<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 June 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 August 9, 2001 was 32,827,261.

================================================================================
<PAGE>

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

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                       Page
                                                                                       ----
<S>                                                                                 <C>
PART I - FINANCIAL INFORMATION
   Item 1. Financial Statements (unaudited):
                  Balance Sheets as of June 30, 2001 and December 31, 2000 ..........    3
                  Statements of Operations for the three- and six-month periods ended
                           June 30, 2001 and 2000 ...................................    4
                  Statements of Cash Flows for the six-month periods ended
                           June 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 ...............   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 ........................................................   21
   Item 6. Exhibits and Reports on Form 8-K .........................................   21

SIGNATURES ..........................................................................   22
</TABLE>

                                       2
<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                              June 30, 2001     December 31, 2000
                                                                              -------------     -----------------
                                                                               (Unaudited)
                                                    ASSETS
Current assets:
<S>                                                                           <C>               <C>
   Cash and cash equivalents..................................................   $  1,052          $     599
   Short-term investments (NOTE 2)............................................     21,641             18,434
   Prepaid expenses and other.................................................        246                345
                                                                                 --------          ---------
     Total current assets.....................................................     22,939             19,378
Fixed assets, net.............................................................      1,234              1,144
Other assets..................................................................        164                179
                                                                                 --------          ---------

       Total assets...........................................................   $ 24,337          $  20,701
                                                                                 ========          =========

                                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses......................................   $  2,020          $   2,093
   Note payable (NOTE 2)......................................................      2,500              2,500
   Accrued development expense - short-term (NOTE 6)..........................        301              1,392
                                                                                 --------          ---------
     Total current liabilities................................................      4,821              5,985

Accrued development expense - long-term (NOTE 6)..............................      1,707              1,967
Deferred rent.................................................................         35                 43
Deferred revenue..............................................................         62                 --

Redeemable convertible preferred stock (liquidation value of $995 and $1,233
 at June 30, 2001 and December 31, 2000, respectively) (NOTE 4)...............        995              1,233

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

Stockholders' equity (NOTE 3):
Preferred stock - $.001 par value; 9,211 shares authorized; .9 and 1.2 shares
    issued and outstanding as Series A redeemable convertible preferred stock
    at June 30, 2001 and December 31, 2000, respectively; 10.0 shares issued
    and outstanding as Series B convertible preferred stock at June 30, 2001
    (liquidation value of $10,000)............................................         --                 --
Common stock - $.002 par value; 75,000 shares authorized; 32,808 and 32,393
    shares issued and outstanding at June 30, 2001 and
    December 31, 2000, respectively...........................................         66                 65
Additional paid-in capital....................................................    179,940            168,967
Accumulated other comprehensive income - unrealized gain on investments.......          6                  9
Accumulated deficit...........................................................   (163,295)          (157,568)
                                                                                 ---------         ---------

     Total stockholders' equity...............................................     16,717             11,473
                                                                                 --------          ---------

       Total liabilities and stockholders' equity.............................   $ 24,337          $  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                Six Months Ended
                                                            June 30,                         June 30,
                                                   --------------------------       --------------------------
                                                      2001            2000             2001            2000
                                                      ----            ----             ----            ----
<S>                                               <C>            <C>               <C>            <C>
Collaborative research agreement revenues.......   $       250    $        --       $       250    $        --
                                                   -----------    -----------       -----------    -----------
Costs and expenses:
   Research and development.....................         2,262          2,485             4,555          4,402
   General and administrative...................           942            569             1,723          1,064
                                                   -----------    -----------       -----------    -----------
                                                         3,204          3,054             6,278          5,466
                                                   -----------    -----------       -----------    -----------
Loss from operations............................        (2,954)        (3,054)           (6,028)        (5,466)
Interest income.................................           276            161               516            295
Interest expense................................           (55)          (163)             (153)          (309)
                                                   -----------    -----------       -----------    -----------

Net loss........................................        (2,733)        (3,056)           (5,665)        (5,480)
Dividends on preferred stock....................            31              7                62              7
                                                   -----------    -----------       -----------    -----------

Net loss applicable to common stockholders......   $    (2,764)   $    (3,063)      $    (5,727)   $    (5,487)
                                                   ===========    ===========       ===========    ===========
Net loss applicable to common stockholders
         per share -- basic and diluted.........   $     (0.08)   $     (0.11)      $     (0.18)   $     (0.20)
                                                   ===========    ===========       ===========    ===========

Weighted average shares outstanding --
         basic and diluted......................        32,737         27,743            32,568         27,370
                                                   ===========    ===========       ===========    ===========
</TABLE>




                 See accompanying notes to financial statements.

                                       4
<PAGE>

                               GENAERA CORPORATION
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                                    Six Months Ended June 30,
                                                                                      2001              2000
                                                                                  ------------     ------------
<S>                                                                              <C>              <C>
Cash Flows From Operating Activities:
   Net loss.....................................................................  $    (5,665)     $    (5,480)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization..............................................          435              457
     Amortization of investment discounts/premiums..............................         (353)            (220)
     Compensation expense on option grants and equity awards....................          228               93
     Receipt and retirement of Series A redeemable convertible preferred stock..         (300)              --
   Changes in operating assets and liabilities:
     (Increase) decrease in prepaid expenses and other..........................          114              (84)
     Increase (decrease) in accounts payable and accrued expenses...............          (73)             568
     Increase (decrease) in accrued development expenses........................       (1,351)             215
     Increase in deferred revenue...............................................           62               --
     Decrease in deferred rent..................................................           (8)              (4)
                                                                                  -----------      ------------

Net cash used in operating activities...........................................       (6,911)          (4,455)
                                                                                  -----------      -----------
Cash Flows From Investing Activities:
   Purchases of investments.....................................................      (20,986)         (14,250)
   Proceeds from maturities of investments......................................       18,129           13,770
   Capital expenditures.........................................................         (525)             (77)
                                                                                  -----------      -----------

Net cash used in investing activities...........................................       (3,382)            (557)
                                                                                  ------------     ------------
Cash Flows From Financing Activities:
   Proceeds from issuance of Series A redeemable convertible preferred stock....           --              500
   Proceeds from issuance of Series B convertible preferred stock...............        9,908               --
   Net proceeds from issuance of common stock...................................           --            4,947
   Proceeds from exercise of stock options......................................          838              447
                                                                                  -----------      -----------

Net cash provided by financing activities.......................................       10,746            5,894
                                                                                  -----------      -----------

Net increase in cash and cash equivalents.......................................          453              882
Cash and cash equivalents at beginning of period................................          599            2,435
                                                                                  -----------      -----------

Cash and cash equivalents at end of period......................................  $     1,052      $     3,317
                                                                                  ===========      ===========
Supplemental Cash Flow Information:

Cash paid during the period for interest........................................  $       125      $       100
                                                                                  ===========      ===========
</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

     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
$2,779,000 at the bank as collateral for the note payable as of June 30, 2001.

NOTE 3.  Stockholders' Equity

     The changes in stockholders' equity from December 31, 2000 to June 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.......     415        1         1,065           --               --       1,066
   Convertible preferred stock issued.....      --       --         9,908           --               --       9,908
   Dividends on preferred stock...........      --       --            --           --              (62)        (62)
   Comprehensive loss:
         Net loss.........................      --       --            --           --           (5,665)     (5,665)
         Carrying value adjustment........      --       --            --           (3)              --          (3)
                                            ------    -----      --------       ------        ---------     -------
   Total comprehensive loss...............      --       --            --           --               --      (5,668)
                                            ------    -----      --------       ------        ---------     -------

Balance at June 30, 2001..................  32,808    $  66      $179,940       $    6        $(163,295)    $16,717
                                            ======    =====      ========       ======        =========     =======
</TABLE>


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



                                       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 June 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, as
of April 18, 2001, 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 June 30, 2001. Preferred dividends of $106,000 have been
accrued as of June 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 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
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.

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, 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 previously issued to
Genentech in exchange for $300,000. This $300,000 was accounted for as a
reduction to research and development expenses for the three- and six-month
periods ended June 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, which will be
recognized on a straight-line basis over the two-year period. For the three- and
six-month periods ended June 30, 2001, the Company received $312,500 in such
payments and recognized $250,000 in revenue related to this agreement. 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 June 30, 2001
(see Notes 4 and 5), $301,000 of this liability becomes payable to Abbott on
March 1, 2002 and thus has been included in current liabilities at June 30,
2001. The remaining amount is included in long-term liabilities as of June 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.

     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 $10,312,500. After considering this investment,
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


                                       8
<PAGE>

                               GENAERA CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (Unaudited)

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

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.

                                       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,
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.

     We maintained cash and investments of $22.7 million at June 30, 2001. At
June 30, 2001, we had current liabilities of $4.8 million and long-term
liabilities of $1.8 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 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

                                       10
<PAGE>

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 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 June 30, 2001, we had an
accumulated deficit of approximately $163.3 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.

                                       11
<PAGE>

     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 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 especially 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 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.

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 June 30, 2001, there were outstanding options to purchase an
aggregate of approximately 3,261,000 shares of our common stock at prices
ranging from $1.03 per share to $16.75 per share, of which approximately
1,713,000 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 1,253,946 shares of our common stock, currently
exercisable from $5.05 to $6.68 per share, and subject to adjustment with future
offerings also were outstanding at June 30, 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. 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 six-month
periods ended June 30, 2001, we recognized $250,000 in revenue related to this
agreement.


     Research and Development Expenses

     Research and development expenses decreased in the three-month period ended
June 30, 2001 as compared to the same period in 2000 due to a nonrecurring
research and development reimbursement amounting to $300,000 received from
Genentech in the second quarter of 2001. Research and development expenses
increased in the six-month period ended June 30, 2001 as compared to the same
period in 2000, due to additional squalamine clinical and manufacturing efforts
as well as preclinical and development activity in our mucoregulator, IL-9 and
produlestan programs partially offset by the Genentech reimbursement.

     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
six-month periods ended June 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- and six-month periods ended June 30,
2001 increased as compared to the same period in 2000 due to higher investment
balances during 2001. Interest expense for the three- and six-month periods
ended June 30, 2001 decreased as compared to the same period 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 $22.7 million at June 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 $1.2 million to $4.8 million at June 30, 2001
from December 31, 2000 due to the payment of our short-term obligation to Abbott
in the first quarter of 2001. Long-term liabilities decreased at June 30, 2001
from December 31, 2000 due to the reclassification of a portion of the Abbott

                                       18
<PAGE>

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 $10.3 million. After considering this investment, 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 June 30, 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 June 30, 2001, our portfolio investments consisted of $1.1 million in
cash and $21.6 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 six months ended June 30, 2001 would have decreased by
approximately $101,000. 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

         In April 2001, we issued 10,000 shares of Series B convertible
     preferred stock to MedImmune, Inc. for an aggregate purchase price of
     $10,000,000. The issuance of the preferred stock was exempt from
     registration pursuant to section 4(2) of the Securities Act of 1993, as
     amended. 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
     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. We prepared and filed a
     registration statement with the SEC, which was declared effective on August
     2, 2001, corresponding to the maximum 2,000,000 shares of common stock
     issuable upon conversion of the preferred shares prior to April 19, 2006.
     We granted MedImmune certain "demand" and "piggy-back" registration rights
     with respect to the additional shares of common stock issuable upon
     conversion of the preferred shares after that date. We intend to use the
     proceeds to fund both ongoing and planned research and development
     activities and working capital to be used for general corporate purposes.

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES

         None.

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

         On May 16, 2001, we held our Annual Meeting of Shareholders (the
     "Annual Meeting"). Proxies were solicited for the Annual Meeting pursuant
     to Regulation 14 of the Securities Exchange Act of 1934. At the Annual
     Meeting, the shareholders elected eight directors for one-year terms,
     amended our Certificate of Incorporation, and amended our 1998 Equity
     Compensation Plan.

         A) In the election of directors, the number of shares voted was as
            follows:

                                                Votes For        Votes Withheld
                                                ---------        --------------
               Michael R. Dougherty            24,677,198           2,025,411
               Bernard Canavan, M.D.           24,678,943           2,023,666
               R. Frank Ecock                  24,679,343           2,023,266
               Zola P. Horovitz, Ph.D.         24,675,943           2,026,666
               Roy C. Levitt, M.D.             24,680,168           2,022,441
               Charles A. Sanders, M.D.        24,674,998           2,027,611
               Robert F. Shapiro               24,675,118           2,027,491
               James B. Wyngaarden, M.D.       24,672,923           2,029,686

                                       20
<PAGE>

         B) In the adoption of an amendment to Genaera Corporation's Certificate
            of Incorporation increasing the number of authorized shares of
            Common Stock by 30,000,000 shares from 45,000,000 shares to
            75,000,000 shares, the number of shares voted was as follows:

                For              Against              Withheld
                ---              -------              --------
             23,885,718        2,790,851               26,040

         C) In the adoption of an amendment to Genaera Corporation's Amended
            1998 Equity Compensation Plan (formerly Magainin Pharmaceuticals
            Inc. 1998 Equity Compensation Plan) to increase the number of shares
            of Genaera Common Stock issuable thereunder by 2,000,000 shares from
            1,500,000 shares to 3,500,000 shares, the number of shares voted was
            as follows:

                For              Against              Withheld
                ---              -------              --------
             12,406,336        2,348,578               53,175

ITEM 5. OTHER INFORMATION

    None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

  (a) Exhibits

    None.

  (b) Reports on Form 8-K

    We filed a Current Report on Form 8-K on April 19, 2001 regarding MedImmune,
    Inc.'s announcement about an agreement with Genaera to develop products
    targeting respiratory disease.

                                       21
<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: August 13, 2001              By: /s/ Christopher P. Schnittker
                                      ------------------------------------
                                      Christopher P. Schnittker
                                      Vice President and Chief Financial Officer

                                       22