<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                _______________

                                   FORM 10-Q

(Mark One)
   [X]              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                          OF THE SECURITIES EXCHANGE ACT OF 1934.

                     For the Quarterly Period Ended March 31, 2001.

                                       or

 [  ]              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934.

                 For the Transition Period from ___________ to __________.

                            Commission File No. 0-19651
                                 _______________

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


                 Delaware                                13-3445668
                 --------                                ----------
       (State or other jurisdiction of                   (IRS Employer
        incorporation or organization)               Identification Number)

              5110 Campus Drive
       Plymouth Meeting, Pennsylvania                        19462
       ------------------------------                        -----
(Address of principal executive offices)                   (ZIP Code)


                                  610-941-4020
                                  ------------
              (Registrant's telephone number, including area code)


  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  [x]   No  [   ]

  The number of outstanding shares of the Registrant's Common Stock, par value
$.002 per share, on May 9, 2001 was 32,783,886.


================================================================================

<PAGE>

                              GENAERA CORPORATION
                         QUARTERLY REPORT ON FORM 10-Q
                      FOR THE QUARTER ENDED MARCH 31, 2001

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                 Page
                                                                                 ----
<S>      <C>                                                                    <C>
PART I - FINANCIAL INFORMATION
 Item 1.  Financial Statements (unaudited):
          Balance Sheets as of March 31, 2001 and December 31, 2000..........      3
          Statements of Operations for the three-months ended
                March 31, 2001 and 2000......................................      4
          Statements of Cash Flows for the three-months ended
                March 31, 2001 and 2000......................................      5
          Notes to Financial Statements......................................      6
 Item 2.  Management's Discussion and Analysis of Financial Condition
                and Results of Operations....................................     10
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk.........     19

PART II - OTHER INFORMATION
 Item 1.  Legal Proceedings...................................................    20
 Item 2.  Changes in Securities and Use of Proceeds...........................    20
 Item 3.  Defaults Upon Senior Securities.....................................    20
 Item 4.  Submission of Matters to a Vote of Security Holders.................    20
 Item 5.  Other Information...................................................    20
 Item 6.  Exhibits and Reports on Form 8-K....................................    20

SIGNATURES....................................................................    21

</TABLE>

                                       2
<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                              GENAERA CORPORATION
                                 BALANCE SHEETS
                 (Amounts in thousands, except per share data)


<TABLE>
<CAPTION>

                                                                                  March 31, 2001   December 31, 2000
                                                                                  ---------------  ------------------
                                                                                    (Unaudited)
<S>                                                                                <C>             <C>
                            ASSETS
Current assets:
  Cash and cash equivalents.........................................................   $     806           $     599
  Short-term investments (Note 2)...................................................      14,043              18,434
  Prepaid expenses and other........................................................         719                 345
                                                                                       ---------           ---------
    Total current assets............................................................      15,568              19,378
Fixed assets, net...................................................................       1,078               1,144
Other assets........................................................................         212                 179
                                                                                       ---------           ---------
     Total assets...................................................................   $  16,858           $  20,701
                                                                                       =========           =========

      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.............................................   $   2,137           $   2,093
  Note payable (Note 2).............................................................       2,500               2,500
  Accrued development expense - short-term (Note 6).................................          --               1,392
                                                                                       ---------           ---------
    Total current liabilities.......................................................       4,637               5,985
Accrued development expense - long-term (Note 6)....................................       2,008               1,967
Deferred rent.......................................................................          39                  43
Redeemable convertible preferred stock (liquidation value of $1,264 and $1,233
 at March 31, 2001 and December 31, 2000, respectively) (Note 4)....................       1,264               1,233
Commitments, contingencies and other matters (Note 6)...............................
Stockholders' equity (Note 3):
Preferred stock - $.001 par value; 9,211 shares authorized; 1.2 shares issued
   and outstanding as Series A redeemable convertible preferred stock...............          --                  --
Common stock - $.002 par value; 45,000 shares authorized; 32,544 and 32,393
   shares issued and outstanding at March 31, 2001 and
   December 31, 2000, respectively..................................................          65                  65
Additional paid-in capital..........................................................     169,354             168,967
Accumulated other comprehensive income - unrealized gain on investments.............          22                   9
Accumulated deficit.................................................................    (160,531)           (157,568)
                                                                                       ---------           ---------
    Total stockholders' equity......................................................       8,910              11,473
                                                                                       ---------           ---------
     Total liabilities and stockholders' equity.....................................   $  16,858           $  20,701
                                                                                       =========           =========

</TABLE>
                See accompanying notes to financial statements.

                                       3
<PAGE>

                              GENAERA CORPORATION
                           STATEMENTS OF OPERATIONS
                                  (Unaudited)
                 (Amounts in thousands, except per share data)
<TABLE>
<CAPTION>


                                                                            Three Months Ended
                                                                                  March 31,
                                                                           ----------------------
<S>                                                                         <C>         <C>
                                                                                2001        2000
                                                                            ---------   ---------
Revenues....................................................................  $    --     $    --
Costs and expenses:
 Research and development...................................................    2,293       1,917
 General and administrative.................................................      781         495
                                                                              -------     -------
                                                                                3,074       2,412
                                                                              -------     -------
Loss from operations........................................................   (3,074)     (2,412)
Interest income.............................................................      240         134
Interest expense............................................................      (98)       (146)
                                                                              -------     -------
Net loss....................................................................   (2,932)     (2,424)
Dividends on preferred stock................................................       31          --
                                                                              -------     -------
Net loss applicable to common stockholders..................................  $(2,963)    $(2,424)
                                                                              =======     =======

Net loss applicable to common stockholders per share - basic and diluted....   $(0.09)     $(0.09)
                                                                              =======     =======

Weighted average shares outstanding - basic and diluted.....................   32,397      26,996
                                                                              =======     =======

</TABLE>




                See accompanying notes to financial statements.

                                       4
<PAGE>

                              GENAERA CORPORATION
                           STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                            (Amounts in thousands)


<TABLE>
<CAPTION>


                                                                             Three Months Ended March 31,
                                                                             ----------------------------
                                                                                  2001          2000
                                                                                --------     ---------
<S>                                                                          <C>             <C>
Cash Flows From Operating Activities:
 Net loss...................................................................... $(2,932)       $(2,424)
 Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization................................................     223            228
  Amortization of investment discounts/premiums................................    (189)           (94)
  Compensation expense on option grants and equity awards......................      86             48
 Changes in operating assets and liabilities:
  Increase in prepaid expenses and other.......................................    (407)          (107)
  Increase (decrease) in accounts payable and accrued expenses.................      44            (98)
  Increase (decrease) in accrued development expenses..........................  (1,351)           100
  Decrease in deferred rent....................................................      (4)            (2)
                                                                                -------        -------
Net cash used in operating activities..........................................  (4,530)        (2,349)
                                                                                -------        -------

Cash Flows From Investing Activities:
 Purchase of investments.......................................................  (6,796)        (4,650)
 Proceeds from maturities of investments.......................................  11,389          6,750
 Capital expenditures..........................................................    (157)           (30)
                                                                                -------        -------
Net cash provided by investing activities......................................   4,436          2,070
                                                                                -------        -------

Cash Flows From Financing Activities:
 Proceeds from exercise of stock options.......................................     301            446
                                                                                -------        -------
Net cash provided by financing activities......................................     301            446
                                                                                -------        -------
Net increase in cash and cash equivalents......................................     207            167
Cash and cash equivalents at beginning of period...............................     599          2,435
                                                                                -------        -------
Cash and cash equivalents at end of period..................................... $   806        $ 2,602
                                                                                =======        =======

Supplemental Cash Flow Information:

Cash paid during the period for interest....................................... $    56        $    46
                                                                                =======        =======

</TABLE>



                See accompanying notes to financial statements.

                                       5
<PAGE>

                              GENAERA CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (Unaudited)

--------------------------------------------------------------------------------
NOTE 1.  Basis of Presentation

  The accompanying financial statements of Genaera Corporation ("Genaera" or the
"Company") are unaudited and have been prepared by the Company pursuant to the
rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for
interim financial statements. The December 31, 2000 balance sheet was derived
from audited financial statements, however, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations. The Company believes that the financial
statements include all adjustments of a normal and recurring nature necessary to
present fairly the results of operations, financial position, changes in
stockholders' equity and cash flows for the periods presented. Results of
operations for interim periods are not necessarily indicative of those to be
achieved for full fiscal years. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000. There
have been no material changes in accounting policies from those stated in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.

NOTE 2.  Note Payable

  Under the terms of its note payable, the Company makes monthly interest-only
payments at an annual rate of 9.125%, with principal due in June 2001. The
Company maintained investments with an approximate market value of $2,748,000 at
the bank as collateral for the note payable as of March 31, 2001.

NOTE 3.  Stockholders' Equity

  The changes in stockholders' equity from December 31, 2000 to March 31, 2001
are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                     Accumulated
                                        Common Stock                    Other                     Total
                                      -----------------  Additional    Compre-                   Stock-
                                        Number            Paid-in      hensive    Accumulated   holders'
                                      of Shares  Amount   Capital      Income       Deficit      Equity
                                      ---------  ------  ----------  -----------  ------------  ---------
<S>                                   <C>        <C>     <C>         <C>          <C>           <C>
Balance at December 31, 2000.......      32,393     $65    $168,967          $ 9    $(157,568)   $11,473
 Exercise of stock options and
  compensation expense on
  option grants and stock awards...         151      --         387           --           --        387
 Dividends on preferred stock......          --      --          --           --          (31)       (31)
 Comprehensive loss:
     Net loss......................          --      --          --           --       (2,932)    (2,932)
     Carrying value adjustment.....          --      --          --           13           --         13
                                      ---------  ------  ----------  -----------    ---------    -------
 Total comprehensive loss..........          --      --          --           --           --     (2,919)
                                      ---------  ------  ----------  -----------    ---------    -------

Balance at March 31, 2001..........      32,544     $65    $169,354          $22    $(160,531)   $ 8,910
                                      =========  ======  ==========  ===========    =========    =======
</TABLE>

                                       6
<PAGE>

                              GENAERA CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (Unaudited)

--------------------------------------------------------------------------------


NOTE 4.  Preferred Stock

  The Company's certificate of incorporation provides the board of directors the
power to issue shares of preferred stock without stockholder approval. This
preferred stock could have voting rights, including voting rights that could be
superior to that of the Company's common stock, and the board of directors has
the power to determine these voting rights. As of March 31, 2001, the Company's
board of directors has designated 80,000 shares of preferred stock as Series A
convertible preferred stock (the "Series A Preferred Stock") and, as of April
18, 2001, 10,000 shares of preferred stock as Series B convertible preferred
stock (the "Series B Preferred Stock") (see "Note 7. Subsequent Events").

  In connection with an agreement with Genentech, Inc. (see "Note 5.
Collaboration Agreement"), 1,188 shares of Series A Preferred Stock have been
issued as of March 31, 2001. Preferred dividends of $76,000 have been accrued as
of March 31, 2001 on the Series A Preferred Stock.


NOTE 5.  Collaboration Agreement

  In December 2000, Genentech provided notice to the Company of its election to
terminate the research, development, and commercialization collaboration
agreement covering the Company's IL-9 antibody development program and related
respiratory technology (the "Genentech Agreement").  See "Note 7. Subsequent
Events."


NOTE 6. Commitments, Contingencies and Other Matters

Manufacturing Agreement

  In January 1999 and prior, the Company entered into several agreements with
Abbott Laboratories providing for the purchase of approximately $10,000,000 of
bulk drug substance to be used in the manufacturing process for LOCILEX Cream.
As FDA approval of LOCILEX Cream did not occur, the Company renegotiated this
agreement with Abbott in September 1999, paying Abbott $4,200,000 at that time
and receiving partial delivery of material. An additional $3,400,000 is due to
Abbott and payable if the Company receives in excess of $10,000,000 of
additional funds (as defined in the agreement) in any year beginning in 2000, in
which case the Company must pay 15% of such excess over $10,000,000 to Abbott.
The Company recorded this conditional obligation as a liability in 1999 at its
then present value.  As a result of the Company's financing activities for the
year ended December 31, 2000 and other cash inflows, $1,392,000 of this
liability was payable and paid to Abbott on March 1, 2001. The Company has
accrued $2,008,000 as of March 31, 2001, which represents the remaining
conditional obligation.

Liquidity

  The Company has not generated any revenues from product sales and has funded
operations primarily from the proceeds of public and private placements of its
securities. Substantial additional financing will be required by the Company in
the near-term to fund its continuing research and development activities. No
assurance can be given that any such financing will be available when needed or
that the Company's research and development efforts will be successful.

  As described in "Note 7. Subsequent Events," in April 2001, the Company
entered into a research collaboration and licensing agreement and a preferred
stock purchase agreement with MedImmune, Inc.

                                       7
<PAGE>

                              GENAERA CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (Unaudited)

--------------------------------------------------------------------------------

("MedImmune") under which the Company received $10,312,500. After considering
this investment, and in the absence of raising additional funds or significantly
reducing expenses, the Company has sufficient resources to sustain operations
through 2002. The Company regularly explores alternative means of financing its
operations and seeks funding through various sources, including public and
private securities offerings and collaborative arrangements with third parties.
The Company currently does not have any commitments to obtain additional funds
and may be unable to obtain sufficient funding in the future on acceptable
terms, if at all. If the Company cannot obtain funding, it will need to delay,
scale back or eliminate research and development programs or enter into
collaborations with third parties to commercialize potential products or
technologies that it might otherwise seek to develop or commercialize
independently, or seek other arrangements. If the Company engages in
collaborations, it will receive lower consideration upon commercialization of
such products than if it had not entered into such arrangements or if it entered
into such arrangements at later stages in the product development process.


NOTE 7.  Subsequent Events

  In April 2001, Genentech and the Company executed a settlement agreement
pursuant to which all licensed technology under the Genentech Agreement was
returned to the Company. At that time, certain development expenditures owed to
the Company by Genentech were settled by the return to the Company and
cancellation of 300 shares of Series A Preferred Stock owned by Genentech.

  In April 2001, the Company entered into a research collaboration and licensing
agreement with MedImmune (the "MedImmune Agreement").  Under the MedImmune
Agreement, the Company and MedImmune will develop and commercialize antibodies
or recombinant molecules against IL-9 to prevent symptoms of asthma and other
respiratory diseases.  The companies also will collaborate on the creation of
specific assays and respiratory disease models for use in assessing product
candidates developed by MedImmune.  MedImmune will be responsible for
development, manufacturing, clinical testing, and marketing of any resulting
product.

  MedImmune will fund at least $2,500,000 for certain research and development
activities at the Company over the next two years in accordance with an
established research and development plan.  The Company could receive up to
$55,000,000 based on the successful completion of future milestones, plus
royalties on any product resulting from this agreement.

  MedImmune also purchased 10,000 shares of the Company's Series B Preferred
Stock for $10,000,000 at the closing of a related stock purchase agreement.
Prior to April 19, 2006, the Series B Preferred Stock is convertible, in whole
or in part, at the holder's option, into shares of the Company's common stock at
a conversion rate of 200 shares of common stock for each share of Series B
Preferred Stock. The maximum aggregate number of common shares issued upon a
conversion of all of the shares of Series B Preferred Stock before April 19,
2006 shall be 2,000,000 shares. The Series B Preferred Stock is convertible
after April 19, 2006, in whole or in part, at the Company's or holder's option,
into shares of the Company's common stock at a conversion rate determined by
dividing the original issue price of $1,000 per share by the lesser of (i) $5.00
or (ii) the 20-day average closing price of the common stock as of the
conversion date [the "Post-April 19, 2006 Conversion Rate"]. However, the
Company may not exercise its option to convert if the closing price of the
common stock is less than $2.15 per share on the day prior to notice of
conversion. In addition, the Series B Preferred Stock shall be automatically
convertible at any time in the event of a merger, consolidation or sale of

                                       8
<PAGE>

                              GENAERA CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (Unaudited)

--------------------------------------------------------------------------------
substantially all of the assets of the Company (a "Merger Event"), at the Post-
April 19, 2006 Conversion Rate. The maximum aggregate number of common shares
issued upon conversion of all of the shares of Series B Preferred Stock after
April 19, 2006 or at any time as a result of a Merger Event shall be 4,642,741
shares of common stock. The Series B Preferred Stock may also be redeemed, in
whole or in part, at any time at the Company's option at a cash redemption price
of $1,000 per share plus accrued and unpaid cumulative dividends to the date of
redemption. Holders of the Series B Preferred Stock have no rights to dividends
other than the right to participate in any dividends that may be declared on the
Company's common stock. With respect to liquidation and dividend rights, the
Series B Preferred Stock ranks senior to the Company's common stock and junior
to the Company's Series A Preferred Stock. In the event of any liquidation,
dissolution or winding up of the Company, the Series B Preferred Stock has a
liquidation preference of $1,000 per share plus accumulated and unpaid
cumulative dividends to the date of liquidation. Holders of the Series B
Preferred Shares have limited voting rights and generally do not have the right
to vote on matters submitted to the holders of the Company's common stock. See
"Note 6. Commitments, Contingencies, and Other Matters" for the effect of this
transaction on the amount payable to Abbott.

                                       9
<PAGE>

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

Forward Looking Statements

  Our disclosure and analysis in this Quarterly Report on Form 10-Q contains
some forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. Such
statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," "hope," and other words and terms
of similar meaning in connection with any discussion of future operating or
financial performance.  In particular, these include statements relating to
present or anticipated scientific progress, development of potential
pharmaceutical products, future revenues, capital expenditures, research and
development expenditures, future financing and collaborations, personnel,
manufacturing requirements and capabilities, and other statements regarding
matters that are not historical facts or statements of current condition.

  Any or all of our forward-looking statements in this Quarterly Report on Form
10-Q may turn out to be wrong. They can be affected by inaccurate assumptions we
might make or by known or unknown risks and uncertainties. Many factors
mentioned in the discussion below will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially.

  We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our filings with the U.S. Securities and Exchange Commission. This discussion
is provided as permitted by the Private Securities Litigation Reform Act of
1995.

Risk Factors Related to Our Business

  Any investment in shares of our common stock involves a high degree of risk.
You should carefully consider the following risk factors, together with the
other information presented in this Quarterly Report on Form 10-Q and our Annual
Report on Form 10-K for the year ended December 31, 2000.

If We Do Not Raise Additional Capital, We May Not Be Able to Continue Our
Research and Development Programs and May Never Commercialize Any Products.

  We maintained cash and investments of $14.8 million at March 31, 2001. At
March 31, 2001, we had current liabilities of $4.6 million and long-term
liabilities of $2.0 million. In April 2001, we entered into a research
collaboration and licensing agreement and a preferred stock purchase agreement
with MedImmune Inc. pursuant to which we received $10.3 million. After
considering this investment, and in the absence of raising additional funds or
significantly reducing expenses, we have sufficient resources to sustain
operations through 2002. We will need to raise substantial additional funds in
the future to continue our research and development programs and to
commercialize our potential products. If we are unable to raise such funds, we
may be unable to complete our development activities for any of our proposed
products.

  We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do not
have any commitments to obtain additional funds, and may be unable to obtain
sufficient funding in the future on acceptable terms, if at all.  If we cannot
obtain funding, we will need to delay, scale back or eliminate research and
development programs or enter into collaborations with third-parties to
commercialize potential products or technologies that we might otherwise seek to
develop or commercialize ourselves, or seek other arrangements.  If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.

                                       10
<PAGE>

  We expect to evaluate all available strategic alternatives to finance our
programs and technology, including broad-based alliances or mergers intended to
create better-financed entities.

We Expect to Continue to Incur Substantial Losses.

  To date, we have engaged primarily in the research and development of drug
candidates.  We have not generated any revenues from product sales and have
incurred losses in each year since our inception.  As of March 31, 2001, we had
an accumulated deficit of approximately $160.5 million.

  Our proposed products are in a relatively early developmental stage and will
require significant research, development and testing.  We must obtain
regulatory approvals for all of our proposed products prior to commercialization
of the product.  Our operations are also subject to various competitive and
regulatory risks. As a result, we are unable to predict when or if we will
achieve any product revenues.  We expect to experience substantial losses in the
foreseeable future as we continue our research, development and testing efforts,
which will cause us to have continued negative results of operations.

If We Do Not Obtain Required Regulatory Approvals, We Will Not Be Able to
Commercialize Any of Our Product Candidates.

  Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities.  Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates.  In general, the process of obtaining
government approval is time consuming and costly.

  Governmental authorities may delay or deny the approval of any of our drug
candidates.  In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts.  A delay or denial of
regulatory approval for any of our drug candidates will materially affect our
business.

  If we receive approval of a product candidate, it may be conditioned upon
certain limitations and restrictions as to the drugs used and may be subject to
continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including:

    . warning letters;
    . fines;
    . withdrawal of regulatory approval;
    . product recalls;
    . operating restrictions;
    . injunctions; and
    . criminal prosecution.

We Will Rely on Marketing and Development Partners and if They Do Not Perform as
Expected, We May Not Successfully Commercialize Our Products.

  We do not have our own sales and marketing staff. In order to successfully
develop and market our future products, we must enter into marketing and
distribution arrangements with third parties. We also expect to delegate the
responsibility for all, or a significant portion, of the development and
regulatory approval for certain products to partners. If our partners do not
develop an approvable or marketable product or do not market a product
successfully, we may not achieve necessary product revenues. Additionally, we
may be unable to enter into other successful arrangements.

  We do not have control over the amount and timing of resources to be devoted
to our products by our collaborative partners. In the future, the interests of
our collaborators may not be consistent with our

                                       11
<PAGE>

interests. Collaborators may develop products independently or through third
parties that could compete with our proposed products. For example,
GlaxoSmithKline maintains a significant presence in the antibiotic area and
currently sells a topical antibiotic product indicated for the treatment of
certain skin infections. In addition, a partner may decide to end a relationship
with us. For example, in December 2000, Genentech provided notice to us of their
election to terminate the collaboration agreement covering the IL-9 antibody
development program and related respiratory technology.

  We also may decide to establish our own sales force to market and sell certain
products. Although some members of our management have limited experience in
marketing pharmaceutical products, we have no experience with respect to
marketing our products. If we choose to pursue this alternative, we will need to
spend significant additional funds and devote significant management resources
and time to establish a successful sales force. Given our inexperience in
establishing and managing a sales force, this effort may not be successful.
Given our financial resources, our efforts in this area would likely be modest
compared to our competitors.

If We Are Not Able to Innovate and Develop Products as Rapidly as Our
Competitors, Our Products May Not Achieve Market Acceptance.

  The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
Many companies are currently involved in research and development activities
focused on the pathogenesis of disease, and the competition among companies
attempting to find genes responsible for disease is intense. In addition, we are
aware that research on compounds derived from animal host-defense systems is
being conducted by others.  Most of these entities have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than we have. We also may face competition from companies using different or
advanced techniques that could render our future products obsolete.

  Many companies are working to develop and market products intended for the
additional disease areas being targeted, including cancer and asthma.  A number
of major pharmaceutical companies have significant franchises in these disease
areas, and can be expected to invest heavily to protect their interests.  In the
cancer field, anti-angiogenic agents are under development at a number of
companies.  In the asthma field, other biopharmaceutical companies also have
reported the discovery of genes relating to asthma.

  We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made.  Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses.  We will be competing with companies that
have significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining regulatory
approvals of such products.  Some of these companies may be in advanced phases
of clinical testing of various drugs that may be competitive with our proposed
products.

  Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with our technology.  In
addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting highly
qualified scientific personnel.

                                       12
<PAGE>

If We Do Not Develop and Maintain Relationships With Contract Manufacturers, We
May Not Successfully Commercialize Our Products.

  We currently do not have the resources, facilities, or technical capabilities
to manufacture any of our proposed products in the quantities and quality
required for commercial sale. We have no plans to establish a manufacturing
facility. We expect to depend upon contract manufacturers for commercial scale
manufacturing of our proposed products in accordance with regulatory standards.
For example, we are currently working with outside contractors for the chemical
production of squalamine. This dependence on contract manufacturers may restrict
our ability to develop and deliver products on a timely, profitable and
competitive basis expecially because the number of companies capable of
producing our proposed products is limited. Furthermore, production of
squalamine and other proposed products will require significant expenditure by
us. We may be unable to maintain arrangements with qualified outside contractors
to manufacture materials at costs that are affordable to us, if at all.

  Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a manufacturing
process.  In order to engage another manufacturer, we may need to obtain a
license or other technology transfer from the original contract manufacturer.
Even if a license is available from the original contract manufacturer on
acceptable terms, we may be unable to successfully effect the transfer of the
technology to the new contract manufacturer.  Any such technology transfer may
also require the transfer of requisite data for regulatory purposes, including
information contained in a proprietary drug master file held by a contract
manufacturer.  If we rely on a contract manufacturer that owns the drug master
file, our ability to change contract manufacturers may be more limited.

We Depend on Our Intellectual Property and, If We Are Unable to Protect Our
Intellectual Property, We May Not Realize Optimal Value from Our Technology.

  Patents

  Our success depends, in part, on our ability to develop and maintain a strong
patent position for our products and technologies, both in the United States and
other countries. As with most biotechnology and pharmaceutical companies, our
patent position is highly uncertain and involves complex legal and factual
questions.  Without patent and other protections, other companies could offer
substantially identical products for sale without incurring the sizeable
development and testing costs that we have incurred.  Our ability to recoup
these expenditures and realize profits upon commercialization could be
diminished.

  We cannot be certain that:

  . patents will issue from any of our patent applications;
  . our patent rights will be sufficient to protect our technology;
  . our patents will not be successfully challenged or circumvented by our
    competitors; or
  . our patent rights will provide us with any commercial advantages.

  The process of obtaining patents can be time consuming and expensive.  Even
after significant expenditure, a patent may not issue.  We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy until a patent issues and publications in
the scientific or patent literature lag behind actual discoveries.

                                       13
<PAGE>

     Even after we are issued patent rights, we cannot be certain that:

  . others will not develop similar technologies or duplicate the technology;
  . others will not design around the patented aspects of the technology;
  . we will not be obliged to defend ourselves in court against allegations of
    infringement of third-party patents;
  . our issued patents will be held valid in court; or
  . an adverse outcome in a suit would not subject us to significant liabilities
    to third parties, require rights to be licensed from third parties, or
    require us to cease using such technology.

  The cost of litigation related to patents can be substantial, regardless of
the outcome.

  Potential Ownership Disputes

  Disputes may arise as to the ownership of our technology.  Most of our
research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when technology was developed, and
assert rights to the technology.  These kinds of disputes have occurred in the
past.  We may not prevail in any such disputes.

  Similar technology ownership disputes may arise in the context of consultants,
vendors or third parties, such as contract manufacturers.  For example, our
consultants are employed by or have consulting agreements with third parties.
There may be disputes as to the capacity in which consultants are operating when
they  make certain discoveries.  We may not prevail in any such disputes.

  Other Intellectual Property

  In order to protect our proprietary technology and processes, we also rely on
trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators, and other advisors.
We may find that these agreements will be breached, or that our trade secrets
have otherwise become known or independently developed or discovered by our
competitors.

  Certain of our exclusive rights to patents and patent applications are
governed by contract.  Generally, these contracts require that we pay royalties
on sales of any products which are covered by patent claims. If we are unable to
pay the royalties, we may lose our patent rights.  Additionally, some of these
agreements also require that we develop the licensed technology under certain
timelines.  If we do not adhere to an acceptable schedule of commercialization,
we may lose our rights.

If We Cannot Recruit and Retain Qualified Management, We May Not Be Able to
Successfully Develop and Commercialize Our Products.

  We depend to a considerable degree on a limited number of key personnel.  Most
significant responsibilities have been assigned to a relatively small number of
individuals.  We do not maintain "key man" insurance on any of our employees.
The loss of certain management and technical personnel could adversely affect
our ability to develop and commercialize products.

                                       14
<PAGE>

We are Subject to Potential Product Liability Claims That Could Result in
Significant Expense if a Claim Arose.

  We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:

  . our proposed products cause some undesirable side effects or injury during
    clinical trials;
  . our products cause undesirable side effects or injury in the market; or
  . third parties that we have agreed to indemnify incur liability.

  While we carry insurance, this coverage is expensive and we may be unable to
maintain adequate coverage on acceptable terms.

If We Do Not Receive Adequate Third-Party Reimbursement for Any of Our Drug
Candidates, Some Patients May Be Unable to Afford Our Products and Sales Could
Suffer.

  In both the United States and elsewhere, the availability of reimbursement
from third-party payers, such as government health administration authorities,
private health insurers and other organizations, can impact prescription
pharmaceutical sales. These organizations are increasingly challenging the
prices charged for medical products and services, particularly where they
believe that there is only an incremental therapeutic benefit that does not
justify the additional cost.  Coverage and reimbursement may not be available
for our proposed products, or, if available, may not be adequate.  Without
insurance coverage, many patients may be unable to afford our products, which
may then not reach optimal sales levels.

  There also has been a trend toward government reforms intended to contain or
reduce the cost of health care. In certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been a number of federal and state proposals to
implement similar government control. We expect this trend to continue, but we
cannot predict the nature or extent of any reform that results. It is possible
that reform could impact pharmaceutical marketing, pricing and profit margins.
These reforms could adversely impact our ability to obtain financing for the
continued development of our proposed products. Furthermore, reforms could have
a broader impact by limiting overall growth of health care spending, such as
Medicare and Medicaid spending, which could also adversely affect our business.

The FDA Has Deemed Our NDA for LOCILEX(TM) Cream to Be Not Approvable, Which
Will Prevent Near Term Commercialization of the Product.

  We announced on July 26, 1999 that we received notification from the FDA that
our NDA for LOCILEX(TM) Cream had been deemed not approvable. LOCILEX(TM) Cream,
a topical cream antibiotic for the treatment of infection in diabetic foot
ulcers, was our lead product development candidate. With the FDA's decision,
near-term commercialization of LOCILEX(TM) Cream will not occur, and we will
generate no revenues from LOCILEX(TM) Cream in the near future.

  In order to again seek approval of LOCILEX(TM) Cream, the FDA has indicated
that we must conduct further development activities, including clinical and
manufacturing activities.  The specific nature of the clinical activities will
be determined after consultations with the FDA. As a result of its review of
manufacturing of the cream product, the FDA issued certain observations of
deficiencies in compliance with their GMP regulations.  In any additional
clinical studies to be conducted, new batches of the cream product will need to
be manufactured from the bulk drug substance, in compliance with FDA-determined
good manufacturing procedures, and meeting strict product specifications.  The
time required to conduct such further clinical and manufacturing development
efforts may be lengthy and costly, and the results may ultimately prove
unsuccessful.

                                       15
<PAGE>

Our Stock Price Is Extremely Volatile Due to a Number of Factors.

  The market prices and trading volumes for securities of biopharmaceutical and
biotechnology companies, including ours, have historically been, and will likely
continue to be, highly volatile.  Future events affecting our business, or that
of our competitors, may significantly impact our stock price, including:

  . product testing results;
  . technological innovations;
  . new commercial products;
  . government regulations;
  . proprietary rights;
  . regulatory actions; and
  . litigation.

We May Be Unable to Maintain the Standards for Listing on the Nasdaq National
Market, Which Could Impact the Liquidity of Our Common Stock and Could Subject
Our Common Stock to the ''Penny Stock'' Rules.

  Our common stock is listed on the Nasdaq National Market. Nasdaq requires
listed companies to maintain standards for continued listing, including a
minimum bid price for shares of a company's stock and a minimum tangible net
worth. If we are unable to maintain these standards, our common stock could be
delisted. Trading in our stock would then be conducted on the Nasdaq Small Cap
Market unless we are unable to meet the requirements for inclusion therein. If
we were unable to meet the requirements for inclusion in the Small Cap Market,
our common stock would be traded on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in quotations
published by the National Quotation Bureau, Inc. that are commonly referred to
as the ''pink sheets.'' As a result, it could be more difficult to sell or
obtain an accurate quotation as to the price of our common stock.

  In addition, if our common stock were delisted, it would be subject to the so-
called "penny stock" rules. The U.S. Securities and Exchange Commission has
adopted regulations that define a ''penny stock'' to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions,
such as any securities listed on a national securities exchange or quoted on
Nasdaq. For any transaction involving a "penny stock," unless exempt, the rules
impose additional sales practice requirements on broker-dealers, subject to
certain exceptions.

  For transactions covered by the "penny stock" rules, a broker-dealer must make
a special suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to the sale. The "penny
stock" rules also require broker-dealers to deliver monthly statements to "penny
stock" investors disclosing recent price information for the "penny stock" held
in the account, and information on the limited market in "penny stocks." Prior
to the transaction, a broker-dealer must provide a disclosure schedule relating
to the "penny stock" market.  In addition, the broker-dealer must disclose the
following:

  . commissions payable to the broker-dealer and the registered representative;
    and
  . current quotations for the security as mandated by the applicable
    regulations.

  If our common stock were delisted and determined to be a ''penny stock,'' a
broker-dealer may find it more difficult to trade our common stock and an
investor may find it more difficult to acquire or dispose of our common stock in
the secondary market.


                                       16
<PAGE>

The Exercise of Options and Warrants and Other Issuances of Shares Could Have a
Dilutive Effect on Our Stock Price.

  As of March 31, 2001, there were outstanding options to purchase an aggregate
of approximately 3,582,000 shares of our common stock at prices ranging from
$1.03 per share to $16.75 per share, of which approximately 1,971,000 were
exercisable as of such date.  Warrants to purchase 229,739 shares of our common
stock, currently exercisable at $8.00 per share, and warrants to purchase an
aggregate of 1,242,153 shares of our common stock, currently exercisable from
$5.06 to $6.79 per share, and subject to adjustment with future offerings also
were outstanding at March 31, 2001.  In addition, in connection with our private
placement in August 2000, we issued warrants to purchase an aggregate of 167,166
shares of our common stock, currently exercisable at $3.50 per share, and
subject to adjustment under certain circumstances.  Exercise of options and
warrants at prices below the market price of our common stock could adversely
affect the price of our common stock. Additional dilution may result from the
issuance of shares in connection with collaborations or manufacturing
arrangements or in connection with other financing efforts.

Our Certificate of Incorporation and Delaware Law Contain Provisions that Could
Discourage a Takeover.

  Our certificate of incorporation provides our board of directors the power to
issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock, and the board of directors has the power to
determine these voting rights. In addition, Section 203 of the Delaware General
Corporation Law contains provisions that impose restrictions on stockholder
action to acquire control of Genaera. The effect of these provisions of our
certificate of incorporation and Delaware law provisions would likely discourage
third parties from seeking to obtain control.

Results of Operations

Revenues

  We have received no revenues from product sales. Revenues in prior periods
have consisted principally of revenues recognized under collaborations with
corporate partners.  We have no currently existing collaborations that will
result in the realization of research and development revenues in the
foreseeable future.

Research and Development Expenses

  Research and development expenses for the first quarter of 2001 increased as
compared to the same period in 2000, due to additional squalamine clinical and
manufacturing activity as well as preclinical and development activity in our
mucoregulator, IL-9 antibody and produlestan programs.

  The level of research and development expenses in future periods will depend
principally upon the progress of our research and development programs and our
capital resources.

General and Administrative Expenses

  General and administrative expenses are primarily comprised of personnel costs
and professional fees and have increased in the first quarter of 2001 as
compared to the same period in 2000 due principally to increases in staffing.

                                       17
<PAGE>

Other Income and Expense


  Other income and expense is primarily comprised of interest income generated
from cash and investments, net of interest expense related to the note payable
and the long-term obligation to Abbott Laboratories.  Interest income for the
three-month period ended March 31, 2001 increased as compared to the same period
in 2000 due to higher investment balances during 2001.  Interest expense for the
three-month period ended March 31, 2001 decreased as compared to the same period
in 2000 as a result of our no longer recognizing additional interest expense on
the long-term obligation to Abbott Laboratories.

Net Loss


  Our goal is to conduct significant research, pre-clinical development,
clinical testing and manufacturing activities over the next several years. We
expect that these activities, together with projected general and administrative
expenses, will result in continued and significant losses.

Financial Condition, Liquidity And Capital Resources


  Cash and investments were $14.8 million at March 31, 2001 as compared to $19.0
million at December 31, 2000.  The primary use of cash was to finance our
operations.

  Since inception, we have funded our operations primarily from the net proceeds
of public and private placements of securities, including:

  .  $17,080,000 raised from our initial public offering in December 1991;
  .  $21,469,000 raised from a public offering completed in February 1993;
  .  $18,023,000 raised from a private placement completed in October 1993;
  .  $32,627,000 raised from a public offering completed in August 1995;
  .  $11,932,000 raised from a private placement completed in August 1996;
  .  $19,172,000 raised from a public offering completed in December 1997;
  .  $ 2,000,000 raised from a private placement completed in December 1998;
  .  $ 3,915,000 raised from a public offering completed in October 1999;
  .  $ 5,447,000 raised from a private placement completed in May 2000;
  .  $11,678,000 raised from a private placement completed in August 2000; and
  .  $   688,000 raised from a private placement in December 2000.


  In addition to the above, we have funded our operations from contract and
grant revenues, interest income and lease and debt financing.

  Current liabilities decreased $1.3 million to $4.6 million at March 31, 2001
from December 31, 2000 due to the payment of our short-term obligation to
Abbott. Long-term liabilities increased slightly at March 31, 2001 from December
31, 2000.

  Under the terms of our $2.5 million note payable, we make monthly interest-
only payments at an annual rate of 9.125%, with principal due in June 2001. We
maintain investments of $2.7 million as collateral for the note payable.

  In April 2001, we entered into a research collaboration and licensing
agreement and a preferred stock purchase agreement with MedImmune pursuant to
which we received $10.3 million.  After considering this investment, and in the
absence of raising additional funds or significantly reducing expenses, we have
sufficient resources to sustain operations through 2002.

                                       18
<PAGE>

  We will need to raise substantial additional funds in the future to continue
our research and development programs and to commercialize our potential
products. If we are unable to raise such funds, we may be unable to complete our
development activities for any of our proposed products.

  We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do not
have any commitments to obtain additional funds and may be unable to obtain
sufficient funding in the future on acceptable terms, if at all.  If we cannot
obtain funding, we will need to delay, scale back or eliminate research and
development programs or enter into collaborations with third parties to
commercialize potential products or technologies that we might otherwise seek to
develop or commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.

  Our capital expenditure requirements will depend upon numerous factors,
including the progress of our research and development programs, the time and
cost required to obtain regulatory approvals, our ability to enter into
additional collaborative arrangements, the demand for products based on our
technology, if and when such products are approved, and possible acquisitions of
products, technologies and companies. We had no significant capital commitments
as of March 31, 2001.

Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  We are exposed to risks associated with interest rate changes. Our exposure to
market risk for changes in interest rates relates primarily to our investment
portfolio. We invest in only U.S. government debt instruments that meet high
quality credit standards, as specified in our investment policy. The policy also
limits the amount of credit exposure we may have to any one issue, issuer or
type of investment.

  As of March 31, 2001, our portfolio investments consisted of $.8 million in
cash and $14.0 million in U.S government debt instruments having a maturity of
less than one year. Due to the nature of our investment portfolio, management
believes that a sudden change in interest rates would not have a material effect
on the value of the portfolio. Management estimates that if the average
annualized yield of our investments had decreased by 100 basis points, our
interest income for the three months ended March 31, 2001 would have decreased
by approximately $42,000. This estimate assumes that the decrease occurred on
the first day of 2001 and reduced the annualized yield of each investment
instrument by 100 basis points. The impact on our future interest income will
depend largely on the gross amount of our investment portfolio.

  We do not currently have any significant direct foreign currency exchange rate
risk.

                                       19
<PAGE>

PART II - OTHER INFORMATION

  ITEM 1.  LEGAL PROCEEDINGS

    We are not a party to any material litigation.

  ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

    None.

  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

    None.

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

    None.

  ITEM 5.  OTHER INFORMATION

    None.

  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

  (a)  Exhibits

       3.5 Certificate of Ownership and Merger Merging M Merger Sub, Inc. with
           and into Magainin Pharmaceuticals Inc. dated March 9, 2001*

       3.7 Certificate of Designations, Preferences and Rights of Series B
           Preferred Stock of Genaera Corporation dated April 19, 2001*

       4.1 Specimen copy of stock certificate for shares of Common Stock of the
           Registrant*

      10.1 Amended License Agreement between Genaera Corporation and Ludwig
           Institute for Cancer Research dated December 20, 1999*+

      10.2 Second Research Agreement between Genaera Corporation and Ludwig
           Institute for Cancer Research dated December 20, 1999*+

      10.3 Settlement Agreement between Genaera Corporation and Genentech, Inc.
           dated April 18, 2001*

      10.4 Collaboration and License Agreement between Genaera Corporation and
           MedImmune, Inc. dated April 19, 2001*+

      10.5 Preferred Stock Purchase Agreement between Genaera Corporation and
           MedImmune, Inc. dated April 19, 2001*
       ____________

      *   Filed herewith.

      +   Confidential treatment has been requested as to certain portions
          of this exhibit pursuant to an application filed with the Securities
          and Exchange Commission.  The omitted portions have been separately
          filed with the Securities and Exchange Commission.

  (b)  Reports on Form 8-K

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

                                       20
<PAGE>

                                   SIGNATURES

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


                                        GENAERA CORPORATION



Date:  May 11, 2001                     By: /s/ Christopher P. Schnittker
                                            -----------------------------
                                            Christopher P. Schnittker
                                            Vice President and Chief Financial
                                            Officer

                                       21
<PAGE>

                                 EXHIBIT INDEX

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

   3.5           Certificate of Ownership and Merger Merging M Merger Sub, Inc.
                 with and into Magainin Pharmaceuticals Inc. dated March 9,
                 2001*

   3.7           Certificate of Designations, Preferences and Rights of Series B
                 Preferred Stock of Genaera Corporation dated April 19, 2001*+

   4.1           Specimen copy of stock certificate for shares of Common Stock
                 of the Registrant*

  10.1           Amended License Agreement between Genaera Corporation and
                 Ludwig Institute for Cancer Research dated December 20, 1999*+

  10.2           Second Research Agreement between Genaera Corporation and
                 Ludwig Institute for Cancer Research dated December 20, 1999*+

  10.3           Settlement Agreement between Genaera Corporation and Genentech,
                 Inc. dated April 18, 2001*

  10.4           Collaboration and License Agreement between Genaera Corporation
                 and MedImmune, Inc. dated April 19, 2001*+

  10.5           Preferred Stock Purchase Agreement between Genaera Corporation
                 and MedImmune, Inc. dated April 19, 2001*

____________

*  Filed herewith.

+  Confidential treatment has been requested as to certain portions of this
   exhibit pursuant to an application filed with the Securities and Exchange
   Commission.  The omitted portions have been separately filed with the
   Securities and Exchange Commission.

                                       22