<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                ________________

                                    FORM 10-Q

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

                  For the Quarterly Period Ended June 30, 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 August 13, 2002 was 35,666,491.

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

<PAGE>

                               GENAERA CORPORATION
                          QUARTERLY REPORT ON FORM 10-Q
                       FOR THE QUARTER ENDED JUNE 30, 2002

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

   Item 1. Financial Statements (unaudited):

                  Balance Sheets as of June 30, 2002 and December 31, 2001 ....................     3

                  Statements of Operations for the three- and six-month periods ended
                           June 30, 2002 and 2001 .............................................     4

                  Statements of Cash Flows for the six-month periods ended
                           June 30, 2002 and 2001 .............................................     5

                  Notes to Financial Statements ...............................................     6

   Item 2. Management's Discussion and Analysis of Financial Condition
                  and Results of Operations ...................................................    10

   Item 3. Quantitative and Qualitative Disclosures about Market Risk .........................    20

PART II   -       OTHER INFORMATION

   Item 1. Legal Proceedings ..................................................................    21
   Item 2. Changes in Securities and Use of Proceeds ..........................................    21
   Item 3. Defaults Upon Senior Securities ....................................................    21
   Item 4. Submission of Matters to a Vote of Security Holders ................................    21
   Item 5. Other Information ..................................................................    21
   Item 6. Exhibits and Reports on Form 8-K ...................................................    22

SIGNATURES ....................................................................................    23
</TABLE>

                                       2

<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                June 30, 2002    December 31, 2001
                                                                                -------------    -----------------
                                                                                 (Unaudited)
                                     ASSETS
<S>                                                                             <C>              <C>
Current assets:
   Cash and cash equivalents ...................................................  $  1,508           $   1,973
   Short-term investments (NOTE 2) .............................................    13,484              14,105
   Prepaid expenses and other current assets ...................................       215                 218
                                                                                  --------           ---------

     Total current assets ......................................................    15,207              16,296

Fixed assets, net ..............................................................     1,563               1,456
Other assets ...................................................................        64                  64
                                                                                  --------           ---------
      Total assets .............................................................  $ 16,834           $  17,816
                                                                                  ========           =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses .......................................  $  2,193           $   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 .................................................     4,755               5,583

Accrued development expense - long-term (NOTE 6) ...............................     1,529               1,529
Other liabilities ..............................................................       163                  50

Series A redeemable convertible preferred stock (liquidation value
   of $1,079 and $1,044 at June 30, 2002 and December 31, 2001,
   respectively) (NOTE 4) ......................................................     1,079               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
    June 30, 2002 and December 31, 2001; 10.0 shares issued and outstanding as
    Series B convertible preferred stock at June 30, 2002 and December 31, 2001
    (liquidation value of $10,000) .............................................        --                  --
Common stock - $.002 par value per share; 75,000 shares authorized; 35,626
   shares and 32,864 shares issued and outstanding at June 30, 2002 and
   December 31, 2001, respectively .............................................        71                  66
Additional paid-in capital .....................................................   187,224             180,112
Accumulated other comprehensive income - unrealized gain on investments ........         5                  23
Accumulated deficit ............................................................  (177,992)           (170,591)
                                                                                  ---------          ---------
     Total stockholders' equity ................................................     9,308               9,610
                                                                                  --------           ---------
      Total liabilities and stockholders' equity ...............................  $ 16,834           $  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                Six Months Ended
                                                            June 30,                         June 30,
                                                   --------------------------       --------------------------
                                                      2002            2001             2002            2001
                                                      ----            ----             ----            ----
<S>                                                <C>            <C>               <C>            <C>
Collaborative research agreement revenues .......  $       417    $       250       $       853    $       250
                                                   -----------    -----------       -----------    -----------

Costs and expenses:
   Research and development .....................        2,895          2,262             6,548          4,555
   General and administrative ...................          863            942             1,738          1,723
                                                   -----------    -----------       -----------    -----------
                                                         3,758          3,204             8,286          6,278
                                                   -----------    -----------       -----------    -----------
Loss from operations ............................       (3,341)        (2,954)           (7,433)        (6,028)
Interest income .................................           71            276               153            516
Interest expense ................................          (43)           (55)              (86)          (153)
                                                   -----------    -----------       -----------    -----------

Net loss ........................................       (3,313)        (2,733)           (7,366)        (5,665)
Dividends on preferred stock ....................           17             31                35             62
                                                   -----------    -----------       -----------    -----------

Net loss applicable to common stockholders ......  $    (3,330)   $    (2,764)      $    (7,401)   $    (5,727)
                                                   ===========    ===========       ===========    ===========

Net loss applicable to common stockholders
         per share -- basic and diluted .........  $     (0.09)   $     (0.08)      $     (0.22)   $     (0.18)
                                                   ===========    ===========       ===========    ===========

Weighted average shares outstanding --
         basic and diluted ......................       35,353         32,737            34,117         32,568
                                                   ===========    ===========       ===========    ===========
</TABLE>

                 See accompanying notes to financial statements.

                                       4

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Six Months Ended June 30,
                                                                                -------------------------
                                                                                   2002           2001
                                                                                   ----           ----
<S>                                                                             <C>          <C>
Cash Flows From Operating Activities:
   Net loss ..................................................................  $  (7,366)   $  (5,665)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization ...........................................        273          435
     Amortization of investment discounts/premiums ...........................       (136)        (353)
     Compensation expense on option grants and equity awards .................        169          228
     Receipt and retirement of Series A redeemable convertible
         preferred stock .....................................................         --        (300)
   Changes in operating assets and liabilities:
     Decrease in prepaid expenses and other ..................................          3          114
     Decrease in accounts payable and accrued expenses .......................       (328)         (73)
     Decrease in accrued development expenses ................................       (480)      (1,351)
     Increase in other liabilities ...........................................         93           54
                                                                                ---------    ---------

Net cash used in operating activities ........................................     (7,772)      (6,911)
                                                                                ---------    ---------

Cash Flows From Investing Activities:
   Purchase of investments ...................................................    (17,961)     (20,986)
   Proceeds from maturities of investments ...................................     18,700       18,129
   Capital expenditures ......................................................       (380)        (525)
                                                                                ---------    ---------

Net cash provided by (used in) investing activities ..........................        359       (3,382)
                                                                                ---------    ---------

Cash Flows From Financing Activities:
   Proceeds from issuance of Series B convertible preferred stock ............         --        9,908
   Proceeds from issuance of common stock ....................................      6,943           --
   Proceeds from exercise of stock options ...................................          5          838
                                                                                ---------    ---------

Net cash provided by financing activities ....................................      6,948       10,746
                                                                                ---------    ---------

Net increase (decrease) in cash and cash equivalents .........................       (465)         453
Cash and cash equivalents at beginning of period .............................      1,973          599
                                                                                ---------    ---------
Cash and cash equivalents at end of period ...................................  $   1,508    $   1,052
                                                                                =========    =========

Supplemental Cash Flow Information:

Cash paid during the period for interest .....................................  $      88    $     125
                                                                                ---------    ---------
</TABLE>

                See accompanying notes to financial statements.

                                       5

<PAGE>

                              GENAREA 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 United States
of America have been condensed or omitted pursuant to SEC rules and regulations.
The Company believes that the financial statements include all adjustments of a
normal and recurring nature necessary to present fairly the results of
operations, financial position, changes in stockholders' equity and cash flows
for the periods presented. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 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

     The Company refinanced its $2,500,000 note payable in the second quarter of
2002. Under the terms of the new note payable, the Company makes monthly
interest-only payments at an annual rate of 5.346%, with principal due in June
2003. The Company maintained investments with an approximate market value of
$2,778,000 at the bank as collateral for the note payable as of June 30, 2002.

NOTE 3.  Stockholders' Equity

     The changes in stockholders' equity from December 31, 2001 to June 30, 2002
are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                             Accumulated
                                                                                Other                      Total
                                             Common Stock     Additional    Comprehensive               Stockholders'
                                          ------------------
                                           Number              Paid-in         Income     Accumulated      Equity
                                           of Shares Amount    Capital                      Deficit
                                           --------- ------   ----------    ------------- -----------   -------------
<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       --          174          --             --           174
   Common stock issued pursuant to
     private placement .................     2,759        5        6,938          --             --         6,943
   Dividends on preferred stock ........        --       --           --          --            (35)          (35)
   Comprehensive loss:
         Net loss ......................        --       --           --          --         (7,366)       (7,366)
         Carrying value adjustment .....        --       --           --         (18)            --           (18)
                                           -------    -----    ---------      ------      ---------        ------
   Total comprehensive loss ............        --       --           --          --             --        (7,384)
                                           -------    -----    ---------      ------      ---------        ------

Balance at June 30, 2002 ...............    35,626    $  71     $187,224      $    5      $(177,992)       $9,308
                                            ======    =====     ========      ======      =========        ======
</TABLE>

                                       6

<PAGE>

                               GENAREA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS (Unaudited)

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

     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 ("SWIB") 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, were $6,943,000. 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 1999 Abbott Settlement (as described in "NOTE
6. Commitments, Contingencies, and Other Matters.") As a condition of SWIB's
purchase of its shares, the Company agreed to, and subsequently did, amend its
outstanding stock option plans and its corporate by-laws to, in general,
prohibit the Company from, among other things, issuing options with exercise
prices below fair market value, from reducing the exercise price of options,
from canceling and re-granting options at lower exercise prices and from issuing
certain convertible securities, each without requisite stockholder approval.

NOTE 4.  Preferred Stock

     The Company's certificate of incorporation provides the board of directors
the power to issue shares of preferred stock without stockholder approval. This
preferred stock could have voting rights, including voting rights that could be
superior to that of the Company's common stock, and the board of directors has
the power to determine these voting rights. As of June 30, 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 June 30, 2002. Preferred dividends of $190,000 have
been accrued as of June 30, 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 June 30, 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 June 30, 2002, the Company recognized $417,000 as
revenue related to the R&D Funding ($312,000) and external cost reimbursements
($105,000). For the six-month period ended June 30, 2002, the Company recognized
$853,000 as revenue related to the R&D Funding ($620,000) and external cost
reimbursements ($233,000). For the three- and six-month periods ended June 30,
2001, the Company recognized $250,000 as revenue related solely to the R&D
Funding.

     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

                                       7

<PAGE>

                               GENAREA CORPORATION

                    NOTES TO FINANCIAL STATEMENTS (Unaudited)

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

time upon the achievement of certain development milestones. Of this grant,
$125,000 has been received as of June 30, 2002 and is recorded as a long-term
liability. The Company did not recognize this amount as revenue because it is
refundable to the CFF upon marketing approval by the FDA or, if development
milestones are satisfied, the Company elects not to enter Phase 3 clinical
trials or to commercialize the product within two years of the completion of
milestone requirements.

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 was due to Abbott and payable if
the Company receives in excess of $10,000,000 of additional funds (as defined in
the agreement) in any year beginning in 2000, in which case the Company must pay
15% of such excess over $10,000,000 to Abbott. The Company recorded this
conditional obligation as a liability in 1999 at its then present value. As a
result of the Company's financing activities 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 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 June 30, 2002 as the Company has not received in excess of
$10,000,000 of cash inflows for the six-month period ended June 30, 2002.

Liquidity

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

     In the absence of raising additional funds or significantly reducing
expenses, the Company believes it has sufficient resources to sustain operations
through at least 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.

                                       8

<PAGE>

NOTE 7. New Accounting Pronouncements

     In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies Emerging Issues Task Force Issue No. 94-3. The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company plans to adopt SFAS No. 146 in
January 2003.

NOTE 8. Subsequent Events

     On August 14, 2002, the Company announced that it is implementing a
realignment of operations intended to focus resources on its most advanced
product development programs and significantly reduce expenses. Under the
realignment plan, the Company reduced its headcount by approximately 35%,
primarily impacting unsupported preclinical research programs. All of the
employees affected by the workforce reduction will be offered severance and
outplacement support. The Company anticipates recording a nonrecurring charge of
approximately $500,000 in the third quarter of 2002. Management expects this
initiative to result in sufficient savings to allow current cash and investments
balances to fund operations related to the Company's realigned goals through at
least mid-2003.

                                       9

<PAGE>

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

Forward Looking Statements

     Our disclosure and analysis in this Quarterly Report on Form 10-Q contains
some forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. Such
statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," "hope," and other words and terms of
similar meaning. In 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.

Overview

     Genaera Corporation is a biopharmaceutical company committed to developing
medicines for serious diseases from genomics and natural products. Research and
development efforts are focused on anti-angiogenesis and respiratory diseases.
Genaera has three products in development addressing substantial unmet medical
needs in major pharmaceutical markets. These include squalamine, an
anti-angiogenesis treatment for cancer and eye disease; interleukin-9 antibody,
a respiratory treatment based on the discovery of a genetic cause of asthma; and
LOMUCIN(TM), a mucoregulator to treat the overproduction of mucus and secretions
involved in many forms of chronic respiratory disease. We were incorporated in
the State of Delaware in 1987 as Magainin Pharmaceuticals, Inc. and began
operations in 1988. We changed our name to Genaera Corporation on March 9, 2001.

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

                                       10

<PAGE>

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.

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 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

                                       11

<PAGE>

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 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.

                                       12

<PAGE>

     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 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(TM), maintains a
significant presence in the antibiotic area and currently sells a topical
antibiotic product indicated for the treatment of certain skin infections. In
addition, a collaborator may decide to end a relationship with us, 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

                                       13

<PAGE>

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 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
commercial 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

                                       14

<PAGE>

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.

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. dditionally, some of these agreements also require that we develop
the licensed technology under

                                       15

<PAGE>

certain timelines. If we do not adhere to an acceptable schedule of
commercialization, we may lose our rights.

Potential Ownership Disputes

     Disputes may arise as to the ownership of our technology. Most of our
research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when technology was developed, and
assert rights to the technology. 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

                                       16

<PAGE>

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.

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.

     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.

                                       17

<PAGE>

     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. In accordance with the contract, 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 cost reimbursements. For the three-month period ended June
30, 2002, we recognized $417,000 as revenue related to contractual R&D funding
($312,000) and external cost reimbursements ($105,000). For the six-month period
ended June 30, 2002, we recognized $853,000 as revenue related to the
contractual R&D funding ($620,000) and external cost reimbursements ($233,000).
For the three- and six-month periods ended June 30, 2001, the Company recognized
$250,000 as revenue related solely to the contractual R&D funding.

Research and Development Expenses

     Research and development expenses increased in the three-month period ended
June 30, 2002, as compared to the same period in 2001, from $2.3 million in 2001
to $2.9 million in 2002 primarily due to increases in personnel and related
costs. Research and development expenses increased in the six-month period ended
June 30, 2002, as compared to the same period in 2001, from $4.6 million in 2001
to $6.5 million in 2002 due to additional squalamine and LOMUCIN(TM) clinical
and manufacturing efforts . We also experienced an increase in personnel and
related costs during this period to support expanding research and 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.

                                       18

<PAGE>

General and Administrative Expenses

     General and administrative expenses decreased in the three-month period
ended June 30, 2002, as compared to the same period in 2001, from $942,000 in
2001 to $863,000 in 2002 due principally to decreases in personnel. General and
administrative expenses remained relatively consistent for the six-month period
ended June 30, 2002 as compared to the same period in 2001 at $1.7 million.

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- and six-month periods ended
June 30, 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- and six-month periods ended June 30, 2002
decreased, as compared to the same period in 2001, due to a reduction in the
note payable's interest rate and because the long-term obligation to Abbott
Laboratories is now recorded at its face value and we no longer recognize
additional interest expense on the obligation.

Financial Condition, Liquidity and Capital Resources

     Cash and short-term investments were $15.0 million at June 30, 2002 as
compared to $16.1 million at December 31, 2001. 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, were approximately $6.9 million. The primary use of cash
during the period was to finance our research and development operations.

     Current liabilities decreased $800,000 to $4.8 million at June 30, 2002
from $5.6 million at December 31, 2001 due to the payment of our short-term
obligation to Abbott along with decreases in other accrued expenses. Under the
terms of our $2.5 million note payable, we make monthly interest-only payments
at an annual rate of 5.346%, with principal due in June 2003. We maintain
investments of $2.8 million as collateral for the note payable.

     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 June 30, 2002.

     After considering the private placement investment in April, and in the
absence of raising additional funds or significantly reducing expenses, we
believe we have sufficient resources to sustain operations through at least
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.

     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

                                       19

<PAGE>

receive lower consideration upon commercialization of such products than if we
had not entered into such arrangements, or if we entered into such arrangements
at later stages in the product development process.

Contractual Cash Obligations

     The table below sets forth our contractual cash obligations at June 30,
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/ ........    1,979          332            701        751        195
        Operating leases and maintenance
          contracts on equipment ..............      395          218            140         36          1
        Research and development
          contracts ...........................    1,897        1,646            242          9         --
                                                 -------      -------        -------     ------      -----
        Total contractual cash obligations ....  $ 8,300      $ 4,696        $ 2,612     $  796      $ 196
                                                 =======      =======        =======     ======      =====
</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 just 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.

Subsequent Events

     On August 14, 2002, we announced that we are implementing a realignment of
operations intended to focus resources on our most advanced product development
programs, Squalamine and LOMUCIN(TM), and significantly reduce expenses. We will
proceed with our ongoing phase 2b non-small cell lung cancer study, and commence
our first "wet" macular degeneration study. Additional studies for squalamine,
including our planned trial in advanced ovarian cancer, will require, at a
minimum, additional funding. For LOMUCIN(TM), we anticipate having the results
from our chronic asthma study later this year, and are proceeding with the
startup of our initial clinical trials in cystic fibrosis. The cystic fibrosis
trials are funded in part by our alliance with the Cystic Fibrosis Foundation,
which has provided a Therapeutics Development Grant of up to $1,700,000.
MedImmune continues as our partner for the IL-9 antibody program for asthma and
fully funds these research and development efforts. Under the realignment plan,
we reduced our headcount by approximately 35%, primarily impacting unsupported
preclinical research programs. All of the employees affected by the workforce
reduction will be offered severance and outplacement support. We anticipate
recording a nonrecurring charge of approximately $500,000 in the third quarter
of 2002. Management expects this initiative to result in sufficient savings to
allow current cash and investments balances to fund operations related to our
realigned goals through at least mid-2003.

Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     As of June 30, 2002, our portfolio investments consisted of $1.5 million in
cash and $13.5 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-month period ended June 30, 2002 would have
decreased by approximately $73,000. 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.

                                       20

<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

         On May 16, 2002, we held our Annual Meeting of Shareholders. Proxies
     were solicited for the Annual Meeting pursuant to Regulation 14 of the
     Securities Exchange Act of 1934. At the Annual Meeting, the shareholders
     elected eight directors for one-year terms and ratified the appointment of
     our independent accountants.

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

                                               Votes For         Votes Withheld
                                              ----------         --------------
              Michael R. Dougherty            23,633,784           2,773,979
              Bernard Canavan, M.D.           23,644,136           2,763,627
              R. Frank Ecock                  23,642,624           2,765,139
              Zola P. Horovitz, Ph.D.         23,644,536           2,763,227
              Roy C. Levitt, M.D.             26,242,611             165,152
              Charles A. Sanders, M.D.        23,643,404           2,764,359
              Robert F. Shapiro               23,643,224           2,764,539
              James B. Wyngaarden, M.D.       23,640,354           2,767,409

         (b)  In the ratification of the appointment of KPMG LLP as independent
              accountants for the fiscal year ending December 31, 2002, the
              number of shares voted was as follows:

                                For              Against              Withheld
                                ---              -------              --------
                            23,710,692          2,669,691              27,380

     ITEM 5.  OTHER INFORMATION

         None.

                                       21

<PAGE>

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

  (a)  Exhibits

       3.1  Second Restated Certificate of Incorporation of the Registrant*

       3.2  By-laws of the Registrant, as Amended and Restated on May 16, 2002*

      10.1  1992 Stock Option Plan, as Amended and Restated on July 22, 2002*

      10.2  Amended 1998 Equity Compensation Plan, as Amended and Restated on
            July 22, 2002*

      10.3  Employment Agreement with Angeline K. Shashlo*

      _____________

      *     Filed herewith.


  (b)  Reports on Form 8-K

       We filed a Current Report on Form 8-K on April 8, 2002 regarding our
       engagement of Wells Fargo as a placement agent.

       We filed a Current Report on Form 8-K on April 11, 2002 regarding our
       completion of a private placement of our common stock.

       We filed a Current Report on Form 8-K on May 21, 2002 incorporating two
       press releases regarding squalamine lung and ovarian cancer clinical
       trial results.

                                       22

<PAGE>

                                   SIGNATURES

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

                                             GENAERA CORPORATION

Date:  August 14, 2002                       By:  /s/ Christopher P. Schnittker
                                                  ------------------------------
                                                  Christopher P. Schnittker
                                                  Vice President and
                                                  Chief Financial Officer

                                       23

<PAGE>

                                  EXHIBIT INDEX

Exhibit No.     Description

    3.1         Second Restated Certificate of Incorporation of the Registrant*

    3.2         By-laws of the Registrant, as Amended and Restated on May 16,
                2002*

   10.1         1992 Stock Option Plan, as Amended and Restated on July 22,
                2002*

   10.2         Amended 1998 Equity Compensation Plan, as Amended and Restated
                on July 22, 2002*

   10.3         Employment Agreement with Angeline K. Shashlo*


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

*    Filed herewith.