<PAGE>

                UNITED STATES 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, 2000.

                                       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
                                _______________

                         MAGAININ PHARMACEUTICALS INC.
                         -----------------------------
            (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 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 10, 2000 was 28,198,315.
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.
                         QUARTERLY REPORT ON FORM 10-Q
                      FOR THE QUARTER ENDED JUNE 30, 2000

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                               Page
                                                                                            ----------
PART I      -  FINANCIAL INFORMATION
Item 1.     Financial Statements (unaudited):
<S>         <C>                                                                  <C>
               Balance Sheets as of June 30, 2000 and December 31, 1999 ..................           3
               Statements of Operations for the three- and six-month periods ended
                   June 30, 2000 and 1999 .................................................          4
               Statements of Cash Flows for the six-month periods ended
                   June 30, 2000 and 1999 .................................................          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 ..........................................         21

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

                                       2
<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                         MAGAININ PHARMACEUTICALS INC.
                                BALANCE SHEETS
                 (Amounts in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                                   June 30, 2000   December 31, 1999
                                                                                   --------------  ------------------
                                                                                    (Unaudited)
<S>                                                                                <C>             <C>
                                     ASSETS
Current assets:
 Cash and cash equivalents .....................................................       $   3,317           $   2,435
 Short-term investments (Note 3) ...............................................           8,933               8,209
 Prepaid expenses and other ....................................................             212                 128
                                                                                       ---------           ---------
   Total current assets ........................................................          12,462              10,772
Fixed assets, net ..............................................................           1,413               1,793
Other assets ...................................................................             166                 166
                                                                                       ---------           ---------
    Total assets ...............................................................       $  14,041           $  12,731
                                                                                       =========           =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable and accrued expenses .........................................       $   1,232           $     664
 Note payable (Note 3) .........................................................           2,500               2,500
                                                                                       ---------           ---------
   Total current liabilities ...................................................           3,732               3,164
Accrued development expense - long-term (Note 7) ...............................           3,177               2,962
Deferred rent ..................................................................              49                  53
Commitments, contingencies and other matters (Note 7)...........................
Redeemable convertible preferred stock (liquidation value of $507) (Note 5) ....             507                  --
Stockholders' equity (Note 4):
Preferred stock--$.001 par value; 9,211 shares authorized; .5 shares issued
  and outstanding as Series A redeemable preferred stock at June 30, 2000;
  none issued at December 31, 1999 .............................................              --                  --
Common stock--$.002 par value; 45,000 shares authorized; 28,198 and 26,943
  shares issued and outstanding at June 30, 2000 and
  December 31, 1999, respectively ..............................................              56                  54
Additional paid-in capital .....................................................         157,140             151,655
Accumulated other comprehensive income--unrealized gain (loss)
  on investments ...............................................................              11                 (13)
Accumulated deficit ............................................................        (150,631)           (145,144)
                                                                                       ---------           ---------
   Total stockholders' equity ..................................................           6,576               6,552
                                                                                       ---------           ---------
    Total liabilities and stockholders' equity .................................       $  14,041           $  12,731
                                                                                       =========           =========

</TABLE>
                See accompanying notes to financial statements.

                                       3
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.
                           STATEMENTS OF OPERATIONS
                                  (Unaudited)
                 (Amounts in thousands, except per share data)
<TABLE>
<CAPTION>


                                               Three Months Ended    Six Months Ended
                                                    June 30,             June 30,
                                               ------------------   ------------------
                                                 2000       1999       2000      1999
                                               -------    -------    -------   -------
<S>                                           <C>         <C>       <C>        <C>
Revenues ....................................  $    --    $    --    $    --   $    --
                                               -------    -------    -------   -------
Costs and expenses:
 Research and development ...................    2,485      3,207      4,402     5,666
 General and administrative .................      569        770      1,064     1,632
                                               -------    -------    -------   -------
                                                 3,054      3,977      5,466     7,298
                                               -------    -------    -------   -------
Loss from operations ........................   (3,054)    (3,977)    (5,466)   (7,298)
Interest income .............................      161        163        295       388
Interest expense ............................     (163)       (50)      (309)     (103)
                                               -------    -------    -------   -------
Net loss ....................................   (3,056)    (3,864)    (5,480)   (7,013)
Dividends on preferred shares ...............        7         --          7        --
                                               -------    -------    -------   -------
Net loss applicable to common shareholders ..  $(3,063)   $(3,864)   $(5,487)  $(7,013)
                                               =======    =======    =======   =======
Net losses applicable to common shareholders
     per share -- basic and diluted .........   $(0.11)    $(0.17)    $(0.20)   $(0.31)
                                               =======    =======    =======   =======
Weighted average shares outstanding --
     basic and diluted ......................   27,743     22,912     27,370    22,911
                                               =======    =======    =======   =======
</TABLE>



                See accompanying notes to financial statements.

                                       4
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.
                           STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                            (Amounts in thousands)
<TABLE>
<CAPTION>


                                                                              Six Months Ended June 30,
                                                                              -------------------------
                                                                                  2000       1999
                                                                                --------   --------
<S>                                                                             <C>        <C>
Cash Flows From Operating Activities:
 Net loss                                                                       $ (5,480)  $ (7,013)
 Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                      457        535
  Amortization of investment discounts/premiums                                     (220)      (291)
  Compensation expense on option grants and stock awards                              93         93
 Changes in operating assets and liabilities:
  Increase in prepaid expenses and other assets                                      (84)      (112)
  Increase (decrease) in accounts payable and accrued expenses                       568       (629)
  Increase in accrued development expenses - long-term                               215         --
  Increase (decrease) in deferred rent                                                (4)         1
                                                                                --------   --------
Net cash used in operating activities                                             (4,455)    (7,416)
                                                                                --------   --------

Cash Flows From Investing Activities:
 Purchase of investments                                                         (14,250)   (17,300)
 Proceeds from maturities of investments                                          13,770     21,000
 Capital expenditures                                                                (77)       (36)
                                                                                --------   --------
Net cash provided by (used in) investing activities                                 (557)     3,664
                                                                                --------   --------

Cash Flows From Financing Activities:
 Payments of note payable                                                         (2,500)    (2,500)
 Proceeds from note payable                                                        2,500      2,500
 Proceeds from issuance of redeemable convertible preferred stock                    500         --
 Net proceeds from issuance of common stock                                        4,947         --
 Proceeds from exercise of options                                                   447         --
                                                                                --------   --------
Net cash provided by financing activities                                          5,894         --
                                                                                --------   --------
Net increase (decrease) in cash and cash equivalents                                 882     (3,752)
Cash and cash equivalents at beginning of period                                   2,435      4,495
                                                                                --------   --------
Cash and cash equivalents at end of period                                      $  3,317   $    743
                                                                                ========   ========

Supplemental Cash Flow Information:
Cash paid during the period for interest                                        $    100   $     99
                                                                                ========   ========
 </TABLE>



                See accompanying notes to financial statements.

                                       5
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS (Unaudited)



NOTE 1.  The Company

  Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is a biopharmaceutical company with research and development
efforts in anti-angiogenesis, respiratory genomics and infectious disease.  The
Company is managed and operated as one business.  The entire business is
comprehensively managed by a single management team that reports to the Chief
Executive Officer.  Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by location and does not
have separately reportable segments as defined by SFAS No. 131.


NOTE 2.  Basis of Presentation

  The accompanying financial statements are unaudited and have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The December 31, 1999 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, 1999. 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, 1999.


NOTE 3.  Note Payable

  The Company refinanced its $2,500,000 note payable in the second quarter of
2000. Under the terms of the new note, the Company makes monthly interest-only
payments at an annual rate of 9.125%, with principal due in June 2001. The
Company maintains investments of approximately $2,777,000 at the bank as
collateral for the note payable.


NOTE 4.  Stockholders' Equity

  The changes in stockholders' equity from December 31, 1999 to June 30, 2000
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, 1999 .........    26,943     $54    $151,655         $(13)    $(145,144)   $ 6,552
 Exercise of stock options and
  compensation expense on
  option grants and stock awards .....       169      --         540           --            --        540
 Common stock issued pursuant to
  collaboration agreement ............     1,086       2       4,945           --            --      4,947
 Dividends on preferred stock ........        --      --          --           --            (7)        (7)
 Comprehensive loss:
     Net loss ........................        --      --          --           --        (5,480)    (5,480)
     Carrying value adjustment .......        --      --          --           24            --         24
                                                                                                   -------
 Total comprehensive loss ............        --      --          --           --            --     (5,456)
                                          ------  ------    --------  -----------     ---------    -------

Balance at June 30, 2000 .............    28,198     $56    $157,140         $ 11     $(150,631)   $ 6,576
                                          ======  ======    ========  ===========     =========    =======
</TABLE>

                                       6
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS (Unaudited)



NOTE 5.  Series A Preferred Stock

  In May 2000, the Company designated 80,000 shares of its previously authorized
9,211,031 shares of preferred stock, par value of $.001 per share, as Series A
non-voting preferred stock (the "Series A Preferred Stock"). The Series A
Preferred Stock is convertible, in whole or in part, at the Company's (subject
to defined limitations) 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 ("Original Issue Price") by the 5-day average closing price of
the common stock as of the conversion date. Shares of the Series A Preferred
Stock issued before May 10, 2005 are convertible at any one date during the six
month period beginning on May 10, 2005. Shares of the Series A Preferred Stock
issued on or after May 10, 2005 are convertible at any one date during the six
month period beginning on December 31, 2008. In addition, the Series A Preferred
Shares shall also be convertible at the holder's option after November 10, 2000
in the event of (1) a merger, consolidation or sale of substantially all of the
assets of the Company or (2) at any time following the first date when the total
number of common shares outstanding, on a fully-diluted and as-converted basis,
multiplied by the preceding 10-day average closing price of such date is less
than 500% of the aggregate Original Issue Price plus accrued and unpaid
cumulative dividends on the Series A Preferred Stock. In any event, the
aggregate number of common shares issued upon conversion of the shares of Series
A Preferred Stock shall not exceed 5,388,595 shares nor shall such aggregate
conversions result in Genentech beneficially owning more than 10% of the
Company's Common Stock. In the event of a conversion which would exceed these
limits, the Company would be required to redeem such shares at a cash redemption
price of $1,000 per share plus accrued and unpaid cumulative dividends to the
date of conversion. The Series A 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. The Series A Preferred Stock ranks senior to the Company's common
stock as to liquidation and dividend rights. In the event of any liquidation,
dissolution or winding up of the Company, the Series A Preferred Stock has a
liquidation preference of $1,000 per share plus accumulated and unpaid
cumulative dividends to the date of liquidation. Cumulative preferred dividends
under the Series A Preferred Stock are payable in arrears on a quarterly basis
at an annual rate of the prime rate plus 2%.

  In connection with an agreement with Genentech, Inc. (see Note 6), 500 shares
of Series A Preferred Stock were issued. Preferred dividends of $7,000 have been
accrued as of June 30, 2000 on the Series A Preferred Stock.


NOTE 6.  Collaboration Agreement

  In May 2000, the Company entered into a research, development and
commercialization collaboration agreement (the "Collaboration Agreement") with
Genentech, Inc. ("Genentech"). Under this agreement, the Company and Genentech
will co-develop an antibody to IL9 for asthma, with options for other products
in respiratory disease. The Company and Genentech simultaneously executed a
Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which the
Company received from Genentech approximately $5,000,000 in exchange for the
issuance of 1,085,973 shares of its common stock and $500,000 representing the
issuance of 500 shares of its Series A Preferred Stock (see Note 5). The Company
will conduct development activities through Phase II clinical testing for
pharmaceutical products covered by the Collaboration Agreement and Genentech
will conduct Phase III clinical testing, manufacturing and marketing for such
products. The Company may elect to co-fund Genentech's Phase III clinical and
regulatory costs in return for a share of profits and losses resulting from the
sales of covered product in the U.S. The Company will receive a royalty on sales
overseas and in the U.S. if the Company elects not to fund the Phase III and
regulatory costs. Future development funding will be provided to the Company by
Genentech through the issuance of additional shares of the Series A Preferred
Stock to Genentech.

                                       7
<PAGE>

NOTE 7. Commitments, Contingencies and Other Matters

Manufacturing Agreement

  The Company renegotiated an earlier manufacturing agreement with Abbott
Laboratories ("Abbott") in 1999. Under this agreement, $3,400,000 is due to
Abbott and payable if the Company receives in excess of $10,000,000 of
additional funds in any year beginning in 2000, in which case 15% of such excess
over $10,000,000 shall be payable to Abbott. The Company has accrued $3,200,000
as the present value of this conditional obligation as of June 30, 2000.

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 9. Subsequent Event", the Company announced that it has
entered into agreements to sell approximately 4,153,000 shares of its common
stock, through a private placement, at a price of $3.00 per share. Proceeds to
the Company from the offering will total approximately $12,400,000, before
offering expenses. After considering such investment, and in the absence of
raising additional funds or significantly reducing expenses, the Company has
sufficient resources to sustain operations through 2001. 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 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 8.  New Accounting Pronouncements

  In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101").  SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements, including the recognition of non-refundable fees received upon
entering into arrangements.  The Company is in the process of evaluating SAB 101
and its effects on the financial statements and current revenue recognition
policies.  The Company is required to adopt this pronouncement no later then the
fourth quarter of 2000, with cumulative effect adjustments, if any, to be
recorded as of January 1, 2000.

NOTE 9.  Subsequent Event

  On August 11, 2000, the Company announced that it has entered into agreements
to sell approximately 4,153,000 shares of its common stock, through a private
placement, at a price of $3.00 per share. Gross proceeds to the Company from the
offering will total approximately $12,400,000, before offering expenses, which
include a cash fee paid and common stock warrants granted to the placement
agent. See Note 7 for the effect of this transaction on amounts payable to
Abbott.

                                       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 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," 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 may turn
out to be wrong. They can be affected by inaccurate assumptions we might make,
or by known or unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future results. Consequently,
no forward-looking statement can be guaranteed. Actual future results may vary
materially.

  We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our filings with the SEC. Also note that we provide the following cautionary
discussion of risks and uncertainties relevant to our business. These are
factors that we think could cause our actual results to differ materially from
expected results. Other unanticipated occurrences besides those listed here
could also adversely affect us. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.

Risk Factors

  Any investment in shares of our common stock involves a high degree of risk.
You should carefully consider the following information about these risks
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, 1999.

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 $12.3 million at June 30, 2000. At June
30, 2000, we had current liabilities of $3.7 million. On August 11, 2000, we
announced that we have entered into agreements to sell approximately 4.1 million
shares of our common stock, through a private placement, at a price of $3.00 per
share. Proceeds to Magainin from the offering will total approximately $12.4
million, before offering expenses. In the absence of raising additional funds or
significantly reducing expenses, we have sufficient resources to sustain
operations through 2001. 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, other than the August 2000
private placement referred to above, and may be unable to obtain sufficient
funding in the future on acceptable terms. 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.

  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.

                                       9
<PAGE>

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, 2000, we had
an accumulated deficit of approximately $150.6 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.

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 U.S. Food
and Drug Administration ("FDA") that our New Drug Application ("NDA") for
LOCILEX 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 good manufacturing procedures.  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
good manufacturing procedures, and meeting strict product specifications.
Further clinical and manufacturing development efforts may again not be
successful. The time required to conduct such activities may be lengthy and the
costs considerable.

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, such as that which has
occurred for LOCILEX Cream, will materially affect our business.  Even 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.

                                       10
<PAGE>

  1) FDA Marketing Approval:

  The primary regulatory agency overseeing all phases of our drug development
and marketing programs is the FDA.  In order to obtain approval from the FDA to
market any drug, we must submit proof of safety, efficacy and quality for each
of our proposed products for each indication, which requires extensive and time
consuming preclinical and clinical testing.  The results of preclinical studies
are submitted to the FDA as part of an Investigational New Drug Application
("IND").  Once the IND is effective, human clinical trials may be conducted.
The results of the clinical trials are submitted to the FDA as part of an NDA.
Following review of the NDA, the FDA may:

   . grant marketing approval;
   . require additional testing or information; or
   . deny the application.

  2) FDA Manufacturing Approval:

  Detailed manufacturing information is also required to be included in the NDA
for review and approval by the FDA.  All manufacturing facilities and processes
must comply with good manufacturing practices ("GMP") regulations prescribed by
the FDA.  All manufacturers must, among other things, pass manufacturing plant
inspections and provide records of detailed manufacturing processes. Among other
things, it must be demonstrated that:

   . the drug product can be consistently manufactured at the same quality
     standard;
   . the drug product is stable over time; and
   . the level of chemical impurities in the drug product are under a designated
     level.

  3) Ongoing FDA Oversight:

  We will continue to be subject to regulation by the FDA even after our drug
products have been approved and commercialized.  Among other things, the FDA
may:

   .  require additional submissions if there are any modifications to the drug
      product including, for example, any changes in manufacturing process,
      labeling, or manufacturing facility;
   .  require post-marketing testing and surveillance to monitor the effects of
      approved drug products; and
   .  enforce conditional approvals that restrict the commercial applications of
      a drug product.

  Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting.

  The Prescription Drug User Fee Act of 1992 imposes substantial fees on a one-
time basis for applications for approval and on an annual basis for
manufacturing and marketing, of prescription drugs.

  4) Other Regulatory Bodies:

  We are also subject to regulation by other regulatory authorities, including
the Occupational Safety and Health Administration, the Environmental Protection
Agency, the Nuclear Regulatory Commission, the Drug Enforcement Agency and the
United States Department of Agriculture, and to regulation under the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
regulatory statutes.

  Drug product marketing outside the United States is subject to foreign
regulatory requirements which may or may not be influenced by FDA approval.
While the requirements vary widely from country to country, generally, the drug
product must be approved by a foreign regulatory authority comparable to the FDA
prior to marketing the product in those countries.  The time required to obtain
foreign approvals may be longer than that in the United States.

                                       11
<PAGE>

  In the future, we may be subject to additional federal, state or local
regulations or additional fees.  Efforts are continually underway to reform
federal regulation of drug products.  Although some of these changes could
streamline and otherwise benefit development, marketing and related requirements
for drugs, others could increase regulatory requirements.

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

  We do not have control over the amount and timing of resources to be devoted
to our products by our collaborative partners. In the future, the interests of
our collaborators may not be consistent with our interests. Collaborators may
develop products independently or through third parties that could compete with
our proposed products. For example, SmithKline maintains a significant presence
in the antibiotic area and currently sells a topical antibiotic product
indicated for the treatment of certain skin infections.  Genentech has recently
launched an antibody-based asthma product.

  We may also decide to establish our own sales force to market and sell certain
products. Although certain members of our management have limited experience in
the marketing of 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, 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.
We are aware that research on compounds derived from animal host-defense systems
is being conducted by others.  Many companies are also 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. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources.  We may
also face competition from companies using different or advanced techniques that
could render our products obsolete.

  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>

  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 have also
reported the discovery of genes relating to asthma.

  Even if eventually approved, LOCILEX(TM) Cream may not be successfully
marketed against oral antibiotics for the treatment of infection in diabetic
foot ulcers. These infections have historically been treated with systemically
administered antibiotics, which may be perceived by some medical professionals
as having certain advantages over LOCILEX(TM) Cream. In addition, we may be
unable to manufacture LOCILEX(TM) Cream at a cost which will allow it to be sold
at a competitive price relative to oral antibiotics or other topical antibiotics
that may be used for this indication.

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

  We currently have neither the resources, facilities, nor the 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 depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards.  This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis.  Additionally, the
number of companies capable of producing our proposed products is limited.  We
may be unable to maintain arrangements with qualified outside contractors to
manufacture materials at costs which 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 had an agreement with Abbott Laboratories providing for the purchase of
approximately $10.0 million of bulk drug substance for LOCILEX Cream.  As FDA
approval of LOCILEX Cream did not occur, we renegotiated this agreement with
Abbott in 1999, paying Abbott $4.2 million and receiving partial delivery of
material. An additional $3.4 million is due to Abbott and payable if we receive
in excess of $10.0 million of additional funds in any year beginning in 2000, in
which case 15% of such excess over $10.0 million shall be payable to Abbott. We
have no further purchase commitments to Abbott and Abbott has no further supply
requirements to us.

  We are also currently working with outside contractors for the chemical
production of squalamine.  Production of squalamine and other proposed products
will also require significant expenditure.

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.

  1) 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.

                                       13
<PAGE>

  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.

  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 can be substantial, regardless of the outcome.

  2) Potential Ownership Disputes:

  There may be disputes arising 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 kind 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.

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

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

  We depend to a considerable degree on a limited number of key personnel.  Many
key 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, Which 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 which 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, and we
may not reach optimal sales levels.

  There has also 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 and pricing.  Not only would this affect possible
future profit margins, it could adversely affect 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 effect our
business.

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 Make it More Difficult for Investors to Dispose 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

                                       15
<PAGE>

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 SEC 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. 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 to be 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 Could Have a
Dilutive Effect on Our Stock Price.

  As of June 30, 2000, there were outstanding options to purchase an aggregate
of approximately 3,480,000 shares of our common stock at prices ranging from
$0.40 per share to $16.75 per share, of which approximately 2,250,000 were
exercisable as of such date. Also outstanding at June 30, 2000 were warrants to
purchase 229,739 shares of our common stock exercisable at $8.00 per share and
warrants to purchase an aggregate of 1,168,808 shares of our common stock,
currently exercisable from $5.33 per share to $7.28 per share, and subject to
adjustment with future offerings. 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 which impose restrictions on stockholder
action to acquire control of Magainin. The effect of these provisions of our
certificate of incorporation and Delaware law provisions would likely discourage
third parties from seeking to obtain control.

Results Of Operations

Revenues

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

                                       16
<PAGE>

Research and Development Expenses

  Research and development expenses decreased in the three- and six-month
periods ended June 30, 2000 as compared to the same periods a year ago as a
result of reductions in manufacturing development, clinical and regulatory
costs, and personnel expenses, principally due to the absence of development
activity relating to LOCILEX(TM) Cream.

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

General and Administrative Expenses

  General and administrative expenses are primarily comprised of personnel costs
and professional fees and have decreased in the three- and six-month periods
ended June 30, 2000 as compared to the same periods a year ago due principally
to reductions in personnel and professional fees.

Other Income and Expense

  Other income and expense is primarily comprised of interest income generated
from cash and investments net of interest expense related to the note payable
and the long-term obligation to Abbott Laboratories. Interest income decreased
for the three- and  six-month periods ended June 30, 2000 as compared to the
same periods of the prior year due to lower investment balances. The increase in
interest expense for the three- and six-month periods ended June 30, 2000 is due
principally to the recognition of interest expense associated with the long-term
obligation to Abbott Laboratories.

Net Loss

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

Financial Condition, Liquidity And Capital Resources

  Cash and investments were $12.3 million at June 30, 2000 as compared to $10.6
million at December 31, 1999. 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; and
   .  $  5,447,000 raised from a private placement completed in May 2000.

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

                                       17
<PAGE>

  Accounts payable and accrued expenses increased $.6 million to $1.2 million at
June 30, 2000 from December 31, 1999 as a result of increased research contract
accruals related to squalamine development.  Long-term liabilities increased $.2
million to $3.2 million at June 30, 2000 from December 31, 1999 reflecting the
increase in the present value of the amount due to Abbott Laboratories under
certain conditions.

  Under the terms of our $2.5 million note payable, which was refinanced in June
2000, we make monthly interest-only payments at an annual rate of 9.125%, with
principal due in June 2001. We maintain investments of $2.8 million as
collateral for the note payable.

  In May 2000, we entered into a research, development and commercialization
collaboration agreement (the "Collaboration Agreement") with Genentech, Inc.
("Genentech").  Under this agreement, we will co-develop with Genentech an
antibody to IL9 for asthma, with options for other products in respiratory
disease.  We simultaneously executed a Stock Purchase Agreement (the "Stock
Purchase Agreement") with Genentech pursuant to which we received from Genentech
approximately $5,000,000 in exchange for the issuance of 1,085,973 shares of our
common stock and $500,000 representing the issuance of 500 shares of our Series
A convertible preferred stock (the "Series A Preferred Stock"), redeemable under
certain circumstances.  We will conduct development activities through Phase II
clinical testing for pharmaceutical products covered by the Collaboration
Agreement and Genentech will conduct Phase III clinical testing, manufacturing
and marketing for such products.  We may elect to co-fund Genentech's Phase III
clinical and regulatory costs in return for a share of profits and losses
resulting from the sales of covered product in the U.S.  We will receive a
royalty on sales overseas and in the U.S. if we elect not to fund the Phase III
and regulatory costs. Future development funding will be provided to us by
Genentech through the issuance of additional shares of the Series A Preferred
Stock to Genentech. Cumulative preferred dividends under the Series A Preferred
Stock are payable in arrears on a quarterly basis at an annual rate of the prime
rate plus 2%.

  We maintained cash and investments of $12.3 million and had current
liabilities of $3.7 million at June 30, 2000. On August 11, 2000, we announced
that we have entered into agreements to sell approximately 4.1 million shares of
our common stock, through a private placement, at a price of $3.00 per share.
Proceeds to Magainin from the offering will total approximately $12.4 million,
before offering expenses. In the absence of raising additional funds or
significantly reducing expenses, we have sufficient resources to sustain
operations through 2001. 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, other than the August 2000
private placement referred to above, and may be unable to obtain sufficient
funding in the future on acceptable terms. 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 other 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, 2000.

                                       18
<PAGE>

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  We are exposed to risks associated with interest rate changes. Our exposure to
market risk for changes in interest rates relates primarily to our investment
portfolio. We invest in 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, 2000, our portfolio investments consisted of $3.3 million in
cash and cash equivalents and $8.9 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 six months ended June 30, 2000 would have
decreased by approximately $50,000. This estimate assumes that the decrease
occurred on the first day of 2000 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 legal proceedings.

  ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

    In May 2000, we issued 1,085,973 shares of common stock (par value $.002 per
  share) and 500 shares of redeemable convertible preferred stock to Genentech,
  Inc. for an aggregate purchase price of $5,499,972.  The issuance of the
  common stock and preferred stock was exempt from registration pursuant to
  section 4(2) of the Securities Act.  We granted Genentech certain "demand" and
  "piggy-back" registration rights with respect to these shares.  We intend to
  use the proceeds to fund both ongoing and planned research and development
  activities, including clinical trials and manufacturing development efforts
  for squalamine, activities associated with our respiratory program, 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 22, 2000, 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 the following members to serve on the Board of
  Directors for one-year terms:

<TABLE>
<CAPTION>

                                        Votes For   Votes Withheld
                                        ----------  --------------
<S>                                     <C>         <C>
     Zola P. Horovitz, Ph.D.            23,582,616       90,719
     Bernard Canavan, M.D.              23,582,616       90,719
     Michael R. Dougherty               23,582,616       90,719
     Roy C. Levitt, M.D.                23,582,616       90,719
     Charles A. Sanders, M.D.           23,582,616       90,719
     Robert F. Shapiro                  23,582,616       90,719
     James B. Wyngaarden, M.D.          23,582,616       90,719
     Michael A. Zasloff, M.D., Ph.D.    23,582,616       90,719

</TABLE>

  ITEM 5.  OTHER INFORMATION

    None.



                                       20
<PAGE>

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

   (a) Exhibits

      10.1      License and Collaboration Agreement between Magainin
                Pharmaceuticals Inc. and Genentech, Inc. dated April 28, 2000.*+

      10.2      Certificate of Designations, Preferences and Rights of Series A
                Preferred Stock of Magainin Pharmaceuticals Inc. dated May 8,
                2000.*

      10.3      Stock Purchase Agreement between Magainin Pharmaceuticals Inc.
                and Genentech, Inc. dated April 28, 2000.*

      10.4      Registration Rights Agreement between Magainin Pharmaceuticals
                Inc. and Genentech, Inc. dated April 28, 2000.*

      27.1      Financial data schedule for the six-month period ended June 30,
                2000 (electronic filing only).*

   (b)  Reports on Form 8-K

        We filed a Current Report on Form 8-K on May 9, 2000 regarding the
        execution of a collaborative agreement and financing arrangement
        agreements between us and Genentech, Inc.



______________

*  Filed herewith.

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

                                       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.


                                                  MAGAININ PHARMACEUTICALS INC.



      Date:  August 11, 2000            BY:     /s/  Michael R. Dougherty
                                                -------------------------
                                                     Michael R. Dougherty
                                                     President and Chief
                                                     Executive Officer


      Date:  August 11, 2000            BY:    /s/   Christopher P. Schnittker
                                               -------------------------------
                                                     Christopher P. Schnittker
                                                     Vice President and
                                                     Chief Financial Officer


                                       22