAY NOT HAVE SUFFICIENT PRODUCT LIABILITY INSURANCE TO COVER SUCH CLAIMS. IT MAY BE EXPENSIVE AND DIFFICULT TO OBTAIN ADEQUATE INSURANCE COVERAGE.       The design, development, manufacture and sale of our product candidates involve risk of liability claims and associated adverse publicity. We have product liability insurance coverage with an aggregate policy limit of approximately $10,000,000 for claims related to our product candidates that may arise from clinical trials conducted prior to November 1, 2002. We also have product liability insurance coverage with aggregate policy limits between approximately $3,000,000 and $5,000,000 for claims related to our product candidates that may arise from clinical trials conducted after September 25, 2003. In the event that our products receive regulatory approval and become commercialized, we would need to acquire additional coverage. Product liability insurance is expensive, may be difficult to obtain and may not be available on acceptable terms, if at all. If we obtain coverage, we cannot guarantee that the coverage limits of these insurance policies will be adequate. A successful claim against us if we are uninsured, or which is in excess of our insurance coverage, could have a material adverse effect on us and our financial condition.  WE RELY ON A THIRD-PARTY SUPPLIER FOR A NON-ACTIVE INGREDIENT IN SOME OF OUR PRODUCT CANDIDATES AND, IN THE EVENT THE SUPPLIER IS UNABLE TO SUPPLY US WITH ADEQUATE PRODUCT, OUR BUSINESS MAY BE NEGATIVELY AFFECTED IF WE ARE NOT ABLE TO TIMELY OBTAIN A SUBSTITUTE INGREDIENT.       We rely on a third-party supplier, Seppic Inc., for a non-active ingredient that is important to the formulation and production of some of our topical product candidates. While we believe similar products are available from other suppliers, if Seppic Inc. were unable or unwilling to supply its product in sufficient quantities at a reasonable price, our results could suffer, as we may encounter significant costs and delays in identifying and measuring the efficacy of replacement third party products.                                         23   TOGETHER, CERTAIN OF OUR SHAREHOLDERS OWN A MAJORITY OF OUR STOCK AND COULD ULTIMATELY CONTROL DECISIONS REGARDING US.       In our recent private placement, we issued 825.5 shares of our Series C Cumulative Convertible Preferred Stock and warrants to purchase 7,861,912 shares of our common stock. The Series C Cumulative Convertible Preferred Stock is convertible into shares of common stock and votes together with the common stock on an as-if-converted to common stock basis. Unless a holder of Series C Cumulative Convertible Preferred Stock elects otherwise, its ability to convert its Series C Cumulative Convertible Preferred Stock into common stock or to vote on an as-if-converted to common stock basis is restricted to the extent that such conversion would result in the holder owning more than 4.95% of our issued and outstanding common stock or voting together with the common stock on an as-if-converted to common stock basis in respect of more than 4.95% of our issued and outstanding common stock. The warrants issued in the private placement are subject to a similar restriction on their exercise. SCO Capital Partners LLC, Beach Capital LLC and Perceptive Life Sciences Master Fund Ltd. ("Perceptive") have elected not to be governed by these restrictions, although we have entered into an agreement with Perceptive whereby Perceptive's ability to convert or vote their shares of Series C Preferred Stock will be subject to a beneficial ownership cap of 9.95% instead of 4.95%. Consequently, giving effect to the beneficial ownership cap restrictions, the Series C Preferred Stock acquired by the investors is convertible into 4,057,882 shares of common stock and the holders of the Series C Cumulative Convertible Preferred Stock vote on an as-converted basis with the holders of our common stock, and therefore hold approximately 80.28% of the voting power of our outstanding securities. Assuming both the conversion of the Series C Cumulative Convertible Preferred Stock and the exercise of all of the Warrants acquired by the investors, in each case without regard to the beneficial ownership cap restrictions, the investors would hold approximately 94% of the outstanding common stock of the Company. In addition, for so long as 20% of the Series C Cumulative Convertible Preferred Stock issued in the private placement remains outstanding, SCO Capital Partners LLC has the right to designate two members to our board of directors. Jeffrey B. Davis and Howard S. Fischer are currently serving on our board of directors as the designees of SCO Capital Partners LLC       Because of the voting rights of the Series C Cumulative Convertible Preferred Stock and the fact that the parties described above currently own a large portion of our voting stock, they may be able to generally determine or they will be able to significantly influence the outcome of corporate actions requiring shareholder approval. As a result, these parties may be in a position to control matters affecting our company, including amendments to our articles of incorporation and bylaws; payment of dividends on our common stock; and acquisitions, sales of all or substantially all of our assets, mergers or similar transactions, including transactions involving a change of control. As a result, some investors may be unwilling to purchase our common stock. In addition, if the demand for our common stock is reduced because of these shareholders' control of the Company, the price of our common stock could be materially depressed.                                         24   CERTAIN OF OUR SHAREHOLDERS OWN LARGE BLOCKS OF OUR COMMON STOCK AND OWN SECURITIES CONVERTIBLE OR EXERCISABLE INTO SHARES OF OUR COMMON STOCK, AND ANY EXERCISES, CONVERSIONS OR SALES BY THESE SHAREHOLDERS COULD SUBSTANTIALLY LOWER THE MARKET PRICE OF OUR COMMON STOCK.       Several of our shareholders, including those shareholders that acquired Series C Cumulative Convertible Preferred Stock and warrants to acquire common stock in our recent private placement, own large blocks of our voting stock. The shares of our common stock owned by these shareholders (or issuable to them upon exercise or conversion of warrants or Series C Cumulative Convertible Preferred Stock) will be registered. Future sales of large blocks of our common stock by any of the above investors could substantially depress our stock price.                            RISKS RELATED TO OUR INDUSTRY                           -----------------------------  OUR INDUSTRY IS HIGHLY COMPETITIVE AND OUR COMPETITORS HAVE OR MAY HAVE SIGNIFICANTLY MORE RESOURCES THAN WE HAVE.       We compete with a number of firms, many of which are large, multi-national organizations with worldwide distribution. We believe that our major competitors in the drug delivery sector of the health care industry include Bentley Pharmaceuticals, Inc., Biosante Pharmaceuticals, Inc., NexMed, Inc., ALZA Corporation, Connetics Corporation, Antares Pharma, Inc. and Barrier Therapeutics, Inc. Competitors with approved products in the therapeutic areas that our clinical stage product candidates seek to address include, with respect to onychomycosis:        o  Novartis AG, maker of Lamisil(R), an oral therapy;        o  Johnson & Johnson, maker of Sporanox(R), an oral therapy; and        o  Sanofi Aventis (Dermik Laboratories), maker of Penlac, a topical nail          lacquer.  and with respect to male hypogonadism:        o  Solvay Pharmaceuticals, Inc., maker of Androgel(R), a topical gel          therapy;        o  Auxilium Pharmaceuticals, Inc., maker of Testim(R), a topical gel          therapy;        o  Watson Pharmaceuticals, Inc., maker of Androderm(R), a transdermal          patch; and        o  Columbia Laboratories, Inc., maker of Striant(R), a buccal film which          is placed between the patient's cheek and gum;       These companies have or may have substantially greater capital resources, research and development and technical staff, facilities and experience in obtaining regulatory approvals, as well as in manufacturing, marketing and distributing products, than we do. Recent trends in this industry are toward further market consolidation of large drug companies into a smaller number of very large entities, further concentrating financial, technical and market strength and increasing competitive pressure in the industry. Academic institutions, hospitals, governmental agencies and other public and private research organizations also are conducting research and seeking patent protection and may develop competing products or technologies of their own through joint ventures or other arrangements. In addition, recently developed technologies, or technologies that may be developed in the future, may or could                                          25   be the basis for competitive products which may be more effective or less costly to use than any products that we currently are developing.       We expect any future products approved for sale to compete primarily on the basis of product efficacy, safety, patient compliance, reliability, price and patent position. Generally, the first pharmaceutical product to reach the market in a therapeutic or preventive area often has a significant commercial advantage compared with later entrants to the market. Our competitive position also will depend on our ability to resume research and development activities, engage third parties to conduct research and development activities, attract and retain qualified scientific and other personnel, develop effective proprietary products, implement production and marketing plans, obtain patent protection and secure adequate capital resources.  GOVERNMENT AND PRIVATE INITIATIVES TO REDUCE HEALTH CARE COSTS COULD HAVE A MATERIAL ADVERSE EFFECT ON PHARMACEUTICAL PRICING AND ON OUR OPERATIONS.       The future revenues and profitability of, and availability of capital for, biomedical and pharmaceutical companies may be affected by the continuing efforts of governmental and private third-party payers to contain or reduce the costs of health care through various means. Reimbursement by payors such as government and managed care organizations has become an increasingly important factor in the success of a drug, as has the listing of new products on large formulary lists (as well as their designated "Tier" on such lists), including those of managed care organizations, pharmaceutical benefit providers and group buying organizations. Failure of a pharmaceutical product to be included on formulary lists, to obtain a Tier position on such formulary lists which provides for a sufficiently low patient cost, or to be reimbursed by government or managed care organizations, could negatively impact the profitability of a drug.       Furthermore, in some foreign markets pricing or profitability of prescription pharmaceuticals is subject to government control and to possible reform in the health care system. Frequently, it is not possible to obtain pricing in foreign markets that is as favorable as that obtainable in the U.S. In the U.S., there have been, and we expect there will continue to be, a number of federal and state proposals to impose similar governmental control. While we cannot predict whether any of these legislative or regulatory proposals will be adopted, the announcement or adoption of these proposals could have a material adverse effect on our prospects.       If we succeed in bringing to market one or more of our product candidates, we cannot assure you that these product candidates will be cost effective or that reimbursement to the consumer will be available or will be sufficient to allow us to sell these products on a profitable basis.                                          26                        RISKS RELATED TO THE SECURITIES MARKET                      --------------------------------------  OUR STOCK PRICE HAS BEEN, AND LIKELY WILL CONTINUE TO BE, HIGHLY VOLATILE, AND AS A RESULT, AN INVESTMENT IN OUR STOCK IS SUBJECT TO SUBSTANTIAL RISK.       The market price of our stock has been, and will likely continue to be, highly volatile due to the risks and uncertainties described in this section of this document, as well as other factors, including:        o  the discontinuance in August 2005 of all of our research and product          development activities and our dependence on additional external          funding in resuming such activities;        o  the results of our previously conducted clinical trials for our          SEPA-based formulations;        o  conditions and publicity regarding the pharmaceutical industry          generally as well as the specific therapeutic areas our product          candidates seek to address;        o  price and volume fluctuations in the stock market at large which do not          relate to our operating performance; and        o  our ability to raise additional capital.       Over the two-year period ending December 31, 2005, the closing price of our common stock as reported on The Nasdaq National Market, The Nasdaq Capital Market, the Pink Sheets LLC and the OTC Bulletin Board ranged from a high of $75.18 to a low of $1.26. On March 7, 2006, the closing price for our common stock on the OTC Bulletin Board was $1.66. In the past, companies that have experienced stock price volatility have sometimes been the subject of securities class action litigation. If litigation were instituted on this basis, it could result in substantial costs and a diversion of management's attention and resources. As a result of this volatility, an investment in our stock is subject to substantial risk.  ON NOVEMBER 22, 2005, OUR COMMON STOCK WAS DELISTED FROM THE NASDAQ CAPITAL MARKET FOR FAILURE TO MEET ITS LISTING STANDARDS. OUR COMMON STOCK CURRENTLY IS QUOTED ON THE OTC BULLETIN BOARD, WHICH INVESTORS MAY PERCEIVE AS LESS DESIRABLE AND WHICH COULD NEGATIVELY AFFECT THE LIQUIDITY OF AN INVESTMENT IN OUR COMMON STOCK.       Our listing on The Nasdaq Capital Market was conditioned on our compliance with Nasdaq's continued listing requirements. The minimum standards for continued listing on The Nasdaq Capital Market include stockholders' equity of $2.5 million or market capitalization of $35 million and a minimum bid price of $1.00.       On October 18, 2005, we received a Nasdaq Staff Determination indicating that our securities were subject to delisting from The Nasdaq Capital Market as we did not comply with the minimum bid price requirement for continued listing. We requested a hearing before a Nasdaq Listing Qualifications Panel to review the Staff Determination. On November 21, 2005, we withdrew our appeal of the Nasdaq Staff Determination and our common stock was delisted from quotation on the Nasdaq Capital Market effective as of Tuesday, November 22, 2005.                                          27   Immediately thereafter, our common stock was quoted on the Pink Sheets LLC, and on December 22, 2005, our stock became eligible for quotation on the OTC Bulletin Board and presently trades under the symbol "MACM.OB."       The over-the-counter market is generally considered to be a less efficient system than markets such as Nasdaq or other national exchanges because of lower trading volumes, transaction delays and reduced security analyst and news media coverage. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our common stock. Additionally, trading of our common stock in an over-the-counter market may make us less desirable to institutional investors and may, therefore, limit our future equity funding options.  WE ARE CONTRACTUALLY OBLIGATED TO ISSUE SHARES IN THE FUTURE, DILUTING YOUR INTEREST IN US.       As of March 7, 2006, our Series C Cumulative Convertible Preferred Stock is convertible into an aggregate of, giving effect to the beneficial ownership restrictions on conversion, 4,057,882 shares of common stock (7,861,900 shares of common stock without regard to the beneficial ownership restrictions on conversion). In addition, as of March 7, 2006, there are outstanding and exercisable warrants to purchase approximately 8,725,270 shares of our common stock, at a weighted average exercise price of $1.89 per share. As of March 7, 2006, there also are outstanding and exercisable options to purchase approximately 430,264 shares of our common stock, at a weighted average exercise price of $34.06 per share. Moreover, we expect to issue additional options to purchase shares of our common stock to compensate employees, consultants and directors and may issue additional shares to raise capital, acquire other companies or technologies, to pay for services, or for other corporate purposes. Any such issuances will have the effect of further diluting the interest of the purchasers of the securities being sold in this offering.
Not applicable.
We currently occupy approximately 3,000 square feet of office and laboratory space under a month-to-month sublease. This space is located on one floor of a three story building in Lexington, Massachusetts. We believe that this facility is adequate to meet our current requirements, and we are evaluating our future facility requirements. We also believe that suitable alternative locations are readily available.
We are not currently engaged in any material legal proceedings.
As described in our Current Report on Form 8-K filed on February 15, 2006, an amendment to the Company's certificate of incorporation to effect a 1-for-6 reverse stock split of our common stock was approved on December 23, 2005 by                                          28   written consent of our stockholders holding a majority of the shares entitled to vote on the matter. Additional information regarding the reverse stock split is contained in our Information Statement filed with the Securities and Exchange Commission on January 17, 2006.                                          29   PART II
MARKET PRICE OF SECURITIES AND RELATED MATTERS       Our common stock is traded on the OTC Bulletin Board under the symbol "MACM.OB." Prior to February 10, 2006, our common stock was traded on the OTC Bulletin Board under the symbol "MCMP.OB." Between November 24, 2003 and November 21, 2005, our common stock was traded on The Nasdaq Capital Market under the symbol "MCHM" and, prior to November 24, 2003, it was traded on The Nasdaq National Market under the symbol "MCHM."       The following chart shows the high and low closing prices for our common stock for the periods indicated:                                                COMMON STOCK                                                   MACM          YEAR ENDED                        HIGH         LOW          DECEMBER 31, 2004          First Quarter                  $ 75.18       $ 34.44          Second Quarter                   71.40         48.72          Third Quarter                    55.86         31.08          Fourth Quarter                   37.38         21.42           DECEMBER 31, 2005          First Quarter                    33.60         16.38          Second Quarter                   19.32          7.98          Third Quarter                    12.18          2.10          Fourth Quarter                    2.52          0.84         These prices are between dealers and do not reflect retail markups, markdowns or commissions and may not necessarily represent actual transactions. As of March 9, 2006, there were 672 holders of record of our common stock.       We have never paid cash dividends on our common stock and our Board of Directors does not contemplate declaring any dividends in the foreseeable future. We intend to retain any earnings to finance research, development, and expansion of our business.       Information concerning securities authorized for issuance under equity compensation plans appears in Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."                                          30
The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected statement of operations data and the selected balance sheet data for each year presented below have been derived from our audited financial statements. These historical data are not necessarily indicative of results to be expected for any future period.       On December 30, 2005 we implemented a 1-for-7 reverse stock split of our common stock and on February 9, 2006 we implemented a subsequent 1-for-6 reverse stock split of our common stock. Unless otherwise noted, data used throughout this Annual Report on Form 10-K has been adjusted to reflect these reverse splits.                                      ------------------------------------------------------------------------------------------                                                                   YEARS ENDED DECEMBER 31,                                  ------------------------------------------------------------------------------------------                                        2005               2004              2003              2002              2001        STATEMENTS OF OPERATIONS DATA:  SALE OF PATENT                    $       ---       $       ---         $ 1,000,000       $       ---       $        --- RESEARCH CONTRACTS                        ---               ---              10,031            42,925            829,385                                     ---------         ---------           ---------         ---------         ----------    TOTAL REVENUES                 $       ---       $       ---         $ 1,010,031       $    42,925       $    829,385 RESEARCH AND DEVELOPMENT    EXPENSES                         2,291,721         4,221,039           2,938,026         3,998,388          9,791,438 NET LOSS                           (5,760,475)       (8,274,521)         (5,661,694)       (7,514,514)       (12,333,243) BENEFICIAL CONVERSION FEATURE     $(  330,243)      $       ---         $      ---        $       ---       $        --- NET LOSS ATTRIBUTABLE TO    COMMON STOCKHOLDERS            $(6,090,718)      $(8,274,521)        $(5,661,694)      $(7,514,514)      $(12,333,243) BASIC AND DILUTED NET LOSS PER    SHARE                          $(     6.25)      $(     9.23)        $(     8.03)      $(    11.30)      $(     19.47) SHARES USED TO COMPUTE    BASIC AND DILUTED NET    LOSS PER SHARE                     974,367           896,039             704,621           664,965            633,508  BALANCE SHEET DATA:  WORKING CAPITAL                   $ 2,755,167       $ 5,635,331         $ 6,345,396       $ 8,704,944       $ 15,739,712 CURRENT ASSETS                      3,130,197         6,403,182           7,325,361         9,119,723         17,099,675 TOTAL ASSETS                        3,781,453         7,109,864           8,249,648        10,132,007         18,257,543 CURRENT LIABILITIES                   375,030           767,851             979,965           414,779          1,359,963 TOTAL LIABILITIES                   1,995,808           773.360           1,013,328           462,488          1,408,838 STOCKHOLDERS' EQUITY              $ 1,455,402       $ 6,336,504         $ 7,236,320       $ 9,669,519       $ 16,848,705                                           31
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-K CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING INFORMATION DUE TO THE FACTORS DISCUSSED UNDER "RISK FACTORS," "NOTE REGARDING FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.  GENERAL       We are a specialty pharmaceutical company that develops and seeks to commercialize pharmaceutical products. Currently, our portfolio of product candidates is based on our proprietary drug delivery technologies: SEPA, MacroDerm and DermaPass. Our patented SEPA topical drug delivery technology (SEPA is an acronym for "Soft Enhancement of Percutaneous Absorption," where "soft" refers to the reversibility of the skin effect, and "percutaneous" means "through the skin") enhances the efficiency and rate of diffusion of drugs into and through the skin. Our patented MacroDerm drug delivery technology encompasses a family of low to moderate molecular weight polymers that impede dermal drug or chemical penetration. We have also filed a patent application for our DermaPass family of transdermal absorption enhancers that have a different drug delivery profile than SEPA, which we believe could be used with a wider range of active pharmaceutical ingredients. Currently, we have two clinical stage investigational new drugs: EcoNail, our lead product, for the treatment of fungal infections of the nails and Opterone, for the treatment of male hypogonadism. We believe that products incorporating our drug delivery technologies may allow selected drugs to be administered more effectively and with improved patient compliance compared to alternative methods of drug administration, such as ingestion and injection.       Since inception, we have been engaged primarily in research and development. We have not generated any meaningful revenues from operations and we have sustained significant operating losses. We anticipate that we will continue to incur significant losses for the foreseeable future. We cannot guarantee that we will be successful in commercializing our products, or that we will ever become profitable. As of December 31, 2005, we had an accumulated deficit of approximately $82,584,992. Our product candidates are in discovery or developmental stages and must undergo a rigorous regulatory approval process, which includes costly and extensive pre-clinical and clinical testing, to demonstrate safety and efficacy before we can market any resulting product. To date, neither the FDA nor any of its international equivalents has approved any of our product candidates for marketing. Please see our financial statements included elsewhere in this Annual Report on Form 10-K for a more detailed description of our financial history.       Our results of operations can vary significantly from year to year and quarter to quarter, and depend, among other factors, on:        o  the progress of clinical trials we conduct;                                          32         o  the degree of our research, marketing and administrative efforts;        o  our ability to raise additional capital;        o  the signing of licenses and product development agreements;        o  the timing of revenues recognized pursuant to license agreements; and        o  the achievement of milestones by licensees.       The timing of our revenues may not match the timing of our associated product development expenses. To date, our research and development expenses generally have exceeded our revenues in any particular period or fiscal year.       We expect to continue to spend significant amounts on developing and seeking regulatory approval of our lead product, EcoNail. Ultimately, if we receive regulatory approval for EcoNail, significant expenses will be incurred in connection with its commercialization. In addition, we also plan to identify and develop, internally, through in-licensing, or through other collaborative arrangements, additional product candidates and technologies that fit within our growth strategy. If we identify potential product candidates, we will incur additional costs in connection with testing and seeking regulatory approval of those product candidates.       We recently completed a private placement of our securities to institutional investors, consisting of two closings, for approximately $8,255,000 in gross proceeds. The first closing of the private placement, in which institutional investors acquired 250 shares of Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") and six-year warrants to purchase 2,380,951 shares of common stock at an exercise of $1.26 per share, for an aggregate purchase price of $2,500,000, took place on December 23, 2005 and is described in our Current Report on Form 8-K filed on December 27, 2005. The second closing of the private placement, in which institutional investors acquired 575.5 shares of our Series C Preferred Stock and six-year warrants to purchase 5,480,961 shares of the Company's common stock at an exercise price of $1.26 per share, for an aggregate purchase price of $5,755,000, occurred on February 13, 2006 and is described in our Current Report on Form 8-K filed on February 16, 2006. The Series C Preferred Stock has a liquidation value of $10,000 per share, is entitled to a dividend of 10% per annum, payable in cash or shares of our common stock at our option, which dividend rate is subject to increase to 14% upon the occurrence of certain events. The number of shares of common stock into which each share of Series C Preferred Stock is convertible is determined by dividing the liquidation value per share plus all accrued and unpaid dividends thereon by $1.05. The conversion price for the Series C Preferred Stock and the warrant exercise price are each subject to a reset adjustment such that if the average of the price of the common stock over the twenty trading days immediately preceding May 8, 2006 (the "Average Price") is lower than the conversion and/or exercise price, then such conversion and/or exercise price shall be adjusted to equal the Average Price.                                         33        We believe that our existing cash and cash equivalents of $3,023,436 as of December 31, 2005 will be sufficient to meet our operating expenses and capital expenditure requirements for at least the next twelve months. As noted above, on February 13, 2006 we received $5,755,000 in gross proceeds ($5,265,100 net of issuance costs but before legal and accounting costs) from the sale of our Series C Preferred Stock and warrants to purchase shares of our common stock. We intend to use these proceeds for working capital and other general corporate purposes.       RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist of:        o  salaries and expenses for our research and development personnel;        o  payments to consultants, investigators, contract research organizations          and manufacturers in connection with our pre-clinical and clinical          trials;        o  costs associated with conducting our clinical trials;        o  costs of developing and obtaining regulatory approvals; and        o  allocable costs, including occupancy and depreciation.       Because a significant portion of our research and development expenses (including employee payroll and related benefits, laboratory supplies, travel, dues and subscriptions, temporary help costs, consulting costs and allocable costs such as occupancy and depreciation) benefit multiple projects or our drug delivery technologies in general, we do not track these expenses by project. On August 31, 2005, we discontinued all research and development activities and terminated substantially all of our non-management personnel. For the fiscal year ended December 31, 2005, we spent $2,291,721 on research and development, including $22,965 and $111,739 in costs associated with clinical trials for EcoNail and Opterone, respectively, and $2,157,017 in costs not specifically tracked to a project. For the fiscal year ended December 31, 2004, we spent $4,221,039 on research and development, including $469,515, $1,109,345 and $388,360 in costs associated with our clinical trials for EcoNail, Opterone and Topiglan (our topical formulation of SEPA and alprostadil for treatment of erectile dysfunction), respectively, and $2,253,819 in costs not specifically tracked to a project. For the fiscal year ended December 31, 2003, we spent approximately $2,938,026 on research and development, including $1,584,000 in costs associated with our clinical trial for Topiglan and $1,354,026 in costs not specifically tracked to a project. EcoNail and Opterone were not in clinical trials in 2003. Following a complete review of the results of a Phase 2 pharmacodynamic study of Topiglan in which Topiglan did not meet its primary clinical endpoints, we have no plans for further clinical studies of Topiglan. Accordingly, as of June 30, 2004, we recorded a reduction of $124,853 to the carrying value of certain patent assets related to Topiglan. For the year ending December 31, 2006, we expect to continue to spend significant amounts on clinical trials for EcoNail.       Each of our research and development programs is subject to risks and uncertainties, including the requirement to seek regulatory approval, that are outside of our control. Moreover, the product candidates identified in these research and development programs, which currently are in developmental stages, must overcome significant technological, manufacturing and marketing challenges                                          34   before they can be successfully commercialized. As a result of these risks and uncertainties, we are unable to predict with any certainty the period in which material net cash inflows from these projects could be expected to commence or the completion date of these programs. For example, we are seeking a partner to advance development of our Opterone product candidate. We cannot predict whether our efforts to find a partner will be successful nor can we predict the manner and timing in which any eventual partner may elect to pursue development of Opterone. In addition, these risks and uncertainties also prevent us from estimating with any certainty the specific timing and future costs of our clinical development programs, although historical trends at similarly situated companies indicate that research and development expenses tend to increase in later stages of clinical development. Our failure to obtain requisite governmental approvals timely or at all will delay or preclude us from licensing or marketing our products or limit the commercial use of our products, which could adversely affect our business, financial condition and results of operations.       MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and administrative expenses consist primarily of salaries and other related costs for personnel, marketing and promotion, professional fees and facilities costs. Assuming we are able to raise sufficient capital, we anticipate that marketing, general and administrative expenses will increase over the next several years as we begin, when appropriate, to license, partner, or market our product candidates if and when they receive regulatory approval.  CRITICAL ACCOUNTING POLICIES AND ESTIMATES       Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to our financial statements included elsewhere in this Annual Report on Form 10-K includes a summary of the significant accounting policies and methods we use in the preparation of our financial statements. The following is a brief discussion of the more significant accounting policies and methods that affect the judgments and estimates used in the preparation of our financial statements.       RESEARCH AND DEVELOPMENT REVENUE. Generally, we recognize research and development funding as revenue at the time the research and development activities are performed under the terms of the related agreements, when the counterparty is obligated to pay, and when no future performance obligation exists. We make estimates of the status of performance with respect to research and development contracts. In the past, we have found such estimates to be sufficiently accurate for revenue recognition purposes. We bill research and development revenue on a cost reimbursement basis, which includes direct costs we incur in connection with research activities and an allocation of certain other costs we incur.       PATENT ASSETS. We defer costs and expenses incurred in connection with pending patent applications. We amortize costs related to successful patent applications over the estimated useful lives of the patents using the straight-line method. We charge accumulated patent costs and deferred patent application costs related to patents that are considered to have limited future value to operations. Estimates we use to determine the future value of deferred patent costs include analysis of potential market size, time and cost to                                          35   complete clinical trials, anticipated interest in our products and potential value for licensing or partnering opportunities. We recognize revenues derived or expected to be derived from the sale, assignment, transfer, or licensing of patents or other intellectual property based upon the terms of the relevant agreement.       DEFERRED TAXES. As part of the process of preparing our financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. In addition, as of December 31, 2005, we had federal tax net operating loss carryforwards of approximately $69,339,393, which expire through 2025. We also have research and development credit carryforwards of $2,432,167. We have recorded a valuation allowance to fully offset against these otherwise recognizable net deferred tax assets due to the uncertainty surrounding the timing of the realization of the tax benefit. In the event that we determine in the future that we will be able to realize all or a portion of the net deferred tax benefit, an adjustment to deferred tax valuation allowance would increase net income in the period in which such a determination is made. The utilization of net operating loss carryforwards and credits available to be used in any given year may be limited in the event of significant changes in ownership interest, as defined.  RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004       We had no revenues for the years ended December 31, 2005 and December 31, 2004. For the year ending December 31, 2006, we do not expect to have any revenues.       Research and development costs for 2005 decreased by $1,929,318, from $4,221,039 in 2004 to $2,291,721 in 2005, a 45.7% decrease. The decrease is primarily attributable to the cessation of research and development activities in August 2005, including a reduction in spending on clinical trials of $1,832,516 compared with 2004 and a reduction in payroll and related expenses of $204,494 in 2005 as a result of a staff reduction in August 2005. The decrease in research and development costs as a result of these reductions was offset in part by increases in payments to technical consultants of $115,000 and other miscellaneous research expenses. For the year ending December 31, 2006, we expect to incur clinical trial costs of approximately $750,000.       Marketing, general and administrative costs for 2005 decreased by $1,170,360, from $4,158,452 in 2004 to $2,988,092 in 2005, a 28.0% decrease. The decrease is primarily attributable to a staff reduction in August 2005 which resulted in a reduction of salary and related expenses of $524,562. In addition, in 2005 legal and audit expenses decreased by approximately $230,000, travel expenses decreased by $40,000, insurance expenses decreased by $75,000, consulting and investor relations expenses decreased by $320,000 and market development expenses decreased by $110,000. The aggregate decrease in marketing, general and administrative costs was offset, in part, by a payment of approximately $370,000 to certain executive officers and administrative staff under transition agreements. For the year ending December 31, 2006, we expect marketing, general and administrative costs to approximate $2,200,000.                                         36        As reported on a Current Report on Form 8-K filed on September 7, 2005, the Company terminated substantially all its non-management personnel on August 31, 2005. The costs associated with this staff reduction and related expenses were approximately $156,839. As reported on a Current Report on Form 8-K filed on September 16, 2005, the Company entered into transition agreements with its executive officers in September 2005. The transition agreements terminated the existing employment and severance agreements between the Company and each executive. Pursuant to the terms of the transition agreements, the executives agreed that they would remain employed by the Company until November 30, 2005. Three executives executed amendments to their transition agreements extending their employment through December 31, 2005 and beyond. The total costs associated with all executive transition agreements were approximately $709,646. Of this total, approximately $320,000 was charged to marketing, general and administrative expenses. These agreements also provided for aggregate payments of approximately $35,000 on November 30, 2005 and $35,000 on December 15, 2005.       Total other income decreased by $39,421 or 37.5%, from $104,971 in 2004 to $65,550 in 2005. The decrease is attributable to lower cash balances available for investment purposes in 2005.       For the year ended December 31, 2005, our net loss was $5,760,475 as compared to a loss of $8,274,521 for the previous year, a 30.4% decrease, which was due to the factors mentioned above.  YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003       We had no revenues for the year ended December 31, 2004. Revenues for the year ended December 31, 2003 were $1,010,031, nearly all of which was attributable to the proceeds from the sale of a patent (U.S. Patent No. 6,459,124), which related to antifungal topical compositions but which did not use our SEPA platform technology. Accordingly, we believe the sale of the patent will not materially adversely affect our future operations, cash flows and financial position.       Research and development costs increased by $1,283,013 from $2,938,026 in 2003 to $4,221,039 in 2004, a 44 % increase. The increase in research and development costs for 2004 is primarily attributable to an increase in employee compensation of $177,034 associated with the addition of four new research and development employees in late 2003 as well as an increase in clinical trials and related costs of $1,034,555. Of total research and development expenses, $361,141 in 2004 and $494,909 in 2003 were paid to independent third party contractors.       Marketing, general and administrative expenses for 2004 aggregated $4,158,452, an increase of $360,360 or 9%, from 2003's total of $3,798,092. The increase in marketing, general and administrative expenses for 2004 is primarily attributable to an increase of $239,942 (which increase was calculated by excluding $55,000 in consulting fees paid to Robert J. DeLuccia in his role as interim Chief Executive Officer during the six months ended June 30, 2003) in consulting fees relating to investor relations and business development, and an increase in accounting related fees of $129,700. The increase is further attributable to the reduction to the carrying value of certain patent assets related to Topiglan of $124,853. Finally, the aggregate size of the increase in                                         37  marketing, general and administrative expenses for 2004 was partially offset by savings in recruitment costs as well as a reduction in the premium for Directors and Officers Insurance.       Total other income increased by $34,578 or 49%, from $70,393 in 2003 to $104,971 in 2004. The increase is attributable primarily to higher cash balances available for investment purposes.       For the year ended December 31, 2004, our net loss was $8,274,521 as compared to a loss of $5,661,694 for the previous year, a 46% increase, which was due to the factors mentioned above.  LIQUIDITY AND CAPITAL RESOURCES       Since inception, our primary source of funding for our operations has been the private and public sale of our securities, and, to a lesser extent, the licensing of our proprietary technology and products, research collaborations, feasibility studies, government grants and the limited sales of products and test materials. During 2003, we received net proceeds of $99,575 from the exercise of stock options and warrants, and net proceeds of $2,971,605 as a result of the sale of our common stock in a private placement. During 2004, we received net proceeds of $443,817 from the exercise of warrants, and proceeds of $6,681,275 (net of issuance costs) as a result of the sale of our common stock in a private placement financing transaction. During 2005, we received net proceeds of $87,500 from the exercise of warrants, and proceeds of $815,000 ($601,342 net of issuance costs) as a result of the sale of our common stock and proceeds of $2,500,000 ($2,125,943 net of issuance costs) as a result of the sale of our Series C Cumulative Convertible Preferred Stock in private placement financing transactions. On February 13, 2006, we received gross proceeds of $5,755,000 ($5,265,100 net of issuance costs but before legal and accounting) as a result of the sale of our Series C Cumulative Convertible Preferred Stock in a private placement financing transaction.       At December 31, 2005, working capital was approximately $2.7 million, compared to $5.6 million at December 31, 2004. The decrease in our working capital reflects the use of funds in operations, partially offset by the receipt of private placement proceeds and net proceeds from the exercise of warrants. On March 9, 2004, we sold approximately 128,619 shares of our common stock for $7,292,700 in gross proceeds ($6,681,275 net of issuance costs) in a private placement to institutional investors. The investors also received warrants to purchase approximately 25,717 shares of common stock at a purchase price of $87.78 per share expiring five years from the closing date. On April 19, 2005, we sold approximately 65,040 shares of our common stock to institutional investors and to certain executive officers and directors of the Company for $815,000 in gross proceeds ($601,342 net of issuance costs). The investors also received warrants to purchase approximately 32,520 shares of common stock at exercise prices $14.70 for the institutional investors and $21.84 for the officers and directors. On December 23, 2005, we sold 250 shares of Series C Cumulative Convertible Preferred Stock for $2,500,000 in gross proceeds ($2,125,943 net of issuance costs) in a private placement to institutional investors. The investors also received warrants to purchase 2,380,951 shares of common stock at an exercise of $1.26 per share. On February 13, 2006, we sold 575.5 shares of our Series C Cumulative Convertible Preferred Stock for $5,755,000 in gross proceeds ($5,265,100 net of issuance costs but before legal                                          38   and accounting) in a private placement to institutional investors. The investors also received warrants to purchase 5,480,961 shares of the Company's common stock at an exercise price of $1.26 per share. Until such time as we obtain agreements with third-party licensees or partners to provide funding for our anticipated business activities, or otherwise generate revenue from the commercialization of our products, we will use our working capital to fund our operating activities.       Pursuant to a plan approved by our Board of Directors in 1998, we are authorized to repurchase 23,809 shares of our common stock to be held as treasury shares for future use. During the fiscal year ended December 31, 2005, we did not repurchase any shares of common stock. At December 31, 2005, 529 repurchased shares remain available for future use and 16,180 shares remain available for repurchase under the plan.       Capital expenditures were $14,519 and patent development costs were $105,080 for the year ended December 31, 2005. Capital expenditures were $73,526 and patent development costs were $36,591 for the year ended December 31, 2004. We anticipate additional capital and patent expenditures will be approximately $100,000 for the fiscal year ending December 31, 2006.       On July 10, 2003, the Board of Directors approved retention payments for certain key employees, including certain executive officers, in order to enhance retention of those employees. We made payments of approximately $84,000 on January 8, 2004 and we made payments of approximately $153,000 on July 2, 2004. On August 31, 2005, at the direction of our Board of Directors, we discontinued all research and development activities and terminated substantially all of our non-management personnel. We made payments of approximately $156,839 in connection with this staff reduction and related expenses. In September 2005, the Company entered into transition agreements with its executive officers. The transition agreements terminated the existing employment and severance agreements between the Company and each executive. Pursuant to the terms of the transition agreements, the executives agreed that they would remain employed by the Company until November 30, 2005. Three executives executed amendments to their transition agreements extending their employment through December 31, 2005 and beyond. We made payments of approximately $709,646 in connection with all executive transition agreements. We also made aggregate payments of approximately $35,000 on November 30, 2005 and $35,000 on December 15, 2005 under a separate provision of the transition agreements. There are no further payments due as a result of the staff reduction or under the transition agreements.       As of December 31, 2005, we had $3,023,436 in cash, cash equivalents and short-term investments. As noted above, on February 13, 2006 we received $5,755,000 in gross proceeds ($5,265,100 net of issuance costs but before legal and accounting costs) from the sale of our Series C Preferred Stock and warrants to purchase shares of our common stock. We believe that our existing cash and cash equivalents will be sufficient to meet our operating expenses and capital expenditure requirements for at least the next twelve months. Our cash requirements may vary materially from those now planned because of changes in the focus and direction of our research and development programs, competitive and technical advances, patent developments or other developments. We will require additional financing to continue operations after we exhaust our current capital resources and to continue our long-term plans for clinical trials and                                          39   new product development. We expect to continue financing our operations through sales of our securities, strategic alliances or other financing vehicles, if any, that might become available to us on terms that we deem acceptable.       We do not enter into financial instrument transactions for trading or speculative purposes. We do not intend to establish any special purpose entity and do not have any material off balance sheet financing transactions. We do not believe that inflation will have any significant effect on the results of our operations.       At December 31, 2005, the Company had no long-term contractual obligations.  RECENT ACCOUNTING PRONOUNCEMENTS       In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS No. 123R"). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first fiscal year that begins after December 15, 2005. MacroChem Corporation expects to adopt SFAS No. 123R using the Statement's modified prospective application method. The Company does not yet have an estimate of the effect on its statements of operations of adopting SFAS No. 123R.       In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements" ("SFAS No. 154"). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The provisions of SFAS No. 154 are effective for accounting changes and corrections of errors made in fiscal periods beginning after December 15, 2005. The adoption of the provisions of SFAS No. 154 is not expected to have a material impact on the Company's financial position or results of operations.                                         40     SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)                                      FIRST            SECOND           THIRD            FOURTH                                 ----------------------------------------------------------------       2005 Quarters      Revenues                   $       ---      $       ---      $       ---      $       ---      Net Loss Attributable to      Common Stockholders        $(1,841,540)     $(1,526,346)     $(1,820,992)     $  (901,840)      Net Loss per Share         $     (1.99)     $     (1.56)     $     (1.83)     $     (0.87)      (basic and diluted)  2004 Quarters      Revenues                   $       ---      $       ---      $       ---      $       ---      Net Loss                   $(2,218,528)     $(2,453,570)     $(1,911,484)     $(1,690,939)      Net Loss per Share         $     (2.52)     $     (2.51)     $     (2.10)     $     (2.10)      (basic and diluted)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS       As of December 31, 2005, we were exposed to market risks, which relate primarily to changes in U.S. interest rates. Our cash equivalents and short-term investments are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of these financial instruments, generally one year or less, changes in interest rates would not have a material effect on our financial position. A hypothetical 10% change in interest rates would not have a material effect on our Statement of Operations or Cash Flows for the twelve months ending December 31, 2005, based on December 31, 2005 balances.       THE FOREGOING STATEMENTS IN THIS REPORT INCLUDE 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. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE THOSE DISCUSSED OR REFERRED TO IN ITEM 1A, RISK FACTORS.
The information required under this Item 8 is set forth on pages 41 through 61 of this report.                                          41                REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders of MacroChem Corporation:  We have audited the accompanying balance sheet of MacroChem Corporation (the "Company") as of December 31, 2005, and the related statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit in accordance with the auditing standards of the Public Company Accounting Standards Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.  In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2005, and the results of their operations and their cash flows for the year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.   /s/ VITALE, CATURANO & COMPANY, LTD.  Boston, Massachusetts March 20, 2006                                          42                REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders of MacroChem Corporation:  We have audited the accompanying balance sheets of MacroChem Corporation (the "Company") as of December 31, 2004, and the related statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the auditing standards of the Public Company Accounting Standards Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.  The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements at December 31, 2004, the Company's recurring losses from operations raised substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of the uncertainty.  /s/ DELOITTE & TOUCHE LLP  Boston, Massachusetts March 24, 2005                                         43                                  MACROCHEM CORPORATION                                  BALANCE SHEETS                                                                               Fiscal Year ended December 31,                                                                                  2005              2004                                                                               ----------        ----------    ASSETS Current assets:       Cash and cash equivalents                                              $ 3,023,436       $ 4,888,868       Short-term investments                                                         ---         1,185,406       Prepaid expenses and other current assets                                  106,761           328,908                                                                              -----------       -----------           Total current assets                                                 3,130,197         6,403,182  Property and equipment, net                                                       72,203           183,079  Other assets:       Patents, net                                                               579,053           523,603                                                                              -----------       -----------           Total other assets                                                     579,053           523,603                                                                              -----------       -----------  Total assets                                                                 $ 3,781,453       $ 7,109,864                                                                              ===========       ===========  LIABILITIES Current liabilities:       Accounts payable                                                       $   125,478       $   244,148       Accrued expenses and other liabilities                                     249,552           523,703                                                                              -----------       -----------           Total current liabilities                                              375,030           767,851  Deferred rent                                                                        ---             5,509 Warrants liability                                                             1,620,778               ---                                                                              -----------       ----------- Total liabilities                                                              1,995,808           773,360  Commitments and contingencies (Note 5)  Preferred stock, $.01 par value, 6,000,000 shares authorized,       250 shares Series C Convertible issued and outstanding at       December 31, 2005 (Notes 4 and 8)                                          330,243               ---                                                                              -----------       -----------                                                                                  330,243               ---  STOCKHOLDERS' EQUITY Common stock, $.01 par value, 100,000,000 shares authorized;       997,438 and 926,285 shares issued at December 31, 2005       and December 31, 2004, respectively                                          9,974             9,263 Additional paid-in capital                                                    84,089,530        83,320,908 Accumulated deficit                                                          (82,584,992)      (76,824,517) Less treasury stock, at cost, 529 and 1,482 shares at December 31, 2005       and December 31, 2004, respectively                                        (59,110)         (169,150)                                                                              -----------       ----------- Total stockholders' equity                                                     1,455,402         6,336,504                                                                              -----------       -----------  Total liabilities and stockholders' equity                                   $ 3,781,453       $ 7,109,864                                                                              ===========       ===========  See notes to financial statements.                                         44                                  MACROCHEM CORPORATION                             STATEMENTS OF OPERATIONS                                                                        Fiscal Year Ended December 31,                                                                   2005             2004             2003                                                                ----------       ----------      ----------     REVENUES       Sale of patent                                           $       ---      $       ---     $ 1,000,000      Research contracts                                               ---              ---          10,031                                                               -----------      -----------     -----------          TOTAL REVENUES                                               ---              ---       1,010,031  OPERATING EXPENSES       Research and development                                   2,291,721        4,221,039       2,938,026      Marketing, general and administrative                      2,988,092        4,158,452       3,798,092      Consulting fees with related parties                             ---              ---           6,000      Costs associated with staff reduction and transition          agreements                                               546,212              ---             ---                                                               -----------      -----------     -----------           TOTAL OPERATING EXPENSES                               5,826,025        8,379,492       6,742,118                                                               -----------      -----------     -----------  LOSS FROM OPERATIONS                                           (5,826,025)      (8,379,492)     (5,732,087)  OTHER INCOME       Interest income                                               65,550          104,971          70,393                                                               -----------      -----------     -----------           TOTAL OTHER INCOME                                        65,550          104,971          70,393                                                               -----------      -----------     -----------  NET LOSS                                                      $(5,760,475)     $(8,274,521)    $(5,661,694)                                                               ===========      ===========     ===========  BENEFICIAL CONVERSION FEATURE (NOTES 4 AND 8)                    (330,243)             ---             ---                                                               -----------      -----------     -----------  NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                  $(6,090,718)     $(8,274,521)    $(5,661,694)                                                               ===========      ===========     ===========  BASIC AND DILUTED NET LOSS PER SHARE                          $     (6.25)     $     (9.23)    $     (8.03)                                                               ===========      ===========     ===========  SHARES USED TO COMPUTE BASIC AND DILUTED NET LOSS PER SHARE       974,367          896,039         704,621                                                               ===========      ===========     ===========  STOCK BASED COMPENSATION INCLUDED IN:       Research and development                                 $       ---      $     8,069     $    39,128      Marketing, general and administrative                            ---           21,122          69,468                                                               -----------      -----------     -----------                                                               $       ---      $    29,191     $   108,596                                                               ===========      ===========     ===========   See notes to financial statements.                                         45                                   MACROCHEM CORPORATION                        STATEMENTS OF STOCKHOLDERS' EQUITY                                    Common Stock Shares                                 ------------------         Additional   Unearned                              Cost of      Total                                                    Common   Paid-In     Compen-   Accumulated               Treasury   Stockholders'                                 Issued  Treasury   Stock    Capital     sation      Deficit      Subtotal     Stock      Equity - ------------------------------------------------------------------------------------------------------------------------------------           BALANCE, JANUARY 1, 2003       670,548    (4,411) $ 6,705  $73,224,277  $  (382) $(62,888,302) $10,342,298  $(672,779) $ 9,669,519  Stock based compensation (1)         -         -        -      110,665   (2,069)            -      108,596          -      108,596 Exercise of common stock  options                         5,419         -       54       99,521        -             -       99,575          -       99,575 Stock issued to 401(k) trust         -     1,641        -     (304,439)       -             -     (304,439)   353,158       48,719 Issuance of common stock, net  108,420         -    1,084    2,970,521        -             -    2,971,605          -    2,971,605 Net loss                             -         -        -            -        -    (5,661,694)  (5,661,694)         -   (5,661,694)                                -------  --------  -------  -----------  -------  ------------  -----------  ---------  -----------   BALANCE, DECEMBER 31, 2003     784,387    (2,770)   7,843   76,100,544   (2,451)  (68,549,996)   7,555,941   (319,621)   7,236,320                                =======  ========  =======  ===========  =======  ============  ===========  =========  ===========  Stock based compensation (1)         -         -        -       26,740    2,451             -       29,191          -       29,191 Exercise of warrants             9,011         -       90      443,727        -             -      443,817          -      443,817 Stock issued to 401(k) trust         -     1,288        -      (91,411)       -             -      (91,411)   150,471       59,060 Issuance of common stock, net  128,619         -    1,286    6,679,989        -             -    6,681,275          -    6,681,275 Issuance of restricted stock     4,268         -       43      161,319                             161,362          -      161,362 Net loss                             -         -        -            -        -    (8,274,521)  (8,274,521)         -   (8,274,521)                                -------  --------  -------  -----------  --------  ------------  -----------  ---------  -----------   BALANCE, DECEMBER 31, 2004     926,285    (1,482) $ 9,263  $83,320,908  $     -  $(76,824,517) $ 6,505,654  $(169,150) $ 6,336,504                                =======  ========  =======  ===========  =======  ============  ===========  =========  ===========  Exercise of warrants             6,012         -       60       87,440        -             -       87,500          -       87,500 Stock issued to 401(k) trust         -       953        -      (94,431)       -             -      (94,431)   110,040       15,609 Issuance of common stock, net   65,141         -      651      417,430        -             -      418,081          -      418,081 Issuance of warrants in   connection with sale of            -         -        -      173,806        -             -      173,806          -      173,806   common stock Issuance of common stock   warrants to non-employees          -         -        -      184,377        -             -      184,377          -      184,377 Net loss                                                                           (5,760,475)  (5,760,475)         -   (5,760,475)                                -------  --------  -------  -----------  -------  ------------  -----------  ---------  -----------  BALANCE, DECEMBER 31, 2005     997,438      (529) $ 9,974  $84,089,530  $     -  $(82,584,992) $ 1,514,512  $ (59,110) $ 1,455,402                                =======  ========  =======  ===========  =======  ============  ===========  =========  ===========  (1) See following page for details. See notes to financial statements.                                                                                     (continued)                                          46                                   MACROCHEM CORPORATION                        STATEMENTS OF STOCKHOLDERS' EQUITY  (1)  Stock Based Compensation                                                                  Common Stock        Additional                                                               ----------------       Paid-In        Unearned                                                               Shares    Amount       Capital      Compensation      Total                                                               ----------------      ----------    ------------   ----------       2003 Issuance of common stock options to non-employees               ----    $ ----      $  35,108       $ (4,902)    $   30,206 Amortization and other changes in unearned compensation         ----      ----            (11)         2,833          2,822 Stock based compensation to employees and directors             ----      ----         75,568           ----         75,568                                                               ------    ------      ---------       --------     ----------                                                                 ----    $ ----      $ 110,665       $ (2,069)    $  108,596                                                               ======    ======      =========       ========     ========== 2004 Issuance of common stock options to non-employees               ----    $ ----      $  15,322       $   ----     $   15,322 Amortization and other changes in unearned compensation         ----      ----          4,093          2,451          6,544 Stock based compensation to employees and directors             ----      ----          7,325           ----          7,325                                                               ------    ------      ---------       --------     ----------                                                                 ----    $ ----      $  26,740       $  2,451     $   29,191                                                               ======    ======      =========       ========     ========== 2005 Issuance of common stock options to non-employees               ----    $ ----      $    ----       $   ----     $     ---- Amortization and other changes in unearned compensation         ----      ----           ----           ----           ---- Stock based compensation to employees and directors             ----      ----           ----           ----           ----                                                               ------    ------      ---------       --------     ----------                                                                 ----    $ ----      $    ----       $   ----     $     ----                                                               ======    ======      =========       ========     ==========  See notes to financial statements.                                                                                       (concluded)                                           47                                  MACROCHEM CORPORATION                             STATEMENTS OF CASH FLOWS                                                                      Year Ended December 31,                                                         -----------------------------------------------                                                              2005             2004            2003                                                         --------------   --------------  --------------     CASH FLOWS FROM OPERATING ACTIVITIES      Net loss                                           $  (5,760,475)   $  (8,274,521)  $  (5,661,694)       Adjustments to reconcile net loss to net cash        used by operating activities:        Depreciation and amortization                          175,024          172,906         185,847        Stock-based compensation                                   ---          190,553         108,596        Loss on disposal                                           ---              767             ---        401(k) contributions in company common stock            15,610           59,060          48,719        Deferred rent                                           (5,509)         (27,854)        (14,346)        Reduction to capitalized patents                           ---          124,853             ---      Change in assets and liabilities:        Receivable due from related party                          ---              ---          25,057        Prepaid expenses and other current assets              222,147          (12,842)       (110,801)        Accounts payable and accrued expenses                 (392,821)        (212,111)        565,186        Deposits                                                   ---           29,193             ---                                                         -------------    -------------   ------------- Net cash used by operating activities                      (5,746,024)      (7,949,996)     (4,853,436)                                                         -------------    -------------   -------------  CASH FLOWS FROM INVESTING ACTIVITIES:      Sales of short-term investments                        1,185,406        2,000,000       5,000,000      Purchases of short-term investments                          ---          (15,883)        (51,178)      Expenditures for property and equipment                  (14,519)         (73,526)         (3,454)      Additions to patents                                    (105,080)         (36,591)        (94,396)                                                         -------------    -------------   ------------- Net cash provided by investing activities                   1,065,807        1,874,000       4,850,982                                                         -------------    -------------   -------------  CASH FLOWS FROM FINANCING ACTIVITIES:      Net proceeds from exercise of common stock        options                                                    ---              ---          99,575      Net proceeds from issuance of Series C        Cumulative Convertible Preferred Stock               2,125,943              ---             ---      Net proceeds from issuance of common stock               601,342        6,681,275       2,971,605      Proceeds from exercise of warrants                        87,500          443,817             ---                                                         -------------    -------------   ------------- Net cash provided by financing activities               $   2,814,785    $   7,125,092   $   3,071,180                                                         -------------    -------------   -------------   See notes to financial statements.                                                         (Continued)                                          48                                  MACROCHEM CORPORATION                       STATEMENTS OF CASH FLOWS (Continued)                                                                            Years Ended December 31,                                                              ---------------------------------------------                                                                  2005              2004            2003                                                                  ----              ----            ----      NET CHANGE IN CASH      AND CASH  EQUIVALENTS                                   $(1,865,432)      $ 1,049,096     $ 3,068,726  CASH AND CASH EQUIVALENTS,      BEGINNING OF YEAR                                         4,888,868         3,839,772         771,046                                                              -----------       -----------     -----------  CASH AND CASH EQUIVALENTS,      END OF YEAR                                             $ 3,023,436       $ 4,888,868     $ 3,839,772                                                              ===========       ===========     ===========  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  The Company did not pay any cash for interest expense or income taxes during the years ended December 31, 2005, 2004 and 2003.  In April 2005, the Company issued warrants to purchase 32,520 shares of its Common Stock to institutional investors in connection with the sale of Common Stock. The warrants were valued at $173,806 based on the relative fair value of the warrants. In April of 2005, the Company issued a warrant for the purchase of 1,190 shares of its Common Stock to the placement agent in connection with the sale of Common Stock. The warrant was valued using the Black Scholes model at $9,455 and is recorded as a non-cash issuance cost.  In December of 2005, the Company issued warrants to purchase 2,380,951 shares of its Common Stock to institutional investors in connection with the sale of Series C Cumulative Convertible Preferred Stock. The warrants were valued at $1,620,778 based on the fair value of the warrants. In December of 2005, the Company issued warrants for the purchase of approximately 238,095 shares of its Common Stock to the designees of the placement agent in connection with the sale of Series C Cumulative Convertible Preferred Stock. The warrant was valued using the Black Scholes model at $174,922 and is recorded as a non-cash issuance cost.   See notes to financial statements.                                                             (Concluded)                                           49                                 MACROCHEM CORPORATION                           NOTES TO FINANCIAL STATEMENTS       All references to share amounts, share prices and per share data in these Notes to Financial Statements reflect both the 1-for-7 reverse stock split effected on December 30, 2005 and the 1-for-6 reverse stock split effected on February 9, 2006. Accordingly, where appropriate, share amounts, share prices and per share data have been adjusted to give retroactive effect of the reverse splits.  1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.       MacroChem Corporation (the "Company") is a specialty pharmaceutical company that develops and seeks to commercialize pharmaceutical products using its proprietary drug delivery technologies.       The Company has been engaged primarily in research and development since its inception in 1981 and has derived limited revenues from the commercial sale of its products, licensing of certain technology and feasibility studies. The Company has had no revenues relating to the sale of any products currently under development. The Company has incurred net losses every year since its inception and the Company anticipates that losses may continue for the foreseeable future. At December 31, 2004, the Company's accumulated deficit was approximately $76.8 million. At December 31, 2004, the Company believed that its existing cash and cash equivalents were sufficient to fund operations under the Company's operating plan until July 2005. At December 31, 2005, the Company's accumulated deficit was approximately $82,584,992. The Company's ability to continue operations after its current capital resources are exhausted depends on its ability to obtain additional financing and achieve profitable operations, as to which no assurances can be given. The Company believes that its existing cash and cash equivalents will be sufficient to fund operations under the Company's current plan for at least the next twelve months. The Company's cash requirements may vary materially from those now planned because of changes in the focus and direction of its research and development programs, competitive and technical advances, patent developments or other developments.       The Company organizes itself as one segment reporting to the chief executive officer. Products and services consist primarily of research and development activities in the pharmaceutical industry.       ACCOUNTING ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The primary estimates underlying the Company's financial statements include the fair market value of warrants included in liabilities, the carrying value and useful lives of the Company's patents and property and equipment, the valuation allowance established for the Company's deferred tax assets, and the underlying assumptions to apply the pricing model to value stock options under SFAS No. 123. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances, and while actual results could differ from those estimates, management does not believe that any change in those                                          50   assumptions in the near term would have a significant effect on the financial position or the results of operations.       FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash equivalents, accounts payable and accrued expenses approximate their fair value because of their short-term nature. Short-term investments are carried at aggregate fair value.       CONCENTRATION OF RISK - Cash and cash equivalents and short-term investments at December 31, 2005 and 2004 are primarily comprised of government agency securities and certificates of deposit.       CASH AND CASH EQUIVALENTS - Cash equivalents consist of short-term, highly liquid investments with a maturity of three months or less when purchased.       SHORT-TERM INVESTMENTS - Short-term investments are a liquid money market mutual fund with a carrying value of $0 and $1,185,406 at December 31, 2005 and 2004, respectively.       PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the related assets, which range from three to ten years.       PATENTS - The Company has filed applications for United States and foreign patents covering aspects of its technology. 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, not exceeding 20 years, 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 expense. Accumulated amortization aggregated approximately $324,008 and $274,379, respectively, at December 31, 2005 and 2004. On an on-going basis, the Company evaluates the recoverability of the net carrying value of various patents by reference to the patent's expected use in drug and other research activities as measured by outside interest in the Company's patented technologies and management's determination of potential future uses of such technologies.       LONG-LIVED ASSETS - The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of such assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Following a complete review of the results of a Phase 2 pharmacodynamic study of Topiglan in which Topiglan did not meet its primary clinical endpoints, the Company has no plans for further clinical studies of Topiglan at this time. Accordingly, in 2004, the Company recorded a reduction of $124,853 to the carrying value of certain patent assets related to Topiglan.       REVENUE RECOGNITION - The Company's business seeks to generate revenues through the development, commercialization and licensing of drug products based upon the Company's intellectual property. Revenues derived or expected to be derived from the sale, assignment, transfer or licensing of patents or other                                          51   intellectual property are recognized based upon the terms of the relevant agreement.       RESEARCH AND DEVELOPMENT - Research and development costs are charged to operations as incurred. Such costs include proprietary research and development activities and expenses associated with research and development contracts, whether performed by the Company or contracted with independent third parties.       STOCK BASED COMPENSATION - The Company has applied the intrinsic value method of accounting for stock options and awards granted to employees. The Company has accounted 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-based awards to non-employees is determined based on the estimated fair value of the award itself, measured using either current market data or an established option pricing model. The measurement date for non-employee awards is generally the date performance of services is complete.       The Company has used 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:                                                       2005          2004          2003                                                -----------   -----------   -----------     Net loss attributable to common      stockholders as reported                  $(6,090,718)  $(8,274,521)  $(5,661,694)  Add:    Stock-based employee compensation      expense included in reported net loss             ---         7,325        75,568  Deduct: Total stock-based employee compensation      measured using the fair value method         (733,414)   (1,038,725)   (1,449,341)                                                -----------   -----------   -----------  Pro forma net loss                             $(6,824,132)  $(9,305,921)  $(7,035,467)                                                ===========   ===========   ===========  Basic and diluted net loss per share - as      reported                                  $     (6.25)  $     (9.23)  $     (8.03)                                                ===========   ===========   ===========  Basic and diluted net loss per share - pro      forma                                     $     (7.00)  $    (10.39)  $     (9.98)                                                ===========   ===========   ===========                                          52        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:                                                      2005             2004              2003                                             -------------     -------------     -----------     Risk-free interest rate                     3.82% - 4.25%     3.05% - 4.14%     2.62%-3.47% Expected life of option grants                 6 years           6 years          6 years Expected volatility of underlying stock          100%              97%              97% Expected dividend payment rate, as a    percentage of the stock price on the    date of grant                                 ---               ---              ---        The weighted average fair values of options granted during 2005, 2004 and 2003 were $10.02, $51.24 and $36.12, respectively.       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.       INCOME TAXES - The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company's financial statements or tax returns. Deferred tax assets and liabilities are determined based upon the difference between the financial reporting basis and the tax basis of existing assets and liabilities using enacted tax rates expected to be in effect in the year(s) in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets if it is more likely than not that such assets will not be realized.       REVERSE STOCK SPLITS - On December 30, 2005 we implemented a 1-for-7 reverse stock split of our common stock and on February 9, 2006 we implemented a subsequent 1-for-6 reverse stock split of our common stock. Unless otherwise noted, data used throughout the Financial Statements have been adjusted to reflect these reverse splits.       NET LOSS PER SHARE - Basic earnings per share is computed using the weighted average number of common shares outstanding during each year. Diluted earnings per common share reflect the effect of the Company's outstanding options and warrants, except where such items would be anti-dilutive. Due to the net losses reported in 2005, 2004 and 2003, basic and diluted per share amounts are the same. For the years ended December 31, 2005, 2004 and 2003, 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 under the treasury stock method for 2005, 2004 and 2003 were 2,807,673, 155,919 and 129,785 shares, respectively.       RECENT ACCOUNTING PRONOUNCEMENT - In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS No. 123R"). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R                                          53   focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the fiscal year that begins after December 15, 2005. MacroChem Corporation expects to adopt SFAS No. 123R using the Statement's modified prospective application method. The Company does not yet have an estimate of the effect on its statements of operations of adopting SFAS No. 123R.       In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements" ("SFAS No. 154"). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The provisions of SFAS No. 154 are effective for accounting changes and corrections of errors made in fiscal periods beginning after December 15, 2005. The adoption of the provisions of SFAS No. 154 is not expected to have a material impact on the Company's financial position or results of operations.  2.   PROPERTY AND EQUIPMENT.       Property and equipment consists of the following as of December 31:                                                                2005             2004                                                         -----------      -----------                    Laboratory equipment                            $ 1,139,249      $ 1,125,978         Office equipment                                    489,459          488,208         Leasehold improvements                              250,049          250,048                                                         -----------      -----------                Total                                      1,878,757        1,864,234          Less:  accumulated depreciation                  (1,806,554)      (1,681,155)                                                          ----------       ----------          Property and equipment, net                     $    72,203      $   183,079                                                         ===========      ===========   3.   ACCRUED EXPENSES.       Accrued expenses and other liabilities consists of the following as of December 31:                                                               2005             2004                                                         -----------      -----------    Accrued professional fees                               $   115,192      $   101,000 Accrued clinical trial costs                                    ---           23,108 Accrued bonuses                                                 ---          213,688 Accrued vendor invoices                                     134,360          185,907                                                         -----------      -----------                                                          $   249,552      $  523, 703                                                         ===========      ===========                                          54   4.   STOCKHOLDERS' EQUITY.       AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of 100,000,000 shares of $.01 par value common stock of which 997,438 shares are issued (996,909 are outstanding) and 5,177,429 are reserved for issuance upon exercise of common stock options and warrants and conversion of Series C Cumulative Convertible Preferred Stock at December 31, 2005. Authorized preferred stock totals 6,000,000 shares, of which 500,000 shares have been designated Series A Preferred Stock, 600,000 shares have been designated Series B Preferred Stock and 1500 shares have been designated Series C Cumulative Convertible Preferred Stock (250 shares were outstanding at December 31, 2005). The Series C Preferred Stock has a liquidation value of $10,000 per share, is entitled to a dividend of 10% per annum, payable in cash or shares of our common stock at our option, which dividend rate is subject to increase to 14% upon the occurrence of certain events. The Series C Preferred Stock is redeemable at the holder's election in the event the Company fails or refuses to convert any shares of Series C Preferred Stock in accordance with the terms of the Certificate of Designation, Rights and Preferences of the Series C Preferred Stock. The number of shares of common stock into which each share of Series C Preferred Stock is convertible is determined by dividing the liquidation value per share plus all accrued and unpaid dividends thereon by $1.05. The conversion price for the Series C Preferred Stock and the warrant exercise price are each subject to a reset adjustment such that if the average of the price of the common stock over the twenty trading days immediately preceding May 8, 2006 (the "Average Price") is lower than the conversion and/or exercise price, then such conversion and/or exercise price shall be adjusted to equal the Average Price. During 1998, the Company's Board of Directors authorized the repurchase of up to 23,809 shares of common stock at market price. The Company repurchased no shares in 2003, 2004 and 2005. At December 31, 2005, 529 repurchased shares remain available for future use and 16,180 shares are available to be repurchased.       STOCK SALES - In September 2003, the Company sold 108,420 shares of common stock and warrants to purchase 21,684 shares of common stock to primarily institutional investors. Gross proceeds were $3,246,000 ($2,971,505 net of issuance costs) and were allocated between the common stock and the warrants based on the relative fair value of the warrants and common stock. In March 2004, the Company sold 128,619 shares of common stock and warrants to purchase 25,723 shares of common stock to primarily institutional investors. Gross proceeds were $7,292,700 ($6,681,274 net of issuance costs) and were allocated between the common stock and the warrants based on the relative fair value of the warrants and common stock. In April 2005, the Company sold approximately 65,040 shares of common stock and warrants to purchase 32,520 shares of common stock to institutional investors and to certain executive officers and directors of the Company. Gross proceeds were $815,000 ($601,342 net of cash issuance costs) and were allocated between the common stock and the warrants based on the relative fair value of the warrants and common stock. In December 2005, the Company sold 250 shares of Series C Cumulative Convertible Preferred Stock and warrants to purchase 2,380,951 shares of common stock to institutional investors. Gross proceeds were $2,500,000 ($2,125,943 net of cash issuance costs) and were allocated between the Series C Cumulative Convertible Preferred Stock and the warrants based on the fair value of the warrants.       WARRANTS - On December 23, 2005, the Company closed a private placement in which institutional investors received warrants to purchase 2,380,951 shares of common stock at an exercise of $1.26 per share for a period of six years. As of December 31, 2005, none of these $1.26 warrants had been exercised. The                                          55   placement agent in this transaction received a warrant to purchase approximately 238,905 shares of common stock at a purchase price of $1.05 for a period of five years. As of December 31, 2005, none of the $1.05 warrants issued to the placement agent had been exercised. In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," the warrants are included as a liability and valued at fair market value until the Company meets the criteria under EITF 00-19 for permanent equity. The Company valued the warrants at $1,620,778 on December 31, 2005 using the Black-Scholes method with the following assumptions: a risk-free interest rate of 4.18%, volatility of 100%, and a dividend yield of 0%.       On April 19, 2005, the Company closed a private placement in which institutional investors and certain executive officers and directors of the Company received warrants to purchase approximately 32,520 shares of common stock for a period of five years. The exercise price of the warrants is $14.70 per share for the institutional investors and $21.84 for the participating executive officers and directors. As of December 31, 2005, approximately 6,012 of the $14.70 warrants issued to the institutional investors had been exercised and none of the $21.84 warrants issued to participating executive officers and directors had been exercised. The placement agent in this transaction received a warrant to purchase approximately 1,190 shares of common stock at a purchase price of $14.70 for a period of five years. As of December 31, 2005, none of the $14.70 warrants issued to the placement agent had been exercised.       During 2004, the Company conducted a private placement in which primarily institutional investors received warrants to purchase an aggregate of 25,723 shares of common stock at a purchase price of $87.78 per share for a period of five years. As of December 31, 2005, none of the $87.78 warrants had been exercised.       During 2003, the Company conducted a private placement in which primarily institutional investors received warrants to purchase an aggregate of 21,684 shares of common stock at a purchase price of $49.266 per share for a period of three years. As of December 31, 2005, 9,011 of the $49.266 warrants issued to the institutional investors had been exercised. The placement agent in this transaction received a warrant to purchase 3,571 shares of common stock at a purchase price of $49.266 for a period of three years. As of December 31, 2005, none of the $49.266 warrants issued to the placement agent had been exercised.       During 2001, institutional investors received warrants to purchase an aggregate of 7,457 shares of common stock at a purchase price of $277.62 per share expiring in five years in connection with a private placement. The warrants are callable by the Company if the closing price of the stock is higher than $755.58 for 15 consecutive trading days at any time before expiration. As a result of subsequent financing transactions, the exercise price of these warrants has been adjusted to $277.62 in accordance with the terms of the warrants. As of December 31, 2005, none of these warrants had been exercised.       All share amounts and prices have been adjusted to reflect the 1-for-7 reverse stock split effective December 30, 2005 and the 1-for-6 reverse stock split effective February 9, 2006.       STOCK OPTION PLANS - The Company has four stock option plans, the 1984 Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option Plan (Non-Qualified Plan), the 1994 Equity Incentive Plan (1994 Plan) and the 2001 Incentive Plan (the 2001 Plan).                                         56        Under the terms of the 1984 ISO and Non-Qualified Plans, the Company may no longer award any options. All options previously granted may be exercised at any time up to ten years from the date of award.       Under the terms of the 1994 Plan, the Company may no longer award any options. All options previously granted under the 1994 Plan may be exercised at any time up to ten years from the date of award.       Under the terms of the 2001 Plan, the Company may grant options to purchase up to a maximum of 123,809 shares of common stock to certain employees, directors and consultants. On June 23, 2004, at the Company's Annual Meeting of Stockholders, the Company's stockholders approved an amendment to the Company's 2001 Incentive Plan to increase the number of shares of Common Stock authorized for issuance under the Incentive Plan by 95,238 from 28,571, resulting in a maximum of 123,809 shares of common stock that may be granted as options. The options may be awarded as incentive stock options (employees only) and non-incentive stock options (certain employees, directors and consultants).       The 2001 Plan, 1994 Plan and the ISO Plan state that the exercise price of options shall not be less than fair market value at the date of grant.       The following table presents activity under all stock option plans:                                                                    Weighted Average                                          Number of Options       Exercise Price                                          -----------------      ----------------                    Outstanding December 31, 2002        102,951                $ 160.44             Granted                           10,633                   47.04             Exercised                         (5,419)                  18.48             Canceled                         (21,158)                  92.40                                          -----------------      ----------------         Outstanding December 31, 2003         87,007                  171.78             Granted                            9,142                   68.04             Exercised                            ---                     ---             Canceled                         (11,619)                 125.16                                          -----------------      ----------------         Outstanding December 31, 2004         84,530                  167.16             Granted                           39,319                   12.67             Exercised                            ---                     ---             Canceled                         (17,153)                  29.85                                          -----------------      ----------------         Outstanding December 31, 2005        106,696                  132.24                                          =================      ================         Exercisable at December 31: 2005      88,360                $ 153.81                                          =================      ================                                     2004      67,993                $ 192.78                                          =================      ================                                     2003      71,024                $ 190.26                                          =================      ================                                           57        The following table sets forth information regarding options outstanding at December 31, 2005:                                                             Weighted Ave.                       Weighted Ave.                         Number of          Number           Exercise                        Exercise Price-  Range of Exercise       Options         Currently       Price-Options     Weighted Ave.       Currently       Prices           Outstanding      Exercisable       Outstanding      Remaining Life     Exercisable  -----------------     -----------      -----------      -------------     --------------   ---------------            $7.98 - 17.22         26,715            14,778           $ 13.99            9.37             $ 17.22    26.46 - 48.30         16,885            14,977             37.61            7.25               32.15   53.34 - 111.51         17,694            13,203             84.51            6.61               89.98   126.84 - 246.75        26,339            26,339            215.03            2.35              215.03   249.40 - 532.90        19,063            19,063            311.71            4.08              311.71                        -----------      -----------      -------------     --------------   --------------- TOTAL                   106,696            88,360           $ 132.24           5.90             $153.81                        ===========      ===========      =============     ==============   ===============        All options granted during the three year period ended December 31, 2005 were granted with an exercise price equal to the market price of the stock.       At December 31, 2005, the Company has reserved 2,807,673 shares of common stock for issuance under all stock option plans and for warrants outstanding.       UNEARNED COMPENSATION - The following table sets forth the changes to the Company's reported unearned compensation for the years ended December 31, 2005, 2004 and 2003 for the non-employee options:                                                                  2005              2004             2003                                                          -------------     --------------   --------------               Balance, January 1                                  $         ---     $        2,451   $          382      Options, warrants and common stock granted to            non-employees valued at fair market value               ---             15,322            4,902      Amortization of unearned compensation                         ---            (17,773)          (2,822)      Other changes in unearned compensation                        ---                ---              (11)                                                          -------------     --------------   --------------      Balance, December 31                                $         ---     $          ---   $        2,451                                                          -------------     --------------   --------------       STOCK AND STOCK OPTION ISSUANCES TO NON-EMPLOYEES - During 2005, there were no options granted to non-employees or consultants. During 2004 and 2003, the Company issued 357 and 1,130 stock grants and options, respectively, to non-employees and consultants and recorded unearned compensation of $15,322 and $4,902, respectively.       STOCK AND STOCK OPTION ISSUANCES OUTSIDE THE STOCK OPTION PLANS - During 2003, an option to purchase 11,904 shares of common stock was granted to Robert J. DeLuccia, the Company's new Chief Executive Officer, of which 3,571 shares vested immediately, with the remainder vesting over two years, with an exercise price of $44.52 per share.       SHAREHOLDER RIGHTS PLAN - The Company has adopted a shareholder rights plan. The Company declared a dividend consisting of one Right for each share of common stock outstanding on September 10, 1999. Stock issued after that date will be issued with an attached Right.       Each Right entitles the holder, upon the occurrence of certain events, to purchase 42/100th of a share of Series B Preferred Stock of the Company at an initial exercise price of $2,100.00, subject to adjustments for stock dividends,                                          58   splits and similar events. The Rights are exercisable only if a person or group acquires 20% or more of the Company's outstanding common stock, or announces an intention to commence a tender or exchange offer, the consummation of which would result in ownership by such person or group of 20% or more of the Company's outstanding common stock.       On December 23, 2005, the shareholder rights plan was amended to provide that the acquisition of the Company's Series C Cumulative Convertible Preferred Stock and warrants to acquire shares of its common stock by the purchasers in the Company's recent private placement, and any subsequent acquisition by the purchasers of common stock upon the conversion or exercise of those securities, would not result in the Rights becoming exercisable.       The Board of Directors may, at its option after the occurrence of one of the events described above, exchange all of the then outstanding and exercisable Rights for shares of common stock at an exchange ratio of one share of common stock per Right.       The Board of Directors may redeem the Rights at the redemption price of $0.01 per Right at any time prior to the expiration of the rights plan on August 13, 2009. Distribution of the Rights is not a taxable event to shareholders.       The Board of Directors has authorized 600,000 shares of Series B Preferred Stock.  5.  COMMITMENTS AND CONTINGENCIES.       At December 31, 2005, the Company had no long-term contractual obligations.  6.  INCOME TAXES.       No income tax provision or benefit has been provided for federal or state income tax purposes as the Company has incurred losses in all periods reported and recoverability of these losses in future tax filings is uncertain. As of December 31, 2005, the Company has available net operating loss carryforwards of approximately $69,339,393 for federal income tax purposes, expiring through 2025 and $44,827,346 for state income tax purposes, expiring through 2010. In addition, the Company has unused investment and research and development tax credits for federal and state income tax purposes aggregating $1,576,194 and $855,973, respectively. The use of the federal net operating loss may also be restricted due to changes in ownership in accordance with definitions as stated in the Internal Revenue Code.       Income taxes computed using the federal statutory income tax rate differs from the Company's effective tax rate primarily due to the following:                                                           Year ended December 31,                                                          2005          2004                                                          ----          ----              Statutory U.S. federal tax rate                   (34.0%)        (34.0%)      State taxes, net of federal tax benefit            (6.2%)         (6.2%)      Federal research and development credits           (1.5%)         (0.6%)       Valuation allowance on deferred tax assets         41.7%          40.8%                                                        -------        ------                                                           -%            -%                                                        -------        ------                                          59        The net tax effect of differences in the timing of certain revenue and expense items and the related carrying amounts of assets and liabilities for financial reporting and tax purposes are not material and, accordingly, are not displayed in the table below. The components of the Company's deferred tax assets as of December 31, 2005 and 2004 are as follows:                                                                 2005               2004                                                          -------------     --------------              Deferred Tax Assets:        Net operating loss carryforwards                  $  26,386,000     $   24,927,000        Tax credit carryforwards                              2,432,000          2,546,000                                                          -------------     --------------                                                             28,818,000         27,473,000      Valuation allowance                                   (28,818,000)       (27,473,000)                                                          -------------     --------------      Deferred tax asset, net                             $         ---     $          ---                                                          =============     ==============        For the years ended December 31, 2005 and 2004, the valuation allowance was increased by approximately $1,345,000 and $2,639,000, respectively, due to the uncertainty of future realization of currently generated net operating loss and tax credit carryforwards.  7.  EMPLOYEE BENEFIT PLAN.       The Company sponsors a qualified 401(k) Retirement Plan (the "Plan") under which employees are allowed to contribute certain percentages of their pay, up to the maximum allowed under Section 401(k) of the Internal Revenue Code. Company contributions to the Plan are at the discretion of the Board of Directors. The Company contributed 953 shares of common stock in 2005, 1,286 shares of common stock in 2004 and 1,642 shares of common stock in 2003, valued at $15,610, $59,060 and $48,719, respectively. The Company also contributed $42,539 in cash to the Plan in 2005.  8.  SUBSEQUENT EVENT.       In February 2006, the Company completed a private placement of its securities to institutional investors, consisting of two closings, for approximately $8.25 million in gross proceeds. The first closing of the private placement, in which institutional investors acquired 250 shares of Series C Cumulative Convertible Preferred Stock and six-year warrants to purchase 2,380,951 shares of common stock at an exercise of $1.26 per share, for an aggregate purchase price of $2.5 million, took place on December 23, 2005 and is reflected in the financial statements at December 31, 2005. The second closing of the private placement, in which institutional investors acquired 575.5 shares of Series C Cumulative Convertible Preferred Stock and six-year warrants to purchase 5,480,961 shares of the Company's common stock at an exercise price of $1.26 per share, for an aggregate purchase price of approximately $5.75 million, occurred on February 13, 2006. As of December 31, 2005, none of the $1.26 warrants had been exercised. The placement agent in the transaction received a warrant to purchase approximately 548,095 shares of common stock at a purchase price of $1.05 for a period of six years. The Series C Preferred Stock has a liquidation value of $10,000 per share, is entitled to a dividend of 10% per annum, payable in shares of our common stock at our option, which dividend rate is subject to increase to 14% upon the occurrence of certain events. The number of shares of common stock into which each share of Series C Convertible Preferred Stock is convertible is determined by dividing the liquidation value per share plus all accrued and unpaid dividends thereon by $1.05. Unless a holder of Series C Cumulative Convertible Preferred Stock elects otherwise, its                                          60   ability to convert its Series C Cumulative Convertible Preferred Stock into common stock or to vote on an as-if-converted to common stock basis is restricted to the extent that such conversion would result in the holder owning more than 4.95% of our issued and outstanding common stock or voting together with the common stock on an as-if-converted to common stock basis in respect of more than 4.95% of our issued and outstanding common stock. The warrants issued in the private placement are subject to a similar restriction on their exercise. SCO Capital Partners LLC, Beach Capital LLC and Perceptive Life Sciences Master Fund Ltd. ("Perceptive") have elected not to be governed by these restrictions, although we have entered into an agreement with Perceptive whereby Perceptive's ability to convert or vote its shares of Series C Preferred Stock is subject to a beneficial ownership cap of 9.95% instead of 4.95%.
On January 24, 2006, Deloitte & Touche LLP ("Deloitte") resigned as our independent registered public accounting firm.       Deloitte's report relating to the financial statements of the Company for the year ended December 31, 2004 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to audit scope or accounting principles, except the report contained an explanatory paragraph relating to the Company's ability to continue as a going concern. Deloitte's report relating to the financial statements of the Company for the year ended December 31, 2003 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.       During the Company's fiscal years ended December 31, 2003 and December 31, 2004, and through January 24, 2006, the date which Deloitte resigned, the Company had no disagreement with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Deloitte's satisfaction, would have caused Deloitte to make reference to the subject matter of the disagreement in connection with its reports for such periods. During the Company's fiscal years ended December 31, 2003 and December 31, 2004, and through January 24, 2006, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.       On February 14, 2006 and effective the same date, on the recommendation of the Company's Audit Committee, the Company engaged Vitale, Caturano & Company Ltd. ("Vitale") as its independent registered public accounting firm to audit the Company's financial statements as of and for the fiscal year ending December 31, 2005 and to perform procedures related to the financial statements included in the Company's quarterly reports on Form 10-Q, beginning with quarter ended March 31, 2006.       During the two most recent fiscal years and through February 14, 2006, the Company has not consulted with Vitale on any matter which was the subject of any disagreement or any reportable event as defined in Regulation S-K Item 304(a)(1)(iv) and Regulation S-K Item 304(a)(1)(v), respectively, or on the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, relating to which either a written report                                          61   was provided to the Company or oral advice was provided that Vitale concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue.
As of the end of the period covered by this report, we carried out a review, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in the SEC rules promulgated under the Securities Exchange Act of 1934, as amended), which are designed to ensure that information required to be disclosed in our Securities and Exchange Commission reports is properly and timely recorded, processed, summarized and reported. Based upon that review, our Chief Executive Officer and Chief Financial Officer concluded that while our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic filings with the Securities and Exchange Commission, there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters. This constitutes a significant deficiency in financial reporting. However, at this time management has decided that, considering the employees involved and the control procedures in place, the risks associated with such lack of segregation are insignificant, and the potential benefits of adding additional employees to clearly segregate duties do not justify the expenses associated with such increases. Management will continue to evaluate this segregation of duties.       There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.  PART III
The following table and subsequent biographies set forth the year each of our current directors was first elected and the age, positions, and offices presently held by each director with the Company:            Name                      Age         Position with MacroChem - -----------------------------     ------    -------------------------------- John L. Zabriskie, Ph.D.            66      Chairman of the Board of Directors Robert J. DeLuccia                  60      President, Chief Executive Officer                                             and Vice Chairman of the Board of                                             Directors Michael A. Davis, M.D., Sc.D.       64      Director Paul S. Echenberg                   62      Director Peter G. Martin                     57      Director Jeffrey B. Davis                    42      Director Howard S. Fischer                   43      Director                                         62        The following is a brief summary of the background of each of our directors:       JOHN L. ZABRISKIE, PH.D., has served as a Director of MacroChem since 2000 and was elected Chairman of the Board of Directors in 2001. Since 2001, he has been a co-founder and Director of PureTech Ventures, LLC. From 1997 to 2000, he was Chairman, President and Chief Executive Officer of NEN Life Science Products, which was sold to Perkin Elmer. In 1994, Dr. Zabriskie became Chairman, President and Chief Executive Officer of Upjohn; he was responsible for Upjohn's merger with Pharmacia, and became Chief Executive Officer of the merged company. Before his appointment at Upjohn, he spent nearly 30 years with Merck & Company, rising to Executive Vice President and President of Merck Manufacturing Division. He is a member of the Board of Directors of PureTech Ventures, LLC (since 2000) and the following publicly traded companies: Array Biopharma (since 2001); Biosource International (since 2002); Momenta Pharmaceuticals, Inc. (since 2001); and Kellogg Company (since 1995). Dr. Zabriskie received a B.S. in chemistry from Dartmouth College and a Ph.D. in organic chemistry from the University of Rochester.       ROBERT J. DELUCCIA has served as our President and Chief Executive Officer and Vice Chairman of the Board of Directors since June 2003 and as a Director since 2000. From 1998 to 1999, Mr. DeLuccia served as President and Chief Executive Officer of Immunomedics, Inc., a Nasdaq-listed biopharmaceutical company focused on the development and commercialization of antibody diagnostic imaging and therapeutic products for cancer and infectious diseases. Prior to Immunomedics, he was President of Sterling Winthrop Pharmaceuticals, the U.S. subsidiary of Sanofi (now Sanofi-Aventis). Mr. DeLuccia began his career as a pharmaceutical sales representative for Pfizer and progressed to Vice President Marketing and Sales Operations for Pfizer's Roerig Division. He is also a member of the board of directors of IBEX Technologies, a publicly traded (TSX) pharmaceutical company specializing in the development of biological markers for diagnosis, monitoring and treatment of cancer and arthritis, and TOPIGEN Pharmaceuticals, Inc., a privately held biopharmaceutical company and developer of anti-inflammatory respiratory products. Mr. DeLuccia holds both a B.S. and an M.B.A. in marketing from Iona College.       MICHAEL A. DAVIS, M.D., SC.D., has served as a Director of MacroChem since 1997 and provided medical and pharmaceutical consulting services to MacroChem from 1991 to 2003. He currently is Medical Director of E-Z-EM, Inc., a public company engaged in supplying oral radiographic contrast media and medical devices. Dr. Davis served as a Director of E-Z-EM from 1995 to 2004 and currently holds the designation of Director Emeritus. In November of 2004 he was elected a Director and Chairman of the Executive Committee of OmniCorder Technologies, Inc. (renamed Advanced BioPhotonics, Inc.), a public company engaged in infrared imaging of perfusion. In January 2006, he was appointed Research Professor of Radiology at SUNY/Stony Brook. From 1980 to 2002, Dr. Davis was Professor of Radiology and Nuclear Medicine and Director of the Division of Radiologic Research at the University of Massachusetts Medical School. From 1986 to 2002, he was Affiliate Professor of Biomedical Engineering at Worcester Polytechnic Institute. From 1982 to 1997, Dr. Davis was Adjunct Professor of Surgery at Tufts University School of Veterinary Medicine. In addition, from February to November 1999 he was President and Chief Executive Officer of Amerimmune Pharmaceuticals, Inc., a public company, and its wholly owned subsidiary, Amerimmune Inc., which is engaged in developing drugs relating to the immune system. From February 1999 to March 2003, Dr. Davis served as a Director of both Amerimmune Pharmaceuticals, Inc. and Amerimmune Inc. Dr. Davis                                          63   received a B.S. and M.S. from Worcester Polytechnic Institute, an S.M. and Sc.D. from the Harvard School of Public Health, an M.B.A. from Northeastern University and an M.D. from the University of Massachusetts Medical School.       PAUL S. ECHENBERG has served as a Director of MacroChem since 2000. Since 1997, he has been the President and Chief Executive Officer of Schroders & Associates Canada, Inc. and a director of Schroder Ventures Limited. These firms provide merchant banking advisory services to a number of Canadian buy-out funds. He is a director of the following publicly traded companies: E-Z-EM, Inc., AngioDynamics, Inc. and Benvest Capital Inc., a merchant bank that he co-founded. From 1989 through 1997, Mr. Echenberg was President of Eckvest Equity, Inc., a private merchant bank providing consulting and personal investment services that he founded. From 1970 to 1989, he was President and Chief Executive Officer of Twinpak, Inc., a manufacturer of plastic packaging, and from 1982 to 1989 he was Executive Vice President of CB Pak, Inc., a publicly traded plastic, glass and packaging company. Mr. Echenberg received a B.Sc. from McGill University and an M.B.A. from Harvard Business School.       PETER G. MARTIN has served as a Director of MacroChem since 1995. Since 1990, Mr. Martin has been an independent investment banker and venture capitalist and currently an advisor to Enzo Biochem. Prior to 1990, he was a commercial banker. Mr. Martin was initially elected to the Board of Directors as the designee of David Russell, who privately purchased one million shares of our Common Stock in 1995. Mr. Russell is no longer entitled to designate a Director of MacroChem. Mr. Martin received a B.A. and J.D. from Fordham University and an M.B.A. from Columbia University.       JEFFREY B. DAVIS has served as a Director of MacroChem since 2005. Since 1997, Mr. Davis has been president of SCO Securities LLC. Prior to joining SCO Securities LLC, from 1995 to 1997, Mr. Davis served as senior vice president and chief financial officer of HemaSure, Inc., a publicly traded development stage healthcare technology company. From 1990 to 1995, he was vice president, corporate finance, at Deutsche Morgan Grenfell, both in the U.S. and Europe. Prior to that, he served in senior marketing and product management positions at AT&T Bell Laboratories, where he was also a member of the technical staff, and he was involved in marketing and product management at Philips Medical Systems North America. Mr. Davis served previously on the board of Bioenvision, Inc. (Nasdaq: BIVN) and currently is a member of the board of directors of Virium Pharmaceuticals, Inc. and Access Pharmaceuticals, Inc., private biotechnology companies. Mr. Davis was initially elected to the Board of Directors as the designee of SCO Capital Partners LLC, who purchased three hundred shares of our Series C Cumulative Convertible Preferred Stock in a private placement closing in December 2005 and February 2006. SCO Capital Partners LLC has the right to designate two individuals to serve on our board of directors for as long as at least 20% of the shares of Series C Preferred Stock issued in that private placement remain outstanding. Mr. Davis holds a BS in biomedical engineering from Boston University and an MBA degree from The Wharton School, University of Pennsylvania.       HOWARD S. FISCHER has served as a Director of MacroChem since 2005. Since December 2005, Mr. Fischer has been a Managing Director of SCO Securities LLC. Prior to that, from January 2005 to September 2005 he was an investment manager and research analyst for Silverback Asset Management's life sciences fund. From 2001 to 2004, he was President of an independent healthcare advisory business,                                          64   providing consulting services to a number of venture capital firms and their portfolio companies, private equity groups and public and private corporations; in addition, he served as a valuation expert in arbitration proceedings. From 1997 to 2001 Mr. Fischer was Executive Director at UBS/PaineWebber Global Healthcare Investment Banking and a Director at Prudential Securities Healthcare Investment Banking. He began his investment banking career at Furman Selz LLC in 1986. Mr. Fischer was initially elected to the Board of Directors as the designee of SCO Capital Partners LLC, who purchased three hundred shares of our Series C Cumulative Convertible Preferred Stock in a private placement closing in December 2005 and February 2006. SCO Capital Partners LLC has the right to designate two individuals to serve on our board of directors for as long as at least 20% of the shares of Series C Preferred Stock issued in that private placement remain outstanding. Mr. Fischer holds an MBA from the University of Chicago's Graduate School of Business and a BS degree from the Wharton School, University of Pennsylvania.  AUDIT COMMITTEE       Mr. Martin (Chairman), Dr. Davis and Mr. Echenberg serve as members of the Audit Committee, which was established to assist the Board of Directors by (1) reviewing our financial results and recommending the selection of our independent auditors; (2) reviewing the effectiveness, quality and integrity of our accounting policies and practices, financial reporting and internal controls; and (3) reviewing the scope of the audit, the fees charged by the independent auditors and any transactions which may involve a potential conflict of interest. The Board of Directors has determined that Mr. Echenberg is the "audit committee financial expert." Each member of the Audit Committee meets the definition of "independent" as required by the established criteria of the SEC.   EXECUTIVE OFFICERS         Name                Age                Position with MacroChem - ---------------------    -------        ---------------------------------------- Robert J. DeLuccia         60           President, Chief Executive Officer and                                         Vice Chairman of the Board of Directors Glenn E. Deegan            39           Vice President and General Counsel Bernard R. Patriacca       62           Vice President, Chief Financial Officer                                         and Treasurer       The following is a brief summary of the backgrounds of Mr. Deegan and Mr. Patriacca. The background of our other executive officer, Mr. DeLuccia, is summarized above.       GLENN E. DEEGAN, ESQ., has served as our Vice President, General Counsel and Secretary since July 2003. From June 2001 until July 2003, Mr. Deegan served as our Director of Legal Affairs and as General Counsel and Secretary. Prior to joining MacroChem, he served as Assistant General Counsel of Summit Technology, Inc. from 1999 to 2001. Earlier in his career, Mr. Deegan was engaged in the private practice of law in Boston at Holland & Knight LLP from 1997 to 1999 and at Nutter, McClennen & Fish, LLP from 1993 to 1997. Mr. Deegan also served as law clerk to the Honorable Francis J. Boyle in the United States District Court for the District of Rhode Island from 1992 to 1993. Mr. Deegan holds a B.S. from Providence College and a J.D. from Boston College.                                         65        BERNARD R. PATRIACCA, C.P.A., has served as our Vice President, Chief Financial Officer and Treasurer since April 2001. From 1997 to 2001, he served as Vice President and Controller of Summit Technology, Inc. From 1994 to 1997, he served as Vice President of Errands Etc., Inc., a privately held homeowners' personal service company. From 1991 to 1994, Mr. Patriacca held senior financial management positions at several privately held consumer services companies. From 1973 to 1991, he was employed in various capacities at Dunkin Donuts, Inc., including Chief Financial Officer and Director. Mr. Patriacca received an M.B.A. and a B.S. from Northeastern University.  CODE OF CONDUCT AND ETHICS       MacroChem's Board of Directors has adopted a code of ethics and conduct that applies to its principal executive officer, principal accounting officer or controller, or persons performing similar functions. That Code of Ethics and Conduct has been posted on MacroChem's Internet website at www.macrochem.com. MacroChem would intend to satisfy the disclosure requirements under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of its Code of Ethics and Conduct and that relates to a substantive amendment or material departure from a provision of the Code by posting such information on its internet website at www.macrochem.com.  SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE       Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who beneficially own more than 10 percent of the Company's Common Stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely on its review of the copies of such reports received by it, and written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that during 2005 all filing requirements applicable to its officers, directors, and such 10 percent beneficial owners were complied with.
EXECUTIVE OFFICERS' COMPENSATION       The following table sets forth the compensation earned by or paid or awarded to Mr. DeLuccia, Mr. Patriacca, Dr. Chan, Mr. Deegan and Mr. Snyder during each of the three fiscal years ended December 31, 2005:                                         66                                SUMMARY COMPENSATION TABLE                                                                                                    Long-Term                                                       Annual Compensation                    Compensation Awards                                                                                           Restricted      Securities                                                                        Other Annual         Stock         Underlying      All Other            Name and                                                    Compensation         Awards          Options     Compensation       Principal Position         Year     Salary ($)    Bonus ($)         ($)(1)            ($)(2)          (#)(3)         ($)(4) - --------------------------      -----     ----------    ---------      ------------       ----------      ----------    ------------         Robert J. DeLuccia (5)           2005      192,000          ---           19,188              ---           9,423          48,000   President, Chief               2004      288,000       58,752           17,688              ---           6,472           -----   Executive Officer              2003      195,000       54,720            6,516           54,720          11,904           -----  Bernard R. Patriacca (6)         2005      133,333          ---            1,188              ---           4,951         198,808   Vice President, Chief          2004      193,750       32,400            1,188              ---           3,452          49,500   Financial Officer and          2003      185,000       29,360            1,032           29,360           1,142          28,000   Treasurer  Thomas C.K. Chan (7)             2005      136,667          ---              414              ---           7,982         203,969   Vice President, Research       2004      196,667       40,590              270              ---           4,102          49,500   & Development, Chief           2003      182,716       30,359              360           30,359           1,809          27,481   Technology Officer  Glenn E. Deegan (8)              2005      120,000          ---              162              ---           4,780         183,667   Vice President,                2004      165,156       30,240              162              ---           3,066          26,500   General Counsel and            2003      138,763       22,913              360           22,913           1,330          16,000   Secretary  Melvin A. Snyder (9)             2005      129,500          ---            1,188              ---           4,304         190,632   Vice President, Market         2004      194,250       24,242            1,188              ---           2,828          48,805   Development                    2003      194,250       24,010            1,584           24,010           1,190          27,160  - ------------------------------------------------------------------------------------------------------------------------------------  (1)  Includes amounts paid for taxable group term life insurance. Also includes,      for Mr. DeLuccia, a monthly automobile allowance of $1,000 for 2003 and a      portion of 2004 and $1,500 for the remainder of 2004 and for 2005. (2)  Although the restricted stock reflected in this table was earned in 2003,      the awards were made in January 2004. The values in this table are as of      the date of the grant. As of December 31, 2005, the following number of      shares of restricted stock were held by the individuals listed in the      table: Mr. DeLuccia - 1,447, Mr. Patriacca - 776, Mr. Deegan - 606, Dr.      Chan - 803, and Mr. Snyder - 635. The value of those shares of restricted      stock as of December 31, 2005 were as follows: Mr. DeLuccia - $1,823.22,      Mr. Patriacca - $977.76, Mr. Deegan - $763.56, Dr. Chan - $1,011.78, and      Mr. Snyder - $800.01. (3)  Total stock option grants reported in the table for 2004 include the      following stock option awards which, although earned in 2004, were granted      on March 23, 2005: Mr. DeLuccia - 4,662; Mr. Patriacca - 2,571; Dr. Chan -      3,221; Mr. Deegan - 2,400; and Mr. Snyder - 1,924. These options were      granted at an exercise price of $17.22 per share. The options expire ten      years from the date of grant and vested fully on the date of grant. (4)  Represents the dollar value of MacroChem's contributions to our 401(k)      Retirement Plan, which are made in our common stock, as well as, for a      portion of fiscal year 2005, in cash. For fiscal year 2004, also represents      the following retention payments payable as of July 2, 2004: Mr. Patriacca      - $43,000; Dr. Chan - $43,000; Mr. Deegan - $20,000; and Mr. Snyder -      $43,000. For fiscal year 2005, also represents the following payments made      pursuant to Transition Agreements: Mr. DeLuccia - $48,000; Mr. Patriacca -      $191,808; Dr. Chan - $197,969; Mr. Deegan - $176,677; and Mr. Snyder -      $185,472. (5)  Mr. DeLuccia's employment commenced on July 1, 2003. Of total salary in      2003, $51,000 related to a consulting contract in connection with his role      as interim CEO. As part of Mr. DeLuccia's 2003 compensation, he received an      award of 1,447 shares of restricted stock on January 7, 2004, all of which      vested six months from the date of grant. (6)  Mr. Patriacca's employment commenced on April 23, 2001. As part of Mr.      Patriacca's 2003 compensation, he received an award of 776 shares of      restricted stock on January 7, 2004, all of which vested six months from      the date of grant. (7)  Dr. Chan was appointed Vice President, Research and Technology on September      24, 2001. As part of Dr. Chan's 2003 compensation, he received an award of      803 shares of restricted stock on January 7, 2004, all of which vested six      months from the date of grant. Dr. Chan's employment with the Company      terminated effective November 30, 2005.                                          67   (8)  Mr. Deegan was appointed Vice President, General Counsel and Secretary on      July 10, 2003. As part of Mr. Deegan's 2003 compensation, he received an      award of 606 shares of restricted stock on January 7, 2004, all of which      vested six months from the date of grant. (9)  As part of Mr. Snyder's 2003 compensation, he received an award of 635      shares of restricted stock on January 7, 2004, all of which vested six      months from the date of grant. Mr. Snyder's employment with the Company      terminated effective November 30, 2005.    STOCK OPTIONS       The following table provides information concerning the grant of stock options during 2005 to Mr. DeLuccia, Dr. Chan, Mr. Deegan, Mr. Patriacca and Mr. Snyder:                            OPTION GRANTS IN LAST FISCAL YEAR                                  INDIVIDUAL GRANTS                                 -----------------                                       % of Total                        Number of      Options                                Potential Realizable Value                        Securities    Granted to   Exercise                   at Assumed Annual Rates of                        Underlying    Employees    or Base                     Stock Price Appreciation                         Options      in Fiscal    Price        Expiration         for Option Term        Name             Granted (#)    Year        ($/sh)        Date          5%($)          10%($) - --------------------   -----------   ----------   --------    -----------    --------------------------         Robert J. DeLuccia       4,662  (1)     11.9       17.22        3/23/15      $50,487        $127,945 Robert J. DeLuccia       4,761  (1)     12.0       10.50        7/20/15       31,439          79,672 Bernard R. Patriacca     2,571  (2)      6.5       17.22        3/23/15       27,843          70,559 Bernard R. Patriacca     2,380  (2)      6.1       10.50        7/20/15       15,716          39,828 Thomas C.K. Chan         3,221  (3)      8.3       17.22        3/23/15       34,882          88,398 Thomas C.K. Chan         4,761  (3)     12.0       10.50        7/20/15       31,439          79,672 Glenn E. Deegan          2,400  (4)      6.1       17.22        3/23/15       25,991          65,866 Glenn E. Deegan          2,380  (4)      6.1       10.50        7/20/15       15,716          39,828 Melvin A. Snyder         1,924  (5)      4.6       17.22        3/23/15       20,836          52,803 Melvin A. Snyder         2,380  (5)      6.1       10.50        7/20/15       15,716          39,828  (1)  A portion of the options granted to Mr. DeLuccia were granted in March 2005      at an exercise price of $17.22 per share. The options expire ten years from      the date of grant and vested fully on the date of grant. A portion of the      options granted to Mr. DeLuccia were granted in July 2005 at an exercise      price of $10.50 per share. The options expire ten years from the date of      grant and vest over the next three years. (2)  A portion of the options granted to Mr. Patriacca were granted in March      2005 at an exercise price of $17.22 per share. The options expire ten years      from the date of grant and vested fully on the date of grant. A portion of      the options granted to Mr. Patriacca were granted in July 2005 at an      exercise price of $10.50 per share. The options expire ten years from the      date of grant and vest over the next three years. (3)  A portion of the options granted to Dr. Chan were granted in March 2005 at      an exercise price of $17.22 per share. The options expire ten years from      the date of grant and vested fully on the date of grant. A portion of the      options granted to Dr. Chan were granted in July 2005 at an exercise price      of $10.50 per share. The options, which were to expire ten years from the      date of grant and vest over the next three years, were cancelled effective      November 30, 2005, the date Dr. Chan's employment with the Company      terminated. (4)  A portion of the options granted to Mr. Deegan were granted in March 2005      at an exercise price of $17.22 per share. The options expire ten years from      the date of grant and vested fully on the date of grant. A portion of the      options granted to Mr. Deegan were granted in July 2005 at an exercise      price of $10.50 per share. The options expire ten years from the date of      grant and vest over the next three years. (5)  A portion of the options granted to Mr. Snyder were granted in March 2005      at an exercise price of $17.22 per share. The options expire ten years from      the date of grant and vested fully on the date of grant. A portion of the      options granted to Mr. Snyder were granted in July 2005 at an exercise      price of $10.50 per share. The options, which were to expire ten years from      the date of grant and vest over the next three years, were cancelled      effective November 30, 2005, the date Mr. Snyder's employment with the      Company terminated.                                           68        The following table provides information concerning option exercises during the fiscal year ended December 31, 2005 and unexercised options held by Mr. DeLuccia, Mr. Patriacca, Mr. Snyder, Dr. Chan, and Mr. Deegan, as of December 31, 2005:             AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL                              YEAR-END OPTION VALUES                                                                    Number of Securities                                                                       Underlying              Value of Unexercised                                                                   Unexercised Options        In-The-Money Options at                                                                       at Year End             Fiscal Year-End ($)(1)                        Shares Acquired on     Value Realized         Exerciseable/                Exerciseable /      Name                Exercise (#)              ($)               Unexerciseable              Unexerciseable - --------------------   ------------------     --------------      ---------------------      ------------------------      Robert J. DeLuccia           ---                   ---              19,073/5,697                  NA/NA Bernard R. Patriacca         ---                   ---              10,840/3,348                  NA/NA Thomas C.K. Chan             ---                   ---                10,065/0                    NA/NA Glenn E. Deegan              ---                   ---               6,342/3,268                  NA/NA Melvin Snyder                ---                   ---                11,089/0                    NA/NA  (1)  The value of Mr. DeLuccia's, Mr. Patriacca's, Dr. Chan's, Mr. Deegan's and      Mr. Snyder's in-the-money unexercised options at the end of fiscal year      ended December 31, 2005 was determined by multiplying the number of options      held by the difference between the market price of common stock underlying      the options on December 31, 2005 ($1.26 per share) and the exercise price      of the options granted.    DIRECTORS' COMPENSATION       Each of our non-employee Directors receives compensation of $12,000 annually, $1,000 per regular meeting attended for the chairman of each committee, $1,000 per regular meeting attended, $500 for each special, telephone or committee meeting attended and reimbursement of travel expenses in connection with attending meetings of the Board of Directors. During a portion of 2005, our non-employee directors voluntarily waived their right to receive fees for attending telephonic meetings of the Board of Directors. No stock options were granted to non-employee Directors during 2005.  EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS       We entered into an employment agreement of indefinite length effective as of February 13, 2006 with Robert J. DeLuccia. The agreement currently provides for annual compensation of $288,000 and for the payment of nine months' salary in the event he is terminated without cause or twelve month's salary in the event he is terminated as a result of a change of control. The agreement also provides for a monthly automobile allowance of $1,500. In addition, the agreement precludes Mr. DeLuccia from competing with the Company during his employment and for a period of two years thereafter, and from disclosing confidential information. Prior to entering into Mr. DeLuccia's current employment agreement, we entered into a transition agreement with Mr. DeLuccia on September 16, 2005 which terminated his then existing employment agreement including the severance pay provisions. The transition agreement, which originally provided that Mr. DeLuccia would remain employed by the Company until November 30, 2005, was subsequently amended to extend his employment through February 2006. During 2005, Mr. DeLuccia received compensation totaling $258,000 pursuant to the employment and transition agreements then in effect.                                         69        We entered into an employment agreement of indefinite length effective as of February 13, 2006 with Glenn E. Deegan. The agreement currently provides for annual base compensation of $180,000, and precludes Mr. Deegan from competing with the Company during his employment and for a period of two years thereafter, and from disclosing confidential information. In addition, on February 13, 2006, we entered into a Severance Agreement with Mr. Deegan. The Severance Agreement provides for the payment of six months' salary in the event he is terminated without cause or nine month's salary in the event he is terminated in connection with or following a change of control, as defined in the agreement. Prior to entering into Mr. Deegan's current employment and severance agreements, we entered into a transition agreement with Mr. Deegan on September 12, 2005 which terminated his then existing employment and severance agreements. The transition agreement, which originally provided that Mr. Deegan would remain employed by the Company until November 30, 2005, was subsequently amended to extend his employment through February 2006. During 2005, Mr. Deegan received compensation totaling $296,667 pursuant to the employment and transition agreements then in effect.       We entered into an employment agreement of indefinite length effective as of February 13, 2006 with Bernard Patriacca. The agreement currently provides for annual base compensation of $200,000, and precludes Mr. Patriacca from competing with the Company during his employment and for a period of two years thereafter, and from disclosing confidential information. In addition, on February 13, 2006, we entered into a Severance Agreement with Mr. Patriacca. The Severance Agreement provides for the payment of six months' salary in the event he is terminated without cause or nine month's salary in the event he is terminated in connection with or following a change of control, as defined in the agreement. Prior to entering into Mr. Patriacca's current employment and severance agreements, we entered into a transition agreement with Mr. Patriacca on September 12, 2005 which terminated his then existing employment and severance agreements. The transition agreement, which originally provided that Mr. Patriacca would remain employed by the Company until November 30, 2005, was subsequently amended to extend his employment through February 2006. During 2005, Mr. Patriacca received compensation totaling $325,141 pursuant to the employment and transition agreements then in effect.           On September 13, 2005, we entered into a transition agreement with Thomas C.K. Chan which terminated his then existing employment and severance agreements. The transition agreement provided that Dr. Chan would remain employed by the Company until November 30, 2005. In addition, the transition agreement precludes Dr. Chan from competing with us for a period of two years and from disclosing confidential information. During 2005, Dr. Chan received compensation totaling $334,636 pursuant to the employment and transition agreements then in effect.       On September 12, 2005, we entered into a transition agreement with Melvin A. Snyder which terminated his then existing employment and severance agreements. The transition agreement provided that Mr. Snyder would remain employed by the Company until November 30, 2005. In addition, the transition agreement precludes Mr. Snyder from competing with us for a period of two years and from disclosing confidential information. During 2005, Mr. Snyder received compensation totaling $314,972 pursuant to the employment and transition agreements then in effect.                                         70   COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION       Our Compensation Committee consists of Dr. Michael Davis (Chairman), Dr. John Zabriskie and Mr. Jeffrey Davis.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS       The following table details the Registrant's equity compensation plans:                          EQUITY COMPENSATION PLAN INFORMATION                                               (a)                       (b)                        (c)                                                                                            Number of securities                                                                                           remaining available for                                    Number of securities to       Weighted-average          future issuance under                                    be issued upon exercise       exercise price of       equity compensation plans                                    of outstanding options,     outstanding options,        (excluding securities       Plan Category                  warrants and rights        warrants and rights      reflected in column (a)) - -------------------------------------------------------------------------------------------------------------------     Equity compensation plans   approved by security   holders                               106,696                      $ 132.24                    73,116 Equity compensation plans   not approved by   security holders                       11,904 (1)                  $  44.52                     None                                        ---------                     --------                  ---------                         Total             118,600                      $ 123.44                    73,116                                        =========                     ========                  ========= - -------------------------------------------------------------------------------------------------------------------  (1)    Represents 11,904 stock options granted to Robert J. DeLuccia in June 2003.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT       The following table sets forth, as of March 7, 2006 (except as noted), information concerning ownership of our common stock by (1) each person known by us to be the beneficial owner of more than five percent (5%) of our common stock, (2) each of our directors, (3) each of the executive officers named in the Summary Compensation Table under "Executive Officers' Compensation" above and (4) all directors and executive officers as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated. There were a total of 996,909 shares of our common stock outstanding on March 7, 2006.                                         71        We have determined the number of shares beneficially owned by each stockholder under rules promulgated by the SEC. The information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting or investment power and any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after March 17, 2005 through the exercise of any stock option, warrant or other right. The inclusion in the following table of those shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner.                                    Name and Address                         Number of Shares          Percentage Class of Stock                  of Beneficial Owner                      Beneficially Owned        of Class                                 FIVE PERCENT STOCKHOLDERS     Series C Preferred Stock        Stephen S. Rouhandeh (1)..............               350              2.40% Series C Preferred Stock        Jeffrey B. Davis (2)..................                50              6.06% Series C Preferred Stock        Joseph Edelman (3)....................               150              8.17% Series C Preferred Stock        Whalehaven Capital Fund Limited (4)...                75              9.09%                                  DIRECTORS AND EXECUTIVE OFFICERS (5) Series C Preferred Stock        Robert J. DeLuccia (5)................                 0                 * Series C Preferred Stock        Bernard R. Patriacca (5)..............                 0                 * Series C Preferred Stock        Melvin A. Snyder (5)(6)...............                 0                 * Series C Preferred Stock        Thomas C.K. Chan (5)(6)...............                 0                 * Series C Preferred Stock        Glenn E. Deegan (5)...................                 0                 * Series C Preferred Stock        Peter G. Martin (5)...................                 0                 * Series C Preferred Stock        Michael A. Davis (5)..................                 0                 * Series C Preferred Stock        Paul S. Echenberg (5).................                 0                 * Series C Preferred Stock        John L. Zabriskie (5).................                 0                 * Series C Preferred Stock        Jeffrey B. Davis (2)(7)...............                50              6.06% Series C Preferred Stock        Howard S. Fischer (7).................                 0                 * Series C Preferred Stock        All directors and officers as a                                     group (11 persons)................                50              6.06%                                  FIVE PERCENT STOCKHOLDERS Common Stock                    Stephen S. Rouhandeh (1)..............         7,138,378             87.75% Common Stock                    Joseph Edelman (3)                               110,152              9.95% Common Stock                    Galleon Management L.P. (8)...........            74,541              7.44% Common Stock                    Arnold H. Snider (9)..................            68,585              6.88%                                  DIRECTORS AND EXECUTIVE OFFICERS (3) Common Stock                    Robert J. DeLuccia (5)(10)............           219,171             19.30% Common Stock                    Bernard R. Patriacca (5)(10)(11)......            71,489              6.70% Common Stock                    Melvin A. Snyder (5)(6)(10)(11).......            11,728              1.16% Common Stock                    Thomas C.K. Chan (5)(6)(10)(11).......            12,533              1.24% Common Stock                    Glenn E. Deegan (5)(10)(11)...........            57,395              5.45% Common Stock                    Peter G. Martin (5)(10)...............            18,625              1.83% Common Stock                    Michael A. Davis (5)(10)..............            18,499              1.82% Common Stock                    Paul S. Echenberg (5)(10)(12).........            19,548              1.93% Common Stock                    John L. Zabriskie (5)(10)(13).........            36,747              3.60% Common Stock                    Jeffrey B. Davis (2)(7)(14)...........            51,916              4.95% Common Stock                    Howard S. Fischer (7)(15).............            51,916              4.95%                                 All directors and officers as a Common Stock                        group (11 persons) (8)(9).........           524,567             40.08% - ------------------ * Less than one percent (1%).                                        72   (1)  According to a Schedule 13D/A dated February 13, 2006, filed jointly by SCO      Capital Partners LLC, SCO Securities LLC, Beach Capital LLC and Steven H.      Rouhandeh, SCO Capital Partners LLC is the record owner of 300 shares of      Series C Convertible Preferred Stock and Beach Capital LLC is the record      owner of 50 shares of Series C Convertible Preferred Stock. Mr. Rouhandeh,      as Chairman and sole member of SCO Capital Partners LLC and managing member      of Beach Capital LLC, has sole dispositive and voting power with respect to      all shares listed in the table. The shares of common stock listed as      beneficially owned by Mr. Rouhandeh include 3,805,046 shares of common      stock issuable upon the exercise of warrants exercisable within 60 days and      3,333,332 shares of common stock issuable upon the conversion of Series C      Preferred Stock convertible within 60 days. The address of SCO Capital      Partners LLC, Beach Capital LLC and Mr. Rouhandeh is 1285 Avenue of the      Americas, 35th Floor, New York, New York 10019. (2)  Lake End Capital LLC is the record owner of the securities listed in the      table. Mr. Jeffrey Davis, as managing member of Lake End Capital LLC, has      sole dispositive and voting power with respect to all shares held of record      by Lake End Capital LLC. The shares of common stock listed as beneficially      owned by Jeffrey Davis include the shares of common stock issuable upon the      conversion of the Series C Preferred Stock held by Lake End Capital LLC and      upon exercise of the warrants held by Lake End Capital LLC within 60 days.      The Series C Preferred Stock and the warrants held by Lake End Capital LLC      are subject to restrictions on their conversion and exercise, respectively,      such that as a result of their conversion or exercise, Lake End Capital      LLC, together with its affiliates, cannot hold more than 4.95% of the      issued and outstanding common stock of the Company. The address of Lake End      Capital LLC is 33 Tall Oaks Drive, Summit, New Jersey 07501. (3)  According to a Schedule 13G dated February 16, 2006, Mr. Edelman has sole      dispositive and voting power with respect to the shares listed in the      table. The shares reported as beneficially owned by Mr. Edelman are held of      record by Perceptive Life Sciences Master Fund, Ltd., a Cayman Islands      company of which the investment manager is Perceptive Advisors LLC, a      Delaware limited liability company of which Mr. Edelman is the managing      member. The shares of common stock listed as beneficially owned by Mr.      Edelman include the shares of common stock issuable upon the conversion of      the Series C Preferred Stock beneficially owned by Mr. Edelman and upon      exercise of the warrants beneficially owned by Mr. Edelman within 60 days.      The Series C Preferred Stock and the warrants beneficially owned by Mr.      Edelman are subject to restrictions on their conversion and exercise,      respectively, such that as a result of their conversion or exercise, Mr.      Edelman, together with his affiliates, cannot hold more than 9.95% of the      issued and outstanding common stock of the Company. The address of Mr.      Edelman is c/o First New York Securities, LLC, 850 Third Avenue, 8th Floor,      New York, NY 10022. (4)  The address of Whalehaven Capital Fund Limited is 14 Par-La-Ville Road, 3rd      Floor, Hamilton HM08 Bermuda. The Series C Preferred Stock and the warrants      held by Whalehaven Capital Fund Limited are subject to restrictions on      their conversion and exercise, respectively, such that as a result of their      conversion or exercise, Whalehaven Capital Fund Limited, together with its      affiliates, cannot hold more than 4.95% of the issued and outstanding      common stock of the Company. (5)  The address of Mr. DeLuccia, Mr. Patriacca, Mr. Snyder, Dr. Chan, Mr.      Deegan, Mr. Martin, Dr. Davis, Mr. Echenberg and Dr. Zabriskie, is c/o      MacroChem, 110 Hartwell Avenue, Lexington, Massachusetts 02421. (6)  As of November 30, 2005, Mr. Snyder and Dr. Chan are no longer employed by      the Company. Other than with respect to the options and/or warrants held by      Mr. Snyder or Dr. Chan as described in note (10) below, the share ownership      of Mr. Snyder and Dr. Chan reflected in the table is as of November 30,      2005. (7)  On December 29, 2005, Mr. Jeffrey Davis and Mr. Fischer were appointed to      the Company's board of directors. Mr. Davis and Mr. Fischer were designated      by SCO Capital Partners LLC in accordance with terms and provisions of the      Purchase Agreement and constitute the "SCO Designated Directors" (as      defined in the Purchase Agreement). The address of Mr. Davis and Mr.      Fischer is 1285 Avenue of the Americas, 35th Floor, New York, New York      10019. (8)  According to a Schedule 13-G/A dated December 30, 2005, filed jointly by      Galleon Management, L.P. ("Galleon"), Raj Rajaratnam, Galleon Management,      L.L.C., Galleon Advisors, L.L.C., Galleon Captains Partners, L.P., Galleon      Captains Offshore, Ltd., Galleon Healthcare Partners, L.P., and Galleon      Healthcare Offshore, Ltd. (collectively, the "Galleon Entities"), Mr.      Rajaratnam, Galleon Management, L.L.C. and Galleon Management, L.P. have      shared dispositive and voting power with respect to all shares listed in      the table, Galleon Advisors, L.L.C. has shared dispositive and voting power      with respect to 10,953 of the shares listed in the table, Galleon Captains      Partners, L.P. has shared dispositive and voting power with respect to      7,120 of the shares listed in the table, Galleon Captains Offshore, Ltd.      has shared dispositive and voting power with respect to 28,480 of the      shares listed in the table, Galleon Healthcare Partners, L.P. has shared      dispositive and voting power with respect to 3,833 of the shares listed in      the table and Galleon Healthcare Offshore, Ltd. has shared dispositive and      voting power with respect to 29,500 of the shares listed in the table. The                                          73        shares listed as beneficially owned by Galleon include the following      numbers of shares issuable upon the exercise of warrants exercisable within      60 days: Galleon Captain's Offshore, Ltd.-678 shares; Galleon Captain's      Partners, LP-169 shares; Galleon Healthcare Offshore, Ltd.-4,214 shares;      and Galleon Healthcare Partners, LP-547 shares. The address of the      principal place of business of Galleon Management L.P. is 135 East 57th      Street, 16th Floor, New York, NY 10022. (9)  According to a Schedule 13-G/A dated December 31, 2005, filed jointly by      Arnold H. Snider, Deerfield Capital, L.P. ("Deerfield Capital"), Deerfield      Partners, L.P. ("Deerfield Partners"), Deerfield Management Company, L.P.      ("Deerfield Management") and Deerfield International Limited ("Deerfield      International", and collectively with Arnold H. Snider, Deerfield Capital,      Deerfield Partners, Deerfield Management and Deerfield International, the      "Deerfield Entities"), Arnold H. Snider has shared dispositive and voting      power with respect to all shares listed in the table, Deerfield Capital and      Deerfield Partners have shared dispositive and voting power with respect to      29,629 of the shares listed in the table and Deerfield Management and      Deerfield International have shared dispositive and voting power with      respect to 38,956 of the shares listed in the table. The address of the      principal place of business of Deerfield International is c/o Hemisphere      Management (B.V.I.) Limited, Bison Court, Columbus Centre, P.O. Box 3460,      Road Town, Tortola, BVI. The address of the principal place of business of      each of the other entities is 780 Third Avenue, 37th Floor, New York, NY      10017. (10) Includes the following numbers of shares issuable upon the exercise of      stock options and/or warrants exercisable within 60 days: Mr. Martin-18,571      shares; Dr. Davis-18,357 shares; Mr. DeLuccia-138,606 shares; Mr.      Echenberg-18,072 shares; Dr. Zabriskie-23,149 shares; Mr. Davis-15,000: Mr.      Fischer-15,000; Mr. Patriacca-70,042 shares; Mr. Snyder-11,093 shares; Dr.      Chan-10,624 shares; and Mr. Deegan-56,789 shares. (11) Does not include the following numbers of vested shares in our 401(k) Plan      contributed by us to match portions of cash contributions by the following      Plan participants: Mr. Patriacca-545 shares; Mr. Snyder- 516 shares; Dr.      Chan-551 shares; and Mr. Deegan-560 shares. (12) Includes 1,382 shares and 691 shares issuable upon the exercise of warrants      exercisable within 60 days that, in each case, are held by Eckvest Equity      Inc., of which Mr. Echenberg is the President and sole equity owner. (13) Includes 11,061 shares and 5,530 shares issuable upon the exercise of      warrants exercisable within 60 days that, in each case, are held by Lansing      Brown Investments LLC, of which Dr. Zabriskie and his wife are the managers      and sole equity holders. (14) Includes 36,916 shares of common stock issuable upon the conversion of      Series C Preferred Stock or the exercise of a warrant held of record by      Lake End Capital LLC as described in Note 2 above that is exercisable      within 60 days. (15) Includes 36,916 shares of common stock issuable upon the exercise of a      warrant that is exercisable within 60 days.
On December 23, 2005 and February 13, 2005, we issued an aggregate of 825.5 shares of our Series C Preferred Stock and warrants to purchase 7,861,900 shares of our common stock in a private placement to institutional investors.       SCO Capital Partners LLC acquired a total of 300 shares of our Series C Preferred Stock and warrants to purchase 2,857,142 shares of our common stock for an aggregate purchase price of $3,000,000, and Beach Capital LLC acquired a total of 50 shares of our Series C Preferred Stock and warrants to purchase 47,620 shares of our common stock for an aggregate purchase price of $500,000. Mr. Stephen S. Rouhandeh is the sole member of SCO Capital Partners LLC and the managing member of Beach Capital LLC, and as such has sole dispositive and voting power with respect to the shares owned by SCO Capital Partners LLC and Beach Capital LLC. The Series C Preferred Stock and warrants beneficially owned by Mr. Rouhandeh are convertible and exercisable into approximately 87.75% of our common stock. In addition, for so long as 20% of the Series C Preferred Stock issued in the private placement remains outstanding, SCO Capital Partners LLC has the right to designate two members to our board of directors. On December 28, 2005, SCO Capital Partners LLC informed us that the initial SCO director designees were Jeffrey B. Davis and Howard S. Fischer, and our board of directors appointed them to our board on December 29, 2005.                                         74        Mr. Rouhandeh is also the Chairman of SCO Securities LLC, which acted as the placement agent in connection with the private placement and which acts as a financial advisor to us for a monthly fee of $12,500. In exchange for its services as placement agent, SCO Securities LLC received a fee equal to 7% of the gross proceeds, or $577,850, and six-year warrants to purchase 786,189 shares of our common stock at an exercise price of $1.05 per share. SCO Securities LLC assigned its warrants to the following four persons in the amounts listed: (i) warrants to purchase 471,713 shares of common stock to SCO Capital Partners LLC; (ii) warrants to purchase 157,238 shares of common stock to Lake End Capital LLC, (iii) warrants to purchase 78,619 shares of common stock to Mark Alvino and (iv) warrants to purchase 78,619 shares of common stock to Howard Fischer. We also paid SCO Securities LLC $82,550 for out-of-pocket expenses incurred in connection with the transaction.       Mr. Jeffrey Davis, who was elected to our Board of Directors on December 29, 2005 as the designee of SCO Capital Partners LLC, is the managing member of Lake End Capital LLC, an entity which purchased 50 shares of our Series C Preferred Stock and warrants to purchase 476,190 shares of our common stock for an aggregate purchase price of $500,000. As noted above, Lake End Capital LLC also received warrants to purchase an additional 157,238 shares of our common stock as a designee of SCO Securities LLC, the placement agent in our recent private placement. Mr. Davis is the President of SCO Securities LLC. Subject to conversion and exercise restrictions on the securities held by Lake End Capital LLC as described in Item 12 of this Annual Report on Form 10-K, the Series C Preferred Stock and warrants beneficially owned by Mr. Davis are convertible and exercisable into 4.95% of our common stock.       Mr. Howard S. Fischer, who was elected to our Board of Directors on December 29, 2005 as the designee of SCO Capital Partners LLC, is a Managing Director of SCO Securities LLC. As noted above, Mr. Fischer received warrants to purchase 78,619 shares of our common stock as a designee of SCO Securities LLC. Subject to conversion and exercise restrictions on the warrants held by Mr. Fischer, the warrants beneficially owned by Mr. Fischer are exercisable for 4.95% of our common stock.
Vitale, Caturano & Company, Ltd. is the Company's independent registered public accounting firm. Prior to January 24, 2006, Deloitte & Touche LLP served as the Company's independent registered public accounting firm. The following table sets forth the estimated aggregate fees billed to the Company for the fiscal year ended December 31, 2005 by Vitale, Caturano & Company, Ltd. and Deloitte & Touche LLP, and for the fiscal year ended December 31, 2004 by Deloitte & Touche LLP:                                     VITALE, CATURANO                                  & COMPANY, LTD.           DELOITTE & TOUCHE LLP                                        2005               2005              2004                     Audit Fees                $    60,000        $      69,100     $    188,000         Audit-Related Fees                 --                   --               --         Tax Fees                           --                   --               --         All Other Fees                     --                   --               --                                   -----------        -------------    -------------          Total                     $    60,000        $      69,100     $    188,000                                   ===========        =============     ============                                          75   AUDIT FEES       Audit fees were for professional services rendered for the audit of the Company's annual financial statements, review of financial statements included in the Company's quarterly reports on Form 10-Q and services that were provided in connection with statutory and regulatory filings or engagements.  AUDIT-RELATED FEES       Audit-Related Fees refer to assurance and related services that are reasonably related to the performance of the audit or review of Company's consolidated financial statements and are not reported under "Audit Fees." The Company did not pay any Audit-Related Fees during 2005 or 2004.  TAX FEES       Tax Fees refer to fees for professional services rendered regarding tax compliance, tax advice or tax planning. The Company did not pay any Tax Fees to Vitale, Caturano & Company, Ltd. or to Deloitte & Touche LLP during 2005 or 2004.  ALL OTHER FEES       All Other Fees refer to fees for services other than those described above. The Company did not pay to Vitale, Caturano & Company, Ltd. or to Deloitte & Touche LLP fees for any other services during 2005 or 2004.  PRE-APPROVAL POLICIES AND PROCEDURES       It is the policy of the Company that all services provided by the Company's independent registered public accounting firm shall be pre-approved by the Audit Committee. The Company's independent registered public accounting firm will provide the Audit Committee with an engagement letter outlining the scope of the audit services proposed to be performed during the fiscal year and the estimated fees for such services. Pre-approval of audit and permitted non-audit services may be given by the Audit Committee at any time up to one year before the commencement of such services by the Company's independent registered public accounting firm. Pre-approval must be detailed as to the particular services to be provided. Pre-approval may be given for a category of services, provided that (i) the category is narrow enough and detailed enough that management of the Company will not be called upon to make a judgment as to whether a particular proposed service by the Company's independent registered public accounting firm fits within such pre-approved category of services and (ii) the Audit Committee also establishes a limit on the fees for such pre-approved category of services.       During 2005, one hundred percent (100%) of the services provided by the Company's independent registered public accounting firm were pre-approved by the Audit Committee.                                         76   PART IV
(a)(1)   The following Financial Statements as of December 31, 2005 and 2004 and          for the three years in the period ended December 31, 2005 are included          in Part II of this Annual Report on Form 10-K:            Report of Independent Registered Public Accounting Firm - Vitale,            Caturano & Company, Ltd.          Report of Independent Registered Public Accounting Firm - Deloitte &            Touche LLP          Balance Sheets          Statements of Operations          Statements of Stockholders' Equity          Statements of Cash Flows          Notes to Financial Statements  (a)(2)   The following Financial Statement Schedules are filed herewith:           None.       Schedules not included herein are omitted because they are not applicable or the required information appears in the Financial Statements or Notes thereto.  (a)(3)   The following exhibits are filed herewith or are incorporated by reference as may be indicated:       3.1    Amended and Restated Certificate of Incorporation of MacroChem             Corporation dated as of February 9, 2006.      3.2    Amended and Restated Bylaws of MacroChem Corporation, incorporated             by reference to Exhibit 5 to our Current Report on Form 8-K dated             August 13, 1999 (File No. 0-13634).      4.1    Stock Purchase Warrant, incorporated by reference to Exhibit 4 to             our Annual Report on Form 10-K for the year ended December 31, 1996             (File No. 0-13634).      4.2    Rights Agreement dated as of August 13, 1999 between MacroChem and             American Stock Transfer & Trust Company, as Rights Agent, including             Form of Certificate of Designation with respect to the Series B             Preferred Stock, par value $.01 per share (attached as Exhibit A to             the Rights Agreement), Form of Rights Certificate (attached as             Exhibit B to the Rights Agreement), and Summary of Rights (attached             as Exhibit C to the Rights Agreement), incorporated by reference to             Exhibits 1, 2, 3 and 4, respectively, to our Current Report on Form             8-K dated August 13, 1999 (File No. 0-13634).      4.3    Amendment No. 1 to the Rights Agreement dated as of December 23,             2005 between MacroChem Corporation and American Stock Transfer &             Trust Company incorporated by reference to Exhibit 4.2 to our             Current Report on Form 8-K dated December 27, 2005 (File No.             0-13634).                                          77        4.4    Common Stock Certificate, incorporated by reference to Exhibit 4c to             our Annual Report on Form 10-K for the year ended December 31, 1999             (File No. 0-13634).      4.5    Form of Common Stock Purchase Warrant dated as of April 19, 2005             incorporated by reference to Exhibit 10.4 to our Current Report on             Form 8-K dated April 22, 2005 (File No. 0-13634).      4.6    Certificate of Designations, Rights and Preferences of Series C             Cumulative Convertible Preferred Stock of MacroChem Corporation             incorporated by reference to Exhibit 4.1 to our Current Report on             Form 8-K dated December 27, 2005 (File No. 0-13634).      4.7    Common Stock Purchase Warrant, incorporated by reference to Exhibit             10.3 to our Current Report on Form 8-K dated December 27, 2005 (File             No. 0-13634).      4.8    Common Stock Purchase Warrant, incorporated by reference to Exhibit             10.3 to our Current Report on Form 8-K dated February 16, 2005 (File             No. 0-13634).      10.1*  MacroChem Corporation 2001 Incentive Plan incorporated by reference             to Exhibit 99 to our Form S-8 as filed on August 8, 2001 (File No.             333-67080).      10.2*  1994 Equity Incentive Plan as amended November 14, 1997,             incorporated by reference to Exhibit 99.1 to our Annual Report on             Form 10-K for the year ended December 31, 1997 (File No. 0-13634).      10.3*  1984 Non-Qualified Stock Option Plan as amended November 15, 1996,             incorporated by reference to Exhibit 10.2 to our Annual Report on             Form 10-K for the year ended December 31, 1996 (File No. 0-13634).      10.4*  1984 Incentive Stock Option Plan as amended November 15, 1996,             incorporated by reference to Exhibit 10.3 to our Annual Report on             Form 10-K for the year ended December 31, 1996 (File No. 0-13634).      10.5*  MacroChem Corporation Option Certificate between the Company and             Robert J. Palmisano, incorporated by reference to Exhibit 10.3 to             our Quarterly Report on Form 10-Q for the quarter ended June 30,             2001 (File No. 0-13634).      10.6*  Form of Severance Agreement between MacroChem and Dr. Thomas C.K.             Chan, dated as of October 25, 2002 incorporated by reference to             Exhibit 10i to our Annual Report on Form 10-K for the year ended             December 31, 2002 (File No. 0-13634).      10.7*  Form of Noncompetition Agreement between MacroChem and Glenn E.             Deegan, Esq., dated as of June 5, 2001 incorporated by reference to             Exhibit 10.12 to our Annual Report on Form 10-K for the year ended             December 31, 2003 (File No. 0-13634).      10.8*  Form of Confidentiality Agreement between MacroChem and Glenn E.             Deegan, Esq., dated as of June 5, 2001 incorporated by reference to             Exhibit 10.13 to our Annual Report on Form 10-K for the year ended             December 31, 2003 (File No. 0-13634).      10.9*  Form of Employment Agreement between MacroChem and Robert J.             DeLuccia incorporated by reference to Exhibit 10.1 to our Quarterly             Report on Form 10-Q for the period ended September 30, 2003 (File             No. 0-13634).                                          78        10.10* MacroChem Corporation Option Certificate reflecting grant by             MacroChem to Robert J. DeLuccia incorporated by reference to Exhibit             10.2 to our Quarterly Report on Form 10-Q for the period ended             September 30, 2003 (File No. 0-13634).      10.11* Form of Retention Agreement between MacroChem and Bernard R.             Patriacca incorporated by reference to Exhibit 10.3 to our Quarterly             Report on Form 10-Q for the period ended September 30, 2003 (File             No. 0-13634).      10.12* Form of Retention Agreement between MacroChem and Melvin A. Snyder             incorporated by reference to Exhibit 10.4 to our Quarterly Report on             Form 10-Q for the period ended September 30, 2003 (File No.             0-13634).      10.13* Form of Retention Agreement between MacroChem and Thomas C.K. Chan             incorporated by reference to Exhibit 10.5 to our Quarterly Report on             Form 10-Q for the period ended September 30, 2003 (File No.             0-13634).      10.14* Form of Retention Agreement between MacroChem and Glenn E. Deegan             incorporated by reference to Exhibit 10.6 to our Quarterly Report on             Form 10-Q for the period ended September 30, 2003 (File No.             0-13634).      10.15* Form of Severance Agreement, dated as of December 17, 2004, by and             between MacroChem and Melvin A. Snyder incorporated by reference to             Exhibit 10.3 to our Current Report on Form 8-K dated February 3,             2005 (File No. 0-13634).      10.16* Transition Agreement, dated as of September 12, 2005, by and between             MacroChem Corporation and Bernard R. Patriacca, incorporated by             reference to Exhibit 10.2 to our Current Report on Form 8-K dated             September 16, 2005 (File No. 0-13634).      10.17* Transition Agreement, dated as of September 13, 2005, by and between             MacroChem Corporation and Thomas C.K. Chan, incorporated by             reference to Exhibit 10.3 to our Current Report on Form 8-K dated             September 16, 2005 (File No. 0-13634).      10.18* Transition Agreement, dated as of September 12, 2005, by and between             MacroChem Corporation and Melvin A. Snyder, incorporated by             reference to Exhibit 10.4 to our Current Report on Form 8-K dated             September 16, 2005 (File No. 0-13634).      10.19* Transition Agreement, dated as of September 12, 2005, by and between             MacroChem Corporation and Glenn E. Deegan, incorporated by reference             to Exhibit 10.5 to our Current Report on Form 8-K dated September             16, 2005 (File No. 0-13634).      10.20* Transition Agreement, dated as of September 16, 2005, by and between             MacroChem Corporation and Robert J. DeLuccia, incorporated by             reference to Exhibit 10.6 to our Current Report on Form 8-K dated             September 16, 2005 (File No. 0-13634).      10.21* Form of Employment Agreement, dated February 13, 2006, by and             between the Company and Robert J. DeLuccia incorporated by reference             to Exhibit 10.4 to our Current Report on Form 8-K dated February 16,             2006 (File No. 0-13634).      10.22* Form of Employment Agreement, dated February 13, 2006, by and             between the Company and Bernard R. Patriacca, including Form of             Confidential Information, Inventions and Non-Competition Agreement             (attached as Exhibit B to the Form of Employment Agreement),             incorporated by reference to Exhibit 10.5 to our Current Report on             Form 8-K dated February 16, 2006 (File No. 0-13634).                                          79        10.23* Form of Severance Agreement, dated February 13, 2006, by and between             the Company and Bernard R. Patriacca, incorporated by reference to             Exhibit 10.6 to our Current Report on Form 8-K dated February 16,             2006 (File No. 0-13634).      10.24* Form of Employment Agreement, dated February 13, 2006, by and             between the Company and Glenn E. Deegan, including Form of             Confidential Information, Inventions and Non-Competition Agreement             (attached as Exhibit B to the Form of Employment Agreement),             incorporated by reference to Exhibit 10.7 to our Current Report on             Form 8-K dated February 16, 2006 (File No. 0-13634).      10.25* Form of Severance Agreement, dated February 13, 2006, by and between             the Company and Glenn E. Deegan, incorporated by reference to             Exhibit 10.8 to our Current Report on Form 8-K dated February 16,             2006 (File No. 0-13634).      10.26  Securities Purchase Agreement among MacroChem, Bay Harbor             Investments, Inc. and Strong River Investments, Inc., incorporated             by reference to Exhibit 10.1 to our Current Report on Form 8-K dated             October 23, 2000 (File No. 0-13634).      10.27  Form of Registration Rights Agreement by and among MacroChem, Bay             Harbor Investments, Inc. and Strong River Investments, Inc.,             incorporated by reference to Exhibit 10.4 to our Current Report on             Form 8-K dated October 23, 2000 (File No. 0-13634).      10.28  Securities Purchase Agreement among MacroChem, Pine Ridge Financial             Ltd., DMG Legacy International, Ltd., SDS Merchant Fund, LP, Par             Investment Partners, L.P., Narragansett I, LP, and Narragansett             Offshore Ltd., incorporated by reference to Exhibit 10.1 to our             Current Report on Form 8-K dated July 24, 2001 (File No. 0-13634).      10.29  Form of Warrant incorporated by reference to Exhibit 10.2 to our             Current Report on Form 8-K dated July 24, 2001 (File No. 0-13634).      10.30  Form of Registration Rights Agreement by and among MacroChem, Pine             Ridge Financial Ltd., DMG Legacy International, Ltd., SDS Merchant             Fund, LP, Par Investment Partners, L.P., Narragansett I, LP, and             Narragansett Offshore Ltd., incorporated by reference to Exhibit             10.3 to our Current Report on Form 8-K dated July 24, 2001 (File No.             0-13634).      10.31  Securities Purchase Agreement, dated as of September 10, 2003, by             and among MacroChem and the purchasers listed on Schedule A thereto,             incorporated by reference to Exhibit 10.1 to our Current Report on             Form 8-K dated September 12, 2003 (File No. 0-13634).      10.32  Form of Warrant dated as of September 10, 2003, incorporated by             reference to Exhibit 10.2 to our Current Report on Form 8-K dated             September 12, 2003 (File No. 0-13634).      10.33  Registration Rights Agreement, dated as of September 10, 2003, by             and among MacroChem and the investors listed on the signature page             thereto, incorporated by reference to Exhibit 10.3 to our Current             Report on Form 8-K dated September 12, 2003 (File No. 0-13634).                                          80        10.34  Securities Purchase Agreement, dated as of March 9, 2004, by and             among MacroChem and the purchasers listed on Schedule A thereto,             incorporated by reference to Exhibit 10.1 to our Current Report on             Form 8-K dated March 10, 2004 (File No. 0-13634).      10.35  Form of Warrant dated as of March 9, 2004, incorporated by reference             to Exhibit 10.2 to our Current Report on Form 8-K dated March 10,             2004 (File No. 0-13634).      10.36  Registration Rights Agreement, dated as of March 9, 2004, by and             among MacroChem and the investors listed on the signature page             thereto, incorporated by reference to Exhibit 10.3 to our Current             Report on Form 8-K dated March 10, 2004 (File No. 0-13634).      10.37  Investor Rights Agreement dated as of December 23, 2005 between             MacroChem Corporation, SCO Capital Partners LLC and Lake End Capital             Partners LLC incorporated by reference to Exhibit 10.2 to our             Current Report on Form 8-K dated December 27, 2005 (File             No.0-13634).      10.38  Amended and Restated Investor Rights Agreement dated as of February             13, 2006, between MacroChem Corporation and the purchasers listed on             the signature pages thereto incorporated by reference to Exhibit             10.2 to our Current Report on Form 8-K dated February 16, 2006 (File             No.0-13634).      10.39  Securities Purchase Agreement, dated as of April 19, 2005, by and             between MacroChem Corporation and the institutional investors listed             on the signature pages thereto, incorporated by reference to Exhibit             10.1 to our Current Report on Form 8-K dated April 22, 2005 (File             No. 0-13634).      10.40  Securities Purchase Agreement, dated as of April 19, 2005, by and             between MacroChem Corporation and the directors and officers of             MacroChem Corporation listed on the signature pages thereto,             incorporated by reference to Exhibit 10.2 to our Current Report on             Form 8-K dated April 22, 2005 (File No. 0-13634).      10.41  Registration Rights Agreement, dated as of April 19, 2005 by and             among MacroChem Corporation and the purchasers listed on the             signature page thereto, incorporated by reference to Exhibit 10.3 to             our Current Report on Form 8-K dated April 22, 2005 (File No.             0-13634).      10.42  Preferred Stock and Warrant Purchase Agreement, dated as of December             23, 2005, by and between MacroChem Corporation and the purchasers             listed on Schedule 1 thereto, incorporated by reference to Exhibit             10.1 to our Current Report on Form 8-K dated December 27, 2005 (File             No. 0-13634).      10.43  Investor Rights Agreement, dated as of December 23, 2005 by and             among MacroChem Corporation and the purchasers listed on the             signature page thereto, incorporated by reference to Exhibit 10.2 to             our Current Report on Form 8-K dated December 27, 2005 (File No.             0-13634).      10.44  Amended and Restated Preferred Stock and Warrant Purchase Agreement,             dated as of February 13, 2006, by and between the Company and the             purchasers listed on the signature pages thereto, incorporated by             reference to Exhibit 10.1 to our Current Report on Form 8-K dated             February 16, 2006 (File No. 0-13634).                                          81        10.45  Lease between GLB Lexington Limited Partnership and MacroChem dated             as of July 21, 1999, for space located at 110 Hartwell Avenue,             Lexington, MA 02421, incorporated by reference to Exhibit 10.11 to             our Annual Report on Form 10-K for the year ended December 31, 1999             (File No. 0-13634).      10.46  First Amendment to Lease between GLB Lexington Limited Partnership             and MacroChem dated as of October 19, 2004, for space located at 110             Hartwell Avenue, Lexington, MA 02421, incorporated by reference to             Exhibit 10.39 to our Annual Report on Form 10-K for the year ended             December 31, 2004 (File No. 0-13634).      10.47  Sublease Agreement, dated as of August 31, 2005, by and between             MacroChem Corporation and ActivBiotics, Inc., incorporated by             reference to Exhibit 10.1 to our Current Report on Form 8-K dated             September 16, 2005 (File No. 0-13634).      16.1   Letter from Deloitte & Touche LLP to the Securities and Exchange             Commission dated January 27, 2006, incorporated by reference to             Exhibit 16.1 to our Current Report on Form 8-K dated January 30,             2006 (File No. 0-13634).      23.1   Consent of Vitale, Caturano & Company, Ltd., an Independent             Registered Public Accounting Firm      23.2   Consent of Deloitte & Touche, LLP, an Independent Registered             Public Accounting Firm      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.  - -------------------------- *Management contract or compensatory plan or arrangement                                         82                                       SIGNATURES        Pursuant to the requirements of Section 13 or 15(d) 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.                                                 MACROCHEM CORPORATION  Dated:    March 28, 2006                       By: /s/  Robert J. DeLuccia         ----------------------------               ----------------------------                                                    Robert J. DeLuccia                                                    President and Chief Executive                                                    Officer   Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 28, 2006.  /s/  Robert J. DeLuccia                          President and - ---------------------------------                Chief Executive Officer Robert J. DeLuccia   /s/  Bernard R. Patriacca                        Vice President and - ---------------------------------                Chief Financial Officer Bernard R. Patriacca   /s/  John L. Zabriskie                           Chairman, Board of Directors - --------------------------------- John L. Zabriskie, Ph.D.   /s/  Peter G. Martin                             Director - --------------------------------- Peter G. Martin   /s/  Michael A. Davis                            Director - --------------------------------- Michael A. Davis, M.D.   /s/ Jeffrey B. Davis                             Director - --------------------------------- Jeffrey B. Davis   /s/ Paul S. Echenberg                            Director - --------------------------------- Paul S. Echenberg   /s/ Howard S. Fischer                            Director - --------------------------------- Howard S. Fischer                                          83    EX-3.(I) 2 arcertofincorp.txt A&R CERTIFICATE OF INCORPORATION                                AMENDED AND RESTATED                           CERTIFICATE OF INCORPORATION                                        OF                               MACROCHEM CORPORATION        1. The name of the Corporation is MacroChem Corporation.       2. The address of its registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is the Corporation Trust Company.       3. The nature of the business or purposes to be conducted or promoted is:       To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.       4. The total number of shares of stock which the corporation shall have authority to issue is one hundred-six million (106,000,000) shares, 100,000,000 of which shall be Common Stock, of the par value of One Cent ($.01) per share; 6,000,000 of which shall be Preferred Stock, of the par value of One Cent ($.01) per share, 500,000 of which shall be designated as "Series A Convertible Preferred Stock", of the par value of One Cent ($.01) per share, and 1,500 of which shall be designated as "Series C Cumulative Convertible Preferred Stock", of the par value of One Cent ($.01) per share, amounting in the aggregate to One Million Sixty Thousand and 00/100 Dollars ($1,060,000.00). Effective as of 5:00 p.m., Eastern time, on the date this Certificate of Amendment of the Certificate of Incorporation is filed with the Secretary of State of the State of Delaware [February 9, 2006], each six (6) shares of the Corporation's Common Stock, par value $.01 per share, issued and outstanding shall, automatically and without any action on the part of the respective holders thereof, be combined and converted into one (1) share of Common Stock, par value $.01 per share, of the Corporation. No fractional shares shall be issued and, in lieu thereof, any holder of less than one share of Common Stock shall be entitled to receive cash for such holder's fractional share based upon the closing sales price of the Corporation's Common Stock as reported on the over-the-counter market as of the date this Certificate of Amendment is filed with the Secretary of State of the State of Delaware [February 9, 2006].  Additional designations and powers, preferences and rights and qualifications, limitations or restrictions thereof of the shares of stock shall be determined by the Board of Directors of the Corporation from time to time.       5. The name and mailing address of the Corporation's incorporator is George A. Stevens, 110 Hartwell Avenue, Lexington, Massachusetts 02173.       6. The names and addresses of the following are to serve as the directors until the first annual meeting of the stockholders or until his successor are elected and qualified:           Alvin J. Karloff                  George A. Stevens          13 Clara Road                     55 Fifar Lane          Framingham, MA  01701             Lexington, MA  02173                                          84            Carlos M. Samour                  D. Raymond Taylor          254 Ocean Avenue                  Docugraphix, Inc.          Newport, RI  02840                1601 Saratoga Sunnyvale Road                                            Cupertino, CA   95014       7. The Corporation is to have perpetual existence.       8. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized:       To make, alter or repeal the bylaws of the Corporation.       To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation.       To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created.       By a majority of the whole board, to designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such agent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the Corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease, or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the bylaws of the Corporation; and, unless the resolution or bylaws expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock.       When and as authorized by the stockholders in accordance with statute, to sell, lease or exchange all or substantially all of the property and assets of the Corporation, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property, including shares of stock in, and/or other securities of, any other Corporation or Corporations, as its board of directors shall deem expedient and for the best interests of the Corporation.       9. To the maximum extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware, a director of this Corporation shall not be                                          85   personally liable to the Corporation or its stockholders for monetary damages for breach of any fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.       10. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement to any reorganization of this Corporation as consequences of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation.       11. Meetings of the stockholders may be held within or without the State of Delaware, as the bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of the Corporation. Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide.       12. The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.       THE UNDERSIGNED, being the incorporator named hereinbefore, for the purposes of forming a Corporation pursuant to the General Corporation Law of the State of Delaware, does make this certificate, hereby declaring and certifying that this is his act and deed and the facts herein stated are true, and accordingly, has hereunto set his hand this 14th day of May, 1992.                                              /s/ George A. Stevens                                             --------------------------                                             George A. Stevens                                           86   COMMONWEALTH OF MASSACHUSETTS)          )  ss.: COUNTY OF MIDDLESEX          )       BE IT REMEMBERED that on this 14th day of May, 1992, personally came before me, a Notary Public for the Commonwealth of Massachusetts, George A. Stevens, the party to the foregoing Certificate of Incorporation, known to me personally to be such, and acknowledged the said certificate to be his act and deed and that the facts stated therein are true.       GIVEN under my hand and seal of office the day and year aforesaid.                                                /s/  Jane M. Davenport                                             --------------------------                                             Notary Public                                             My commission expires on 03/04/94                                           87    EX-23 3 exhibit231.txt VC CONSENT                                                                      Exhibit 23.1              CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             --------------------------------------------------------   As independent registered public accountants, we hereby consent to the incorporation of our report dated March 20, 2006 relating to the financial statements of MacroChem Corporation for the year ended December 31, 2005 included in this Form 10-K, into the Company's previously filed Registration Statement Nos. 33-82298, 333-34533, 333-50402, 333-67058, 333-109554, 333-114724 and 333-124966 of MacroChem Corporation on Form S-3 and Registration Statement Nos. 33-48876, 33-85812, 333-28967 and 333-67080 of MacroChem Corporation on Form S-8.     /s/Vitale, Caturano & Company, Ltd.  VITALE, CATURANO & COMPANY, LTD.   March 27, 2006 Boston, Massachusetts                                            88    EX-23 4 exhibit232.txt D&T CONSENT                                                                      Exhibit 23.2   CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We consent to the incorporation by reference in Registration Statement Nos. 33-82298, 333-34533, 333-50402, 333-67058, 333-109554 333-114724 and 333-124966 on Form S-3 and Registration Statement Nos. 33-48876, 33-85812, 333-28967 and 333-67080 of MacroChem Corporation on Form S-8 of our report dated March 24, 2005, relating to the financial statements for the year ended December 31, 2004 of MacroChem Corporation, which report contained an explanatory paragraph relating to the Company's ability to continue as a going concern, appearing in this Annual Report on Form 10-K of MacroChem Corporation for the year ended December 31, 2005.  /s/ Deloitte & Touche LLP  Boston, Massachusetts March 27, 2006                                           89    EX-31 5 exhibit311.txt EXHIBIT 31.1 RJD CERTIFICATION                                                                      EXHIBIT 31.1                              CERTIFICATION PURSUANT TO                   SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002   CERTIFICATIONS  I, Robert J. DeLuccia, certify that:  1.   I have reviewed this annnual report on Form 10-K of MacroChem Corporation;  2.   Based on my knowledge, this report does not contain any untrue statement of      a material fact or omit to state a material fact necessary to make the      statements made, in light of the circumstances under which such statements      were made, not misleading with respect to the period covered by this      report;  3.   Based on my knowledge, the financial statements, and other financial      information included in this report, fairly present in all material      respects the financial condition, results of operations and cash flows of      the registrant as of, and for, the periods presented in this report;  4.   The registrant's other certifying officer(s) and I are responsible for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we      have:  a)   Designed such disclosure controls and procedures, or caused such disclosure      controls and procedures to be designed under our supervision, to ensure      that material information relating to the registrant, including its      consolidated subsidiaries, is made known to us by others within those      entities, particularly during the period in which this report is being      prepared;  b)   Evaluated the effectiveness of the registrant's disclosure controls and      procedures and presented in this report our conclusions about the      effectiveness of the disclosure controls and procedures, as of the end of      the period covered by this report based on such evaluation; and  c)   Disclosed in this report any change in the registrant's internal control      over financial reporting that occurred during the registrant's most recent      fiscal quarter (the registrant's fourth fiscal quarter in the case of an      annual report) that has materially affected, or is reasonably likely to      materially affect, the registrant's internal control over financial      reporting; and  5.   The registrant's other certifying officer(s) and I have disclosed, based on      our most recent evaluation of internal control over financial reporting, to      the registrant's auditors and the audit committee of the registrant's board      of directors (or persons performing the equivalent functions):                                         90   a)   All significant deficiencies and material weaknesses in the design or      operation of internal control over financial reporting which are reasonably      likely to adversely affect the registrant's ability to record, process,      summarize and report financial information; and  b)   Any fraud, whether or not material, that involves management or other      employees who have a significant role in the registrant's internal control      over financial reporting.  Date:    March 27, 2006          --------------                                               /s/ Robert J. DeLuccia                                            -------------------------------------                                            Robert J. DeLuccia                                            President and Chief Executive Officer                                                           91    EX-31 6 exhibit312.txt EXHIBIT 31.2 BRP CERTIFICATION                                                                      EXHIBIT 31.2                              CERTIFICATION PURSUANT TO                   SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002   CERTIFICATIONS  I, Bernard R. Patriacca, certify that:  1.   I have reviewed this annual report on Form 10-K of MacroChem Corporation;  2.   Based on my knowledge, this report does not contain any untrue statement of      a material fact or omit to state a material fact necessary to make the      statements made, in light of the circumstances under which such statements      were made, not misleading with respect to the period covered by this      report;  3.   Based on my knowledge, the financial statements, and other financial      information included in this report, fairly present in all material      respects the financial condition, results of operations and cash flows of      the registrant as of, and for, the periods presented in this report;  4.   The registrant's other certifying officer(s) and I are responsible for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we      have:  a)   Designed such disclosure controls and procedures, or caused such disclosure      controls and procedures to be designed under our supervision, to ensure      that material information relating to the registrant, including its      consolidated subsidiaries, is made known to us by others within those      entities, particularly during the period in which this report is being      prepared;  b)   Evaluated the effectiveness of the registrant's disclosure controls and      procedures and presented in this report our conclusions about the      effectiveness of the disclosure controls and procedures, as of the end of      the period covered by this report based on such evaluation; and  c)   Disclosed in this report any change in the registrant's internal control      over financial reporting that occurred during the registrant's most recent      fiscal quarter (the registrant's fourth fiscal quarter in the case of an      annual report) that has materially affected, or is reasonably likely to      materially affect, the registrant's internal control over financial      reporting; and  5.   The registrant's other certifying officer(s) and I have disclosed, based on      our most recent evaluation of internal control over financial reporting, to      the registrant's auditors and the audit committee of the registrant's board      of directors (or persons performing the equivalent functions):                                          92   a)   All significant deficiencies and material weaknesses in the design or      operation of internal control over financial reporting which are reasonably      likely to adversely affect the registrant's ability to record, process,      summarize and report financial information; and  b)   Any fraud, whether or not material, that involves management or other      employees who have a significant role in the registrant's internal control      over financial reporting.  Date:    March 27, 2006          --------------                                             /s/ Bernard R. Patriacca                                          ---------------------------------------                                          Bernard R. Patriacca                                          Vice President, Chief Financial Officer                                          and Treasurer                                                             93    EX-32 7 exhibit321.txt EXHIBIT 32.1 RJD CERTIFICATION                                                                      EXHIBIT 32.1                               CERTIFICATION 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    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, the undersigned, as chief executive officer of MacroChem Corporation (the "Company"), does hereby certify that to the undersigned's knowledge:       1) the Company's Annual Report on Form 10-K for the year ended         December 31, 2005 as filed with the Securities and Exchange Commission         (the "Form 10-K") fully complies with the requirements of Section 13(a)         or 15(d) of the Securities Exchange Act of 1934; and       2) the information contained in the Company's Form 10-K fairly presents, in         all material respects, the financial condition and results of operations         of the Company.                                      /s/  Robert J. DeLuccia                                     -------------------------------------                                     Robert J. DeLuccia                                     President and Chief Executive Officer  Dated:    March 27, 2006           --------------   A signed original of this written statement required by Section 906 has been provided to MacroChem Corporation and will be retained by MacroChem Corporation and furnished to the Securities and Exchange Commission or its staff upon request.                                                        94             EX-32 8 exhibit322.txt EXHIBIT 32.2 BRP CERTIFICATION                                                                      Exhibit 32.2                               CERTIFICATION 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    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, the undersigned, as chief financial officer of MacroChem Corporation (the "Company"), does hereby certify that to the undersigned's knowledge:       1) Company's Annual Report on Form 10-K for the year ended December 31,         2005 as filed with the Securities and Exchange Commission (the "Form         10-K") fully complies with the requirements of Section 13(a) or 15(d) of         the Securities Exchange Act of 1934; and       2) the information contained in the Company's Form 10-K fairly presents, in         all material respects, the financial condition and results of operations         of the Company.                             /s/  Bernard R. Patriacca                            -----------------------------------------------------                            Bernard R. Patriacca                            Vice President, Chief Financial Officer and Treasurer   Dated:    March 27, 2006           --------------    A signed original of this written statement required by Section 906 has been provided to MacroChem Corporation and will be retained by MacroChem Corporation and furnished to the Securities and Exchange Commission or its staff upon request.                                                        95         -----END PRIVACY-ENHANCED MESSAGE-----