<PAGE>


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

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

                                    FORM 10-Q

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

                 For the Quarterly Period Ended March 31, 2002.

                                       or

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

                   For the Transition Period from ___________ to __________.

                           Commission File No. 0-19651

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

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


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

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


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


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

     The number of outstanding shares of the Registrant's Common Stock, par
value $.002 per share, on May 6, 2002 was 35,626,241.

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

<PAGE>

                               GENAERA CORPORATION

                          QUARTERLY REPORT ON FORM 10-Q

                      FOR THE QUARTER ENDED MARCH 31, 2002


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
PART I  -   FINANCIAL INFORMATION
<S>                                                                                  <C>
 Item 1. Financial Statements (unaudited):

            Balance Sheets as of March 31, 2002 and December 31, 2001                  3

            Statements of Operations for the three-months ended
                     March 31, 2002 and 2001                                           4

            Statements of Cash Flows for the three-months ended
                     March 31, 2002 and 2001                                           5

            Notes to Financial Statements                                              6

 Item 2. Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                                  9

 Item 3. Quantitative and Qualitative Disclosures about Market Risk                   19


PART II -   OTHER INFORMATION


 Item 1. Legal Proceedings                                                            20

 Item 2. Changes in Securities and Use of Proceeds                                    20

 Item 3. Defaults Upon Senior Securities                                              20

 Item 4. Submission of Matters to a Vote of Security Holders                          20

 Item 5. Other Information                                                            20

 Item 6. Exhibits and Reports on Form 8-K                                             20


SIGNATURES                                                                            21
</TABLE>

                                        2

<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

                               GENAERA CORPORATION

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

<TABLE>
<CAPTION>
                                                                                        March 31, 2002     December 31, 2001
                                                                                        --------------     -----------------
                                                                                          (Unaudited)
<S>                                                                                     <C>                <C>
                                                  ASSETS

Current assets:
   Cash and cash equivalents ..........................................................    $  1,702            $   1,973
   Short-term investments (NOTE 2) ....................................................       9,871               14,105
   Prepaid expenses and other current assets ..........................................         336                  218
                                                                                           --------            ---------

     Total current assets .............................................................      11,909               16,296

Fixed assets, net .....................................................................       1,662                1,456
Other assets ..........................................................................          64                   64
                                                                                           --------            ---------
       Total assets ...................................................................    $ 13,635            $  17,816
                                                                                           ========            =========

                                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses ..............................................    $  2,758            $   2,521
   Note payable (NOTE 2) ..............................................................       2,500                2,500
   Accrued development expense - short-term (NOTE 6) ..................................          --                  480
   Other current liabilities ..........................................................          62                   82
                                                                                           --------            ---------
     Total current liabilities ........................................................       5,320                5,583

Accrued development expense - long-term (NOTE 6) ......................................       1,529                1,529
Other liabilities .....................................................................         125                   50

Series A redeemable convertible preferred stock (liquidation value of $1,061 and
    $1,044 at March 31, 2002 and December 31, 2001, respectively) (NOTE 4) ............       1,061                1,044

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

Stockholders' equity (NOTE 3):

Preferred stock - $.001 par value per share; 9,211 shares authorized; 0.9 shares
    issued and outstanding as Series A redeemable convertible preferred stock at
    March 31, 2002 and December 31, 2001; 10.0 shares issued and outstanding as
    Series B convertible preferred stock at March 31, 2002 and December 31, 2001
    (liquidation value of $10,000) ....................................................          --                   --
Common stock - $.002 par value per share; 75,000 shares authorized; 32,867
    shares and 32,864 shares issued and outstanding at March 31, 2002 and
    December 31, 2001, respectively ...................................................          66                   66
Additional paid-in capital ............................................................     180,197              180,112
Accumulated other comprehensive income -- unrealized loss on investments ..............          (1)                  23
Accumulated deficit ...................................................................    (174,662)            (170,591)
                                                                                           --------            ---------
     Total stockholders' equity .......................................................       5,600                9,610
                                                                                           --------            ---------
       Total liabilities and stockholders' equity .....................................    $ 13,635            $  17,816
                                                                                           ========            =========
</TABLE>

                See accompanying notes to financial statements.

                                        3

<PAGE>

                               GENAERA CORPORATION

                            STATEMENTS OF OPERATIONS
                                   (Unaudited)
                  (Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                        Three Months Ended
                                                                                             March 31,
                                                                                    --------------------------
                                                                                       2002           2001
                                                                                    -----------    -----------
<S>                                                                                 <C>            <C>
Collaborative research agreement revenues ......................................    $       436    $        --

Costs and expenses:
   Research and development ....................................................          3,653          2,293
   General and administrative ..................................................            875            781
                                                                                    -----------    -----------
                                                                                          4,528          3,074
                                                                                    -----------    -----------
Loss from operations ...........................................................         (4,092)        (3,074)
Interest income ................................................................             82            240
Interest expense ...............................................................            (43)           (98)
                                                                                    -----------    -----------

Net loss .......................................................................         (4,053)        (2,932)
Dividends on preferred stock ...................................................             18             31
                                                                                    -----------    -----------

Net loss applicable to common stockholders .....................................    $    (4,071)   $    (2,963)
                                                                                    ===========    ===========

Net loss applicable to common stockholders per share - basic and diluted .......    $     (0.12)   $     (0.09)
                                                                                    ===========    ===========

Weighted average shares outstanding - basic and diluted ........................         32,866         32,397
                                                                                    ===========    ===========
</TABLE>

                 See accompanying notes to financial statements.

                                        4

<PAGE>

                               GENAERA CORPORATION

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

<TABLE>
<CAPTION>
                                                                                       Three Months Ended March 31,
                                                                                       ----------------------------
                                                                                          2002              2001
                                                                                        --------          --------
<S>                                                                                   <C>              <C>
Cash Flows From Operating Activities:
   Net loss ........................................................................  $    (4,053)     $    (2,932)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization .................................................          147              223
     Amortization of investment discounts/premiums .................................          (73)            (189)
     Compensation expense on option grants and equity awards .......................           79               86
   Changes in operating assets and liabilities:
     Increase in prepaid expenses and other ........................................         (118)            (407)
     Increase in accounts payable and accrued expenses .............................          237               44
     Decrease in accrued development expenses ......................................         (480)          (1,351)
     Increase (decrease) in other liabilities ......................................           55               (4)
                                                                                      -----------      -----------

Net cash used in operating activities ..............................................       (4,206)          (4,530)
                                                                                      -----------      -----------

Cash Flows From Investing Activities:
   Purchase of investments .........................................................       (6,017)          (6,796)
   Proceeds from maturities of investments .........................................       10,300           11,389
   Capital expenditures ............................................................         (353)            (157)
                                                                                      -----------      -----------

Net cash provided by investing activities ..........................................        3,930            4,436
                                                                                      -----------      -----------
Cash Flows From Financing Activities:
   Proceeds from exercise of stock options .........................................            5              301
                                                                                      -----------      -----------

Net cash provided by financing activities ..........................................            5              301
                                                                                      -----------      -----------

Net increase (decrease) in cash and cash equivalents ...............................         (271)             207
Cash and cash equivalents at beginning of period ...................................        1,973              599
                                                                                      -----------      -----------

Cash and cash equivalents at end of period .........................................  $     1,702      $       806
                                                                                      ===========      ===========
Supplemental Cash Flow Information:

Cash paid during the period for interest ...........................................  $        43      $        56
                                                                                      ===========      ===========
</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, 2001 balance sheet was
derived from audited financial statements, however, certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with accounting principles generally accepted in the Untied 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, 2001. 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, 2001.

NOTE 2.  Note Payable

     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
$2,790,000 at the bank as collateral for the note payable as of March 31, 2002.

NOTE 3.  Stockholders' Equity

     The changes in stockholders' equity from December 31, 2001 to March 31,
2002 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, 2001 ............   32,864    $  66     $180,112      $   23      $  (170,591)    $ 9,610
   Exercise of stock options and
     compensation expense on
     option grants and stock awards .....        3       --           85          --               --          85
   Dividends on preferred stock .........       --       --           --          --              (18)        (18)
   Comprehensive loss:
         Net loss .......................       --       --           --          --           (4,053)     (4,053)
         Carrying value adjustment ......       --       --           --         (24)              --         (24)
                                            ------    -----     --------      ------      -----------     -------
   Total comprehensive loss .............       --       --           --          --               --      (4,077)
                                            ------    -----     --------      ------      -----------     -------

Balance at March 31, 2002 ...............   32,867    $  66     $180,197      $   (1)     $  (174,662)    $ 5,600
                                            ======    =====     ========      =======     ===========     =======
</TABLE>

                                        6

<PAGE>

                               GENAERA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS(Unaudited)

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

NOTE 4. Preferred Stock

     The Company's certificate of incorporation provides the board of directors
the power to issue shares of preferred stock without stockholder approval. This
preferred stock could have voting rights, including voting rights that could be
superior to that of the Company's common stock, and the board of directors has
the power to determine these voting rights. As of March 31, 2002, 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., 1,188 shares of Series A Preferred Stock were issued during 2000 and 888
shares are outstanding as of March 31, 2002. Preferred dividends of $173,000
have been accrued as of March 31, 2002 on the Series A Preferred Stock. In
connection with an agreement with MedImmune, Inc. (as described in "NOTE 5.
Collaboration Agreements"), 10,000 shares of Series B Preferred Stock were
issued in April 2001 and are outstanding as of March 31, 2002.

NOTE 5. Collaboration Agreements

     In April 2001, the Company entered into a research collaboration and
licensing agreement with MedImmune to develop and commercialize therapies
related to the Company's IL9 program. MedImmune is expected to fund at least
$2,500,000 for research and development activities at the Company through April
2003 (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 also will reimburse the Company for certain external costs incurred by
the Company in connection with the IL9 research plan, which will be recognized
by the Company as revenues when the related expenses are incurred. For the
three-month period ended March 31, 2002, the Company recognized $436,000 as
revenue related to the R&D Funding ($308,000) and external cost reimbursements
($128,000).

     In September 2001, the Company received a contingent award of up to
$1,700,000 from an affiliate of the Cystic Fibrosis Foundation ("CFF") to
support early clinical evaluation of LOMUCIN(TM) involving patients with cystic
fibrosis. This award has been granted and shall be paid to the Company from time
to time upon the achievement of certain development milestones. Of this grant,
$125,000 has been received as of March 31, 2002 and is recorded as a long-term
liability because it is refundable to the CFF upon marketing approval by the FDA
or upon the Company's election not to enter Phase 3 clinical trials or to
commercialize the product within two years of milestone completion, assuming
efficacy is demonstrated.

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 (the "Abbott
Settlement"), paying Abbott $4,200,000 at that time and receiving partial
delivery of material. An additional $3,400,000 is due to Abbott and payable if
the Company receives in excess of $10,000,000 of additional funds (as defined in
the agreement) in any year beginning in 2000, in which case the Company must pay
15% of such excess over $10,000,000 to Abbott. The Company recorded this
conditional obligation as a liability in 1999 at its then present value. As a
result of the Company's financing activities during 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 during 2001 and other cash
inflows, $480,000 of this

                                        7

<PAGE>



                               GENAERA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS(Unaudited)

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

liability was payable and paid to Abbott on March 1, 2002. The remaining amount
of $1,529,000 due to Abbott is included in long-term liabilities as of March 31,
2002. See "NOTE 7. Subsequent Event."

Liquidity

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

     As described in "NOTE 7. Subsequent Event," on April 10, 2002, the Company
completed the sale of 2,758,855 shares of its common stock at $2.75 per share.
Net proceeds from the offering, after deducting placement agent fees and
offering expenses, are estimated to total approximately $7,000,000. After
considering this investment, and in the absence of raising additional funds or
significantly reducing expenses, the Company believes it has sufficient
resources to sustain operations through mid-2003.

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

NOTE 7.  Subsequent Event

     On April 10, 2002, the Company completed the sale of 2,758,855 shares of
its common stock at $2.75 per share. The shares were sold to three of its
largest current institutional shareholders: Wellington Management Company, LLC,
the State of Wisconsin Investment Board, and Caxton Associates, LLC. Wells Fargo
Securities, LLC acted as a placement agent for 1,813,400 of the shares sold. Net
proceeds from the offering, after deducting placement agent fees and offering
expenses, are estimated to total approximately $7,000,000. Warrants to purchase
100,000 shares of the Company's common stock at an exercise price of $2.75 per
share will be issued to the placement agent in connection with this transaction.
When issued, these warrants will be exercisable and have a term of 5 years from
the date of issue. The gross proceeds from this offering are considered a
"financing activity" for the purposes of the Abbott Settlement. See "NOTE 6.
Commitments, Contingencies and Other Matters."

                                        8

<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 particular, these include, among others, 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.

     There are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements,
including those addressed below under "Risk Factors Related to Our Business."

     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.

Critical Accounting Policies and Estimates

     The SEC recently released cautionary advice regarding critical accounting
policies. The SEC has defined critical policies and practices as items that are
both most important to the portrayal of a company's financial condition and
results, and require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effects of
matters that are inherently uncertain. The preparation of our financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in our financial statements and accompanying
notes. Actual results could differ materially from those estimates. The items in
our financial statements requiring significant estimates and judgments are as
follows:

Revenue Recognition
-------------------

     Contract revenue for research and development is recorded as earned based
on the performance requirements of the contract. Non-refundable contract fees
for which no further performance obligations exist, and for which there is no
continuing involvement by us, are recognized on the earlier of when the payments
are received or when collection is assured. Revenue from non-refundable upfront
license fees and certain guaranteed payments where we continue involvement
through development collaboration is recognized on a straight-line basis over
the development period. Revenue associated with performance milestones is
recognized based upon the achievement of the milestones, as defined in the
respective agreements. Revenue under R&D cost reimbursement contracts or
government grants is recognized as the related costs are incurred. Advance
payments received in excess of amounts earned are classified as liabilities
until earned. Payments received that are refundable also are classified as
liabilities until the refund provision expires. We make an estimate as to the
appropriate deferral period for recognition of revenue on any collaborative fees
received. Changes in these estimates, due to the evolution of the development
program, can have a significant effect on the timing of revenue recorded.

                                        9

<PAGE>

Research and Development Expenses
---------------------------------

     Research and development expenses include related salaries, contractor
fees, and facility costs. R&D expenses consist of independent R&D contract
costs, contract manufacturing costs and costs associated with collaborative R&D
arrangements. In addition, we fund R&D at other research institutions under
agreements that are generally cancelable. R&D expenses also include external
activities such as investigator-sponsored trials. All such costs are charged to
R&D expense systematically as incurred, which may be measured by percentage of
completion, contract milestones, patient enrollment or the passage of time. At
the initiation of certain contracts, we must make an estimate as to the duration
and expected completion date of the contract, which may require a change due to
accelerations, delays or other adjustments to the contract period or work
performed. Changes in these estimates could have a significant effect on the
amount of R&D costs in a specific period.

Stock-Based Compensation
------------------------

     We account for stock-based employee compensation under the intrinsic
value-based method set forth by Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations.
Effective January 1, 1996, we adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Stock or other equity-based compensation for
non-employees must be accounted for under the fair value-based method as
required by SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, and other related
interpretations. Under this method, the equity-based instrument is valued at
either the fair value of the consideration received or the equity instrument
issued on the date of grant. The resulting compensation cost is recognized and
charged to operations over the service period, which is usually the vesting
period. Estimating the fair value of equity securities involves a number of
judgments and variables that are subject to significant change. A change in the
fair value estimate could have a significant effect on the amount of
compensation cost.

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, 2001.

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 believe our current resources, together with the proceeds of the April
10, 2002 private placement of our common stock, are sufficient to meet our
research and development goals and sustain operations through mid-2003. However,
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, collaborative arrangements with third parties and other strategic
alliances and business transactions. 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. We may be compelled to seek
collaborations with third parties to commercialize potential products or
technologies that we might otherwise seek to develop or commercialize ourselves,
or seek other arrangements, none of which may result in our obtaining necessary
funds. If we cannot obtain funding, we will need to delay, scale back or
eliminate research and development programs. If we raise

                                       10

<PAGE>

additional capital by issuing equity or securities convertible into equity, our
stockholders may experience dilution and our share price 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 in the foreseeable future 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. We currently have a
substantial accumulated deficit.

     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 also are 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.

Development and commercial introduction of our products will take several more
years and may not be successful.

     We are dedicating substantially all of our resources to research and
development, do not have any marketed products, and have not generated any
product revenue. Because substantially all of our potential products currently
are in research, preclinical development or the early and middle stages of
clinical testing, revenues from sales of any products will not occur for at
least the next several years, if at all. Our technologies are relatively new
fields and may not lead to commercially viable pharmaceutical products. Before
we can commercially introduce any products, we will likely incur substantial
expense for, and devote a significant amount of time to, preclinical testing and
clinical trials. We cannot apply for regulatory approval of our potential
products until we have performed additional research and development testing and
demonstrated in preclinical testing and clinical trials that our product
candidates are safe and effective for use in humans. Some of our product
candidates are in the early stages of research and development, and we may
abandon further development efforts on these product candidates before they
reach clinical trials. Conducting clinical trials is a lengthy, time-consuming
and expensive process. Our clinical trials may not demonstrate the safety and
efficacy of our potential products, and we may encounter unacceptable side
effects or other problems in the clinical trials. Should this occur, we may have
to delay or discontinue development of the potential products. Further, even if
we believe that any product is safe or effective, we may not obtain the required
regulatory approvals, be able to manufacture our products in commercial
quantities or be able to market any product successfully.

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 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, such as that which occurred
for our LOCILEX(TM) Cream, a topical cream for the treatment of infection in
diabetic foot ulcers, will materially affect our business. Even if we receive
approval of a product candidate, it may be conditioned upon

                                       11

<PAGE>

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 in connection with the development of our
products and expect to rely on third parties to market any products we develop;
if these parties do not perform as expected, we may never successfully develop
or commercialize our products.

     We expect to delegate the responsibility for all, or a significant portion,
of the development and regulatory approval for certain potential products to
third parties. We do not have control over the amount and timing of resources to
be devoted to the development of these potential 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, 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, which would
require that we repartner the technology. 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. Ultimately, these third parties may never develop an approvable or
marketable product.

     We do not have our own sales and marketing staff. In order to successfully
market our future products, we must enter into marketing and distribution
arrangements with third parties. If these parties do not market a product
successfully, we may never generate sufficient revenue to become profitable.
Additionally, we may be unable to successfully enter into arrangements with
other parties for such products.

     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 being targeted by us, including cancer, age-related
macular degeneration and chronic obstructive respiratory diseases. A number of
major pharmaceutical companies have significant franchises in these disease
areas, and can be expected to invest heavily to protect their interests. With
respect to cancer and

                                       12

<PAGE>

AMD, anti-angiogenic agents are under development at a number of companies. In
the respiratory field, other biopharmaceutical companies also have reported the
discovery of genes relating to asthma and other respiratory diseases.

     Many of the companies developing or marketing competing products have
significantly greater financial resources than us and significantly more
experience than us 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 necessary 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 currently are 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. These contract
manufacturers generally have multiple projects and they may give ours a lower
priority than others. As a result of contract manufacture errors, our product
could be lost or delivered late, delaying our clinical and preclinical programs,
or may not be produced in accordance with all current applicable regulatory
standards. Product not produced in accordance with all current applicable
regulatory standards may lead to adverse outcomes for patients and/or product
recalls. Furthermore, the development of a robust, low-cost manufacturing
process for the commercial production of squalamine and other proposed products
will require significant time and 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 that we use may utilize their own technology, our
technology, or technology acquired or licensed from third parties in developing
a manufacturing process. If we determine to engage a different contract
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 also may 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.

                                       13

<PAGE>

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. If we do not maintain patent and other protections, other
companies could offer for sale products that are substantially identical to ours
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 are subject to the risk that:

        .   patents will not issue from any of our patent applications;
        .   our patent rights will not be sufficient to protect our technology;
        .   others may file patents ahead of us in time and prevent the issuing
            of our patent claims;
        .   others will not design around the patented aspects of our
            technology;
        .   our patents will be successfully challenged or circumvented by our
            competitors; or
        .   an adverse outcome in a suit challenging our patents would 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.

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 rights to these patents and patent
applications. 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

                                       14

<PAGE>

assert rights to the technology. We have been involved in these kinds of
disputes in the past and have resolved them. We may not prevail in any similar
disputes that may arise in the future.

     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 scientific 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 engage incur liabilities that we have agreed
            to indemnify them against.

     While we carry insurance, this coverage may be insufficient to cover our
product liability losses. Moreover, product liability 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 affect 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.

                                       15

<PAGE>

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, had
been 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 current GMPs. The time required to conduct
such further clinical and manufacturing development efforts may be lengthy and
costly, and the results may ultimately prove unsuccessful.

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
Nasdaq Small Cap Market, our common stock may 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 some published quotation service.
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 from Nasdaq, 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.

                                       16

<PAGE>

     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.

The exercise of options and warrants and other issuances of shares will likely
have a dilutive effect on our stock price.

     We currently have a large number of options and warrants outstanding, some
of which grant the right to purchase shares of our common stock at prices below
its current market price and are currently exercisable. Some warrant exercise
prices are subject to adjustment under the anti-dilution provisions of the
warrant agreements. The 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 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
--------

     To date, we have not received any revenues from product sales. Our revenues
have consisted principally of revenues recognized under collaborations with
third parties. In April 2001, we entered into a research collaboration and
licensing agreement with MedImmune to develop and commercialize therapies
related to our IL9 program. MedImmune is expected to fund at least $2.5 million
for our research and development activities through April 2003, payable in eight
equal quarterly installments plus certain external costs. For the three-month
period ended March 31, 2002, we recognized $436,000 in revenue related to this
agreement.

                                       17

<PAGE>

Research and Development Expenses
---------------------------------

     Research and development expenses increased in the three-month period ended
March 31, 2002, as compared to the same period in 2001, from $2.3 million in
2001 to $3.7 million in 2002, due to additional squalamine and LOMUCINTM
development efforts. The level of research and development expenses in future
periods will depend principally upon the progress of our research and
development programs and our capital resources.

General and Administrative Expenses
-----------------------------------

     General and administrative expenses increased in the three-month period
ended March 31, 2002, as compared to the same period in 2001, from $781,000 in
2001 to $875,000 in 2002, due principally to increases in personnel related to
general corporate and business development 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 $2.5
million note payable. Interest income for the three-month period ended March 31,
2002 decreased, as compared to the same period in 2001, due to declining
investment interest yields and lower average investment balances. Interest
expense for the three-month period ended March 31, 2002 decreased, as compared
to the same period in 2001, 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.

Financial Condition, Liquidity and Capital Resources

     Cash and short-term investments were $11.6 million at March 31, 2002 as
compared to $16.1 million at December 31, 2001. The primary use of cash was to
finance our research and development operations.

     Current liabilities decreased $.3 million to $5.3 million at March 31, 2002
from December 31, 2001 due to the payment of our short-term obligation to
Abbott. 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. Long-term liabilities increased at March 31, 2002 from December 31,
2001 due to a milestone payment from an affiliate of the Cystic Fibrosis
Foundation.

     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 commitments for
capital expenditures as of March 31, 2002.

     On April 10, 2002, we completed the sale of approximately 2.7 million
shares of our common stock at $2.75 per share. Net proceeds from the offering,
after deducting placement agent fees and offering expenses, are estimated to
total approximately $7.0 million. After considering this investment, and in the
absence of raising additional funds or significantly reducing expenses, we have
sufficient resources to sustain operations through mid-2003.

     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.

                                       18

<PAGE>

     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.

Contractual Cash Obligations

     The table below sets forth our contractual cash obligations at March 31,
2002 (in thousands):

<TABLE>
<CAPTION>
                                                                                        Cash Payments Due by Period
                                                                           ------------------------------------------------------
                                                                             Less than                                   After
        Contractual Cash Obligations                              Total        1 year      1-3 years     4-5 years      5 years
        ----------------------------                              -----        ------      ---------     ---------      -------
        <S>                                                      <C>         <C>           <C>           <C>            <C>
        Bank debt /1/ ...................................         $2,500       $2,500         $   --         $   --       $   --
        Abbott settlement /2/ ...........................          1,529           --          1,529             --           --
        Operating lease on building /3/ .................          2,060          330            695            744          291
        Operating leases and maintenance
            contracts on equipment ......................            460          243            168             47            2
        Research and development
            contracts ...................................          2,657        2,358            278             21           --
                                                                  ------       ------         ------         ------       ------
        Total contractual cash obligations ..............         $9,206       $5,431         $2,670         $  812       $  293
                                                                  ======       ======         ======         ======       ======
</TABLE>

______________________

/1/ We maintain cash and investments of approximately $2.8 million as collateral
    for this obligation. Our current intention is to refinance this obligation
    prior to its maturity.

/2/ Payable if we receive in excess of $10 million of additional funds in any
    year beginning in 2000, in which case 15% of such excess over $10 million
    shall be payable to Abbott.

/3/ The lease provides for escalations relating to increases in the Consumer
    Price Index not to exceed 7% but no less than 3.5% beginning in December
    2002. We have assumed a minimum lease payment escalation of 3.5% for the
    purposes of this table.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     As of March 31, 2002, our portfolio investments consisted of $1.7 million
in cash and $9.9 million in U.S government debt instruments having a maturity of
less than one year. Due to the nature of our investment portfolio, management
believes that a sudden change in interest rates would not have a material effect
on the value of the portfolio. Management estimates that if the average
annualized yield of our investments had decreased by 100 basis points, our
interest income for the three-month period ended March 31, 2002 would have
decreased by approximately $32,000. This estimate assumes that the decrease
occurred on the first day of 2002 and reduced the annualized yield of each
investment instrument by 100 basis points. The impact on our future interest
income will depend largely on the gross amount of our investment portfolio.

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

                                       19

<PAGE>

PART II - OTHER INFORMATION

     ITEM 1.   LEGAL PROCEEDINGS

          We are not a party to any material litigation.

     ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

          None.

     ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None.

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

          None.

     ITEM 5.   OTHER INFORMATION

          None.

     ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

          10.1 Employment Agreement with David F. Jarosz *

               ________________

          *    Filed herewith.

      (b) Reports on Form 8-K

          No reports on Form 8-K were filed during the quarter ended March 31,
          2002.

                                       20

<PAGE>

                                   SIGNATURES

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


                                           GENAERA CORPORATION


Date: May 9, 2002                        By: /s/ Christopher P. Schnittker
                                             -------------------------------
                                                 Christopher P. Schnittker
                                                 Vice President and
                                                 Chief Financial Officer

                                       21

<PAGE>

                                  EXHIBIT INDEX

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

     10.1      Employment Agreement with David F. Jarosz*

____________

*   Filed herewith.