<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 September 30, 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 November 1, 2001 was 32,859,386.

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

<PAGE>


                               GENAERA CORPORATION
                          QUARTERLY REPORT ON FORM 10-Q
                    FOR THE QUARTER ENDED SEPTEMBER 30, 2001

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                          ----
<S>                                                                                                       <C>
PART I    -       FINANCIAL INFORMATION

   Item 1. Financial Statements (unaudited):

                  Balance Sheets as of September 30, 2001 and December 31, 2000.......................      3

                  Statements of Operations for the three- and nine-month periods ended

                           September 30, 2001 and 2000 ...............................................      4

                  Statements of Cash Flows for the nine-month periods ended

                           September 30, 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 ................................     20



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>

                                                                                     September 30, 2001   December 31, 2000
                                                                                     ------------------   -----------------
                                                                                         (Unaudited)

                                                    ASSETS

<S>                                                                                  <C>                     <C>
Current assets:
   Cash and cash equivalents ............................................................. $   1,954         $     599
   Short-term investments (NOTE 2) .......................................................    18,025            18,434
   Prepaid expenses and other ............................................................       300               345
                                                                                            --------         ---------

     Total current assets ...............................................................     20,279            19,378

Fixed assets, net ........................................................................     1,233             1,144
Other assets .............................................................................       164               179
                                                                                            --------         ---------

       Total assets ...................................................................... $  21,676         $  20,701
                                                                                            ========         =========

                                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses ................................................. $   3,031         $   2,093
   Note payable (NOTE 2) .................................................................     2,500             2,500
   Accrued development expense - short-term (NOTE 6) .....................................       401             1,392
                                                                                            --------         ---------

     Total current liabilities ...........................................................     5,932             5,985

Accrued development expense - long-term (NOTE 6) .........................................     1,608             1,967
Other liabilities ........................................................................        90                43

Redeemable convertible preferred stock (liquidation value of $1,014 and $1,233
 at September 30, 2001 and December 31, 2000, respectively) (NOTE 4) .....................     1,014             1,233

Commitments, contingencies and other matters (NOTE 6) ....................................

Stockholders' equity (NOTE 3):
Preferred stock - $.001 par value; 9,211 shares authorized; 0.9 and 1.2 shares
    issued and outstanding as Series A redeemable convertible preferred stock at
    September 30, 2001 and December 31, 2000, respectively; 10.0 shares issued
    and outstanding as Series B convertible preferred stock at September
    30, 2001 (liquidation value of $10,000); none issued at December 31, 2000............         --                --
Common stock - $.002 par value; 75,000 shares authorized;
    32,859 and 32,393 shares issued and outstanding at September 30, 2001 and
    December 31, 2000, respectively ...................................................           66                65
Additional paid-in capital ..............................................................    179,984           168,967
Accumulated other comprehensive income - unrealized gain on investments .................         45                 9
Accumulated deficit .....................................................................   (167,063)         (157,568)
                                                                                            ---------        ---------

     Total stockholders' equity .........................................................     13,032            11,473
                                                                                            --------         ---------

       Total liabilities and stockholders' equity .......................................  $  21,676         $  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                Nine Months Ended
                                                          September 30,                    September 30,
                                                   --------------------------       --------------------------
                                                      2001            2000             2001            2000
                                                      ----            ----             ----            ----

<S>                                                <C>            <C>               <C>            <C>
Collaborative research agreement revenues .......  $       315    $        --       $       565    $        --
                                                   -----------    -----------       -----------    -----------

Costs and expenses:
   Research and development .....................        3,461          2,820             8,016          7,222
   General and administrative ...................          755            578             2,478          1,642
                                                   -----------    -----------       -----------    -----------
                                                         4,216          3,398            10,494          8,864
                                                   -----------    -----------       -----------    -----------
Loss from operations ............................       (3,901)        (3,398)           (9,929)        (8,864)
Interest income .................................          197            269               713            564
Interest expense ................................          (44)          (180)             (197)          (489)
                                                   -----------    -----------       -----------    -----------

Net loss ........................................       (3,748)        (3,309)           (9,413)        (8,789)
Dividends on preferred stock ....................           20             16                82             23
                                                   -----------    -----------       -----------    -----------

Net loss applicable to common stockholders ......  $    (3,768)   $    (3,325)      $    (9,495)   $    (8,812)
                                                   ===========    ===========       ===========    ===========

Net loss applicable to common stockholders
         per share -- basic and diluted .........  $     (0.11)   $     (0.11)      $     (0.29)   $     (0.31)
                                                   ===========    ===========       ===========    ===========

Weighted average shares outstanding --
         basic and diluted ......................       32,841         30,328            32,660         28,363
                                                   ===========    ===========       ===========    ===========
</TABLE>


                 See accompanying notes to financial statements.



                                        4

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                      Nine Months Ended September 30,
                                                                                      -------------------------------
                                                                                           2001              2000
                                                                                       -----------      -----------
<S>                                                                                    <C>              <C>
Cash Flows From Operating Activities:
   Net loss .......................................................................    $    (9,413)     $    (8,789)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization ................................................            647              687
     Amortization of investment discounts/premiums ................................           (537)            (422)
     Compensation expense on option grants and equity awards ......................            261              146
     Receipt and retirement of Series A redeemable convertible preferred stock ....           (300)              --
   Changes in operating assets and liabilities:
     (Increase) decrease in prepaid expenses and other ............................             60             (150)
     Increase in accounts payable and accrued expenses ............................            938            1,372
     Increase (decrease) in accrued development expenses ..........................         (1,350)             338
     Increase (decrease) in other liabilities .....................................             47               (7)
                                                                                       -----------      -----------

Net cash used in operating activities ..........................................            (9,647)          (6,825)
                                                                                       -----------      -----------
Cash Flows From Investing Activities:
   Purchases of investments .......................................................        (30,198)         (28,144)
   Proceeds from maturities of investments ........................................         31,179           15,775
   Capital expenditures ...........................................................           (736)            (148)
                                                                                       -----------      -----------

Net cash provided by (used in) investing activities ...............................            245          (12,517)
                                                                                       -----------      ------------
Cash Flows From Financing Activities:
   Proceeds from issuance of Series A redeemable convertible preferred stock ......             --              500
   Net proceeds from issuance of Series B convertible preferred stock .............          9,908               --
   Net proceeds from issuance of common stock .....................................             --           16,625
   Proceeds from exercise of stock options ........................................            849              448
                                                                                       -----------      -----------

Net cash provided by financing activities .........................................         10,757           17,573
                                                                                       -----------      -----------

Net increase in cash and cash equivalents .........................................          1,355           (1,769)
Cash and cash equivalents at beginning of period ..................................            599            2,435
                                                                                       -----------      -----------

Cash and cash equivalents at end of period ........................................    $     1,954      $       666
                                                                                       ===========      ===========
Supplemental Cash Flow Information:

Cash paid during the period for interest ..........................................    $       160      $       148
                                                                                       ===========      ===========
</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 in the United States of
America 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

     The Company refinanced its $2,500,000 note payable in the second quarter of
2001. Under the terms of its note payable, the Company makes monthly
interest-only payments at an annual rate of 6.753%, with principal due in June
2002. The Company maintained investments with an approximate market value of
$2,773,000 at the bank as collateral for the note payable as of September 30,
2001.

NOTE 3.  Stockholders' Equity

     The changes in stockholders' equity from December 31, 2000 to September 30,
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 ......     466        1        1,109          --             --      1,110
   Convertible preferred stock issued ....      --       --        9,908          --             --      9,908
   Dividends on preferred stock ..........      --       --           --          --            (82)       (82)
   Comprehensive loss:
         Net loss ........................      --       --           --          --         (9,413)    (9,413)
         Carrying value adjustment .......      --       --           --          36             --         36
                                           -------    -----     --------      ------     ----------    --------
         Total comprehensive loss ........      --       --           --          --             --     (9,377)
                                           -------    -----     --------      ------     ----------    --------

Balance at September 30, 2001 ............  32,859    $  66     $179,984      $   45     $ (167,063)   $13,032
                                           =======    =====     ========      ======     ==========    ========
</TABLE>

     In May 2001, the Company increased the number of shares of its authorized
common stock to 75,000,000 shares.



                                       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 September 30, 2001, the
Company's board of directors has designated 80,000 shares of preferred stock as
Series A redeemable convertible preferred stock (the "Series A Preferred Stock")
and 10,000 shares of preferred stock as Series B convertible preferred stock
(the "Series B Preferred Stock").

     In connection with an agreement with Genentech, Inc. (see "Note 5.
Collaboration Agreements"), 888 shares of Series A Preferred Stock are issued
and outstanding as of September 30, 2001. Preferred dividends of $126,000 have
been accrued as of September 30, 2001 on the Series A Preferred Stock.

     In April 2001, MedImmune, Inc. ("MedImmune") purchased 10,000 shares of the
Company's Series B Preferred Stock for $10,000,000 in connection with the
execution of a related collaboration agreement (see "Note 5. Collaboration
Agreements"). 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 is 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
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 is 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 accrued 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 Company's amount payable to Abbott Laboratories.

NOTE 5. Collaboration Agreements

     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").

                                        7

<PAGE>

                               GENAERA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS(Unaudited)

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


     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, $300,000 in 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 previously issued to
Genentech. This $300,000 was accounted for as a reduction to research and
development expenses for the nine-month period ended September 30, 2001.

     In April 2001, the Company entered into a research collaboration and
licensing agreement with MedImmune to 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 is expected to fund at least $2,500,000 for research and
development activities at the Company over the next two years (the "R&D
Funding"), which will be recognized by the Company as revenues on a
straight-line basis over the two-year period. In addition to the R&D Funding,
MedImmune will also reimburse the Company for all external costs incurred by the
Company in connection with the IL-9 research plan, which will be recognized by
the Company as a reduction to research and development expenses. For the three
and nine-month periods ended September 30, 2001, the Company recognized $315,000
and $565,000, respectively, as revenue related to the R&D Funding and $132,000
of external cost reimbursements 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.

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(TM)
Cream. As FDA approval of LOCILEX(TM) 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 was 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. As a result of the Company's financing activities through September 30,
2001 (see Notes 4 and 5), $401,000 of this liability becomes payable to Abbott
on March 1, 2002 and thus has been included in current liabilities at September
30, 2001. The remaining amount is included in long-term liabilities as of
September 30, 2001.

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.

                                        8

<PAGE>

                               GENAERA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS(Unaudited)

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


     In April 2001, the Company entered into a research collaboration and
licensing agreement and a preferred stock purchase agreement with MedImmune
under which the Company received $10,000,000. MedImmune is expected to fund at
least $2,500,000 for research and development activities of the Company over the
next two years, of which $625,000 has been received through September 30, 2001.
After considering the MedImmune transaction, and in the absence of raising
additional funds or significantly reducing expenses, the Company believes it
will have 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. Common Stock Options

     In May 2001, the stockholders approved an amendment to the Company's
Amended 1998 Equity Compensation Plan to increase the number of shares of common
stock issuable thereunder to 3,500,000 shares.

NOTE 8. New Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board issued two
statements as a result of its deliberations on the business combinations
project, Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141, which eliminates the use of the pooling-of-interests method of accounting,
will be effective for any business combinations initiated after June 30, 2001
and also includes the criteria for the recognition of intangible assets
separately from goodwill. SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001 and will require that goodwill and certain
intangibles not be amortized, but rather be subject to an impairment test at
least annually. SFAS Nos. 141 and 142 are not expected to have a significant
impact on the Company's financial position at adoption as the Company currently
does not have any intangible assets or goodwill.

                                        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, the impact of new accounting
pronouncements, 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,
except as required by law. 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.

     As of September 30, 2001, we had cash and investments of $20.0 million at
September 30, 2001. We believe these resources are sufficient 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 provide 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 raise
additional capital by issuing equity or securities convertible into equity, our
stockholders may experience dilution and share prices may decline. Any debt
financing may result in restrictions on spending or payment of dividends. 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.

We Expect to Continue to Incur Substantial Losses and May Never Generate
Revenues or Become Profitable.

     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 September 30, 2001, we
had an accumulated deficit of approximately $167.1 million.

                                       10

<PAGE>

     Our proposed products are in a relatively early developmental stage and
will require significant research, development and testing. We must obtain
regulatory approvals for any proposed product 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 or become profitable. 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 government
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval for pharmaceutical products is time consuming and costly.

     Governmental authorities may delay or deny the approval of any of our
product 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 product candidates will materially
affect our business. For example, in July 1999, 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. As a result of
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, if ever.

     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 Expect to Rely On Third Parties to Market Any Products We Develop and Expect
to Rely On Third Parties in Connection With the Development of Our Products; If
These Parties Do Not Perform as Expected, We May Never Sucessfully 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 third parties. If these parties do
not develop an approvable or marketable product or do not market a product
successfully, we may never generate revenue or become profitable. Additionally,
we may be unable to enter into successful arrangements with other parties for
such products.

     We do not have control over the amount and timing of resources to be
devoted to our products by our collaborative partners. Our collaborators may not
place a high priority on their contractual arrangements with us. Collaborators
may develop products independently or through third parties that could compete
with our proposed products. For example, GlaxoSmithKline, a current
collaborative partner, which entered into an agreement with us relating to the
development of LOCILEX(TM), 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 collaborator may decide to
end a relationship with us. For example, in December 2000, Genentech provided
notice to us of its election to terminate the collaboration agreement covering
the IL9 antibody development program and related respiratory technology.

                                       11

<PAGE>

     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. This effort
may not be successful. Moreover, because our financial resources are limited,
our sales and marketing expenditures in this area would likely be modest
compared to our competitors.

We Face Formidable Competition With Respect to the Products We are Seeking to
Develop and the Recruitment of Highly Trained Scientific Personnel.

     The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in our fields of interest. Some of these 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. We also may face competition from companies using different
or advanced techniques that could render our future products obsolete. Most of
these entities have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources than we have.

     Many companies are working to develop and market products intended for the
additional disease areas we are targeting, 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 and expand 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.

     Many of the companies developing or marketing competing products 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.

     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 efforts may not be successful.

     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.

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 especially because the

                                       12

<PAGE>

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, Our Business May be Harmed.

     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. As a result, our
ability to recover these expenditures and realize profits upon commercialization
likely would be diminished.

     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 by the U.S. Patent and Trademark Office
until a patent issues, and publications in the scientific or patent literature
concerning new technologies occur some time after actual discoveries of the
technologies are made.

     We cannot be certain that:

     .    patents will issue from any of our patent applications;

     .    our patent rights will be sufficient to protect our technology;

     .    others will not design around the patented aspects of the technology;

     .    our patents will not be successfully challenged or circumvented by our
          competitors; or

     .    an adverse outcome in a suit challenging our patents 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.

                                       13

<PAGE>

     Other Intellectual Property

     In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our 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 that 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.

     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 and were resolved. 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.

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.

We are Subject to Potential Product Liability Claims That Could Result in
Significant Costs.

     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.

                                       14

<PAGE>

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. If any of our products ever obtain marketing
approval, coverage and reimbursement may not be available for these products,
or, if available, may not be adequate. Without insurance coverage, many patients
may be unable to afford our products, in which case sales of the product would
be adversely affected.

     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. These reforms
could adversely affect our ability to obtain financing for the continued
development of our proposed products or market any of our products that are
successfully developed. 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, and the
Product May Never be Approved.

     In July 1999, 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. As a result of 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, if ever.

     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. As a result of its review of manufacturing of the
cream product, the FDA issued certain observations of deficiencies in compliance
with their current good manufacturing procedures regulations. If any additional
clinical studies are conducted, new batches of the cream product will need to be
manufactured from the bulk drug substance and meet strict product specifications
in compliance with FDA-determined cGMP. 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.

     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 have a significant impact on our stock price. Among
these events are the following:

     .    product testing results from us or our competitors;
     .    technological innovations by us or our competitors;
     .    new commercial products from us or our competitors;
     .    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 Adversely Affect 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 may then be conducted on the Nasdaq Small Cap
Market. However, if we are 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 are not included in Nasdaq or traded on a
national securities exchange or in quotations published by the National
Quotation Bureau, Inc. that are commonly referred to as the "pink sheets." If
this occurs, it could be more difficult to sell our securities or obtain the
same level of market information as to the price of our common stock as is
currently available.

     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
transaction. 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 September 30, 2001, there were outstanding options to purchase an
aggregate of approximately 3,815,000 shares of our common stock at prices
ranging from $1.03 per share to $16.75 per share, of which approximately
1,975,000 were exercisable as of such date. Warrants to purchase 396,905 shares
were outstanding, of which warrants to purchase 229,739 shares of our common
stock are currently exercisable at $8.00 per share and warrants to purchase
167,166 shares of our common stock are currently exercisable at $3.50 per share,
in each case subject to adjustment under the anti-dilution provisions of the
warrants. 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 of our capital stock
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. 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 could discourage third
parties from seeking to obtain control, even though the price at which such
third parties seek to acquire our common stock is in excess of the market price
for our stock.

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. In April 2001, we entered into a research collaboration and
licensing agreement with MedImmune to develop and commercialize antibodies or
recombinant molecules against IL-9 to prevent symptoms of asthma and other
respiratory diseases. MedImmune will fund at least $2.5 million for our research
and development activities over the next two years. For the three- and
nine-month periods ended September 30, 2001, we recognized $315,000 and
$565,000, respectively, in revenue related to this agreement.

     Research and Development Expenses

     Research and development expenses increased in the three- and nine- month
periods ended September 30, 2001 as compared to the same period in 2000 due to
additional squalamine and LOMUCIN(TM) clinical and manufacturing efforts as well
as preclinical and development activities in our mucoregulator, IL-9 and
trodulamine (formerly referred to as produlestan) programs. The increase in
research and development expenses for the nine-month period ended September 30,
2001 was partially offset by a nonrecurring research and development
reimbursement amounting to $300,000 received from Genentech in the second
quarter of 2001.

     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.

                                       17

<PAGE>

     General and Administrative Expenses

     General and administrative expenses have increased for the three- and
nine-month periods ended September 30, 2001 as compared to the same period in
2000 due principally to increases in personnel related to general corporate
activities.

     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. Interest income for the three-month period ended September 30, 2001
decreased as compared to the same period in 2000 due to declining investment
interest yields. Interest income for the nine-month period ended September 30,
2001 increased as compared to the same period in 2000 due to higher investment
balances during 2001 offset by declining investment interest yields. Interest
expense for the three- and nine-month periods ended September 30, 2001 decreased
as compared to the same periods in 2000 due to our no longer recognizing
additional interest expense on the long-term obligation to Abbott Laboratories
as the obligation is now recorded at its face value.

     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 $20.0 million at September 30, 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;
   . $   688,000 raised from a private placement completed in December 2000; and
   . $ 9,908,000 raised from a private placement completed in April 2001.

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

     Current liabilities decreased slightly at September 30, 2001 from December
31, 2000 due to the payment of our short-term obligation to Abbott in the first
quarter of 2001 offset by increasing accrued expenses.

                                       18

<PAGE>

Long-term liabilities decreased at September 30, 2001 from December 31, 2000 due
to the reclassification of a portion of the Abbott obligation from long-term to
short-term as a result of our MedImmune transaction in April 2001.

     Under the terms of our $2.5 million note payable, we make monthly
interest-only payments at an annual rate of 6.753%, with principal due in June
2002. We maintain investments of $2.8 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 $10.0 million. MedImmune is expected to fund at least $2.5
million for our research and development activities over the next two years, of
which $625,000 has been received through September 30, 2001. After considering
the MedImmune transaction, and in the absence of raising additional funds or
significantly reducing expenses, we believe we will 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.

     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 September 30, 2001.

New Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board issued two
statements as a result of its deliberations on the business combinations
project, Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141, which eliminates the use of the pooling-of-interests method of accounting,
will be effective for any business combinations initiated after June 30, 2001
and also includes the criteria for the recognition of intangible assets
separately from goodwill. SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001 and will require that goodwill and certain
intangibles not be amortized, but rather be subject to an impairment test at
least annually. SFAS Nos. 141 and 142 are not expected to have a significant
impact on our financial position at adoption as we currently do not have any
intangible assets or goodwill.

                                       19

<PAGE>

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 September 30, 2001, our portfolio investments consisted of $2.0
million in cash and $18.0 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 nine months ended September 30, 2001 would have
decreased by approximately $153,000. 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.

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

           3.8    Certificate of Amendment of the Restated Certificate of
                  Incorporation of Genaera Corporation dated September 5, 2001*
           ___________

             *   Filed herewith.

      (b)  Reports on Form 8-K

        There were no reports on Form 8-K filed during the quarter ended
September 30, 2001.

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<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: November 2, 2001                    By: /s/  Christopher P. Schnittker
                                              --------------------------------
                                              Christopher P. Schnittker
                                              Vice President and Chief Financial
                                              Officer

                                       21

<PAGE>

                                  EXHIBIT INDEX

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

       3.8        Certificate of Amendment of the Restated Certificate of
                  Incorporation of Genaera Corporation dated September 5, 2001*
______________

*      Filed herewith.
                                       22