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                                                                    Exhibit 10.2

                               GENAERA CORPORATION
                      AMENDED 1998 EQUITY COMPENSATION PLAN
                     (as amended and restated July 22, 2002)

     The Genaera Corporation Amended 1998 Equity Compensation Plan (the "Plan")
was formerly known as the Magainin Pharmaceuticals, Inc. 1998 Equity
Compensation Plan. On March 9th, 2001 the Board of Directors (the "Board") of
Genaera Corporation (the "Company") amended the Plan to change the name of the
Plan to the Genaera Corporation Amended 1998 Equity Compensation Plan and on
March 21, 2001 the Board amended the Plan to increase the number of shares
available under the Plan. On May 16, 2001 the Shareholders of the Company voted
to approve the increase in the number of shares available under the Plan. The
Plan is hereby amended to reflect the amendments to the Plan adopted by the
Board and approved by the Shareholders.

     The purpose of the Plan is to provide (i) designated officers (including
officers who are also directors) and other employees of the Company and its
subsidiaries, (ii) non-employee members of the Board, and (iii) consultants and
advisors who perform valuable services for the Company or its subsidiaries, with
the opportunity to receive grants of incentive stock options, nonqualified stock
options or restricted stock. The Company believes that the Plan will encourage
the participants to contribute materially to the growth of the Company, thereby
benefitting the Company's shareholders, and will align the economic interests of
the participants with those of the shareholders. For purposes of the Plan, the
term subsidiary shall refer to any company (whether a corporation, partnership,
joint venture or other entity) in which the Company owns, directly or
indirectly, a majority of the shares of capital stock or other equity interest.

1.   Administration

     (a) Committee. The Plan shall be administered and interpreted by a
committee (the "Committee"), which shall consist of two or more persons
appointed by the Board, all of whom shall be "outside directors" as defined
under section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code") and related Treasury regulations and non-employee directors as defined
under Rule 16b-3 under the Securities and Exchange Act of 1934, as amended (the
Exchange Act). Notwithstanding the foregoing, the Board of Directors may ratify
or approve (and, in the case of Grants to the members of the Committee, shall
approve) Grants, in which case references to the Committee shall be deemed to
include the Board of Directors.

     (b) Committee Authority. The Committee shall have the sole authority to (i)
determine the individuals to whom grants shall be made under the Plan, (ii)
determine the type, size and terms of the grants to be made to each such
individual, (iii) determine the time when the

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grants will be made and the duration of any applicable exercise or restriction
period, including the criteria for exercisability and the acceleration of
exercisability, and (iv) deal with any other matters arising under the Plan.

         (c) Committee Determinations. The Committee shall have full power and
authority to administer and interpret the Plan, to make factual determinations
and to adopt or amend such rules, regulations, agreements and instruments for
implementing the Plan and for the conduct of its business as it deems necessary
or advisable, in its sole discretion. The Committee's interpretations of the
Plan and all determinations made by the Committee pursuant to the powers vested
in it hereunder shall be conclusive and binding on all persons having any
interest in the Plan or in any awards granted hereunder. All powers of the
Committee shall be executed in its sole discretion, in the best interest of the
Company, not as a fiduciary, and in keeping with the objectives of the Plan and
need not be uniform as to similarly situated individuals.

2.       Grants

         Awards under the Plan may consist of grants of stock options as
described in Section 5 ("Options") or restricted stock as described in Section 6
("Restricted Stock") or a combination of both (hereinafter collectively referred
to as "Grants"). All Grants shall be subject to the terms and conditions set
forth herein and to those other terms and conditions consistent with this Plan
as the Committee deems appropriate and as are specified in writing by the
Committee to the individual in a grant instrument or an amendment to the grant
instrument (the "Grant Instrument"). The Committee shall approve the form and
provisions of each Grant Instrument. Grants under a particular Section of the
Plan need not be uniform as among the grantees.

3.       Shares Subject to the Plan

         (a) Shares Authorized. Subject to the adjustment specified below, the
aggregate number of shares of common stock of the Company (the "Company Stock")
that may be issued or transferred under the Plan is 3,500,000 shares. The
maximum number of shares of Company Stock that may be issued or transferred as
Restricted Stock shall not exceed twenty-five percent (25%) of the aggregate
number of shares of Company Stock that may be issued or transferred under the
Plan. Notwithstanding anything in the Plan to the contrary, the maximum
aggregate number of shares of Company Stock that shall be subject to Grants made
under the Plan to any one individual during any calendar year shall be 250,000
shares. The shares may be authorized but unissued shares of Company Stock or
reacquired shares of Company Stock, including shares purchased by the Company on
the open market for purposes of the Plan. If and to the extent Options granted
under the Plan terminate, expire, or are canceled, forfeited, exchanged or
surrendered without having been exercised or if any shares of Restricted Stock
are forfeited, the shares subject to such Grants shall again be available for
purposes of the Plan. Notwithstanding anything in the Plan to the contrary, the
Committee shall not amend any Grant Instrument to decrease the Exercise Price of
an Option below the Fair Market Value of the Option as of the date on which such
Option was granted, and the Committee shall not exchange or substitute any

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Option for an Option at an Exercise Price that is below the Fair Market Value of
the exchanged or substituted Option as of the date on which the exchanged or
substituted Option was granted.

         (b) Adjustments. If there is any change in the number or kind of shares
of Company Stock outstanding (i) by reason of a stock dividend, spinoff,
recapitalization, stock split, or combination or exchange of shares, (ii) by
reason of a merger, reorganization or consolidation in which the Company is the
surviving corporation, (iii) by reason of a reclassification or change in par
value, or (iv) by reason of any other extraordinary or unusual event affecting
the outstanding Company Stock as a class without the Company's receipt of
consideration, or if the value of outstanding shares of Company Stock is
substantially reduced as a result of a spinoff or the Company's payment of an
extraordinary dividend or distribution, the maximum number of shares of Company
Stock available for Grants, the maximum number of shares of Company Stock that
any individual participating in the Plan may be granted in a year, the number of
shares covered by outstanding Grants, the kind of shares issued under the Plan,
and the price per share or the applicable market value of such Grants may be
appropriately adjusted by the Committee to reflect any increase or decrease in
the number of, or change in the kind or value of, issued shares of Company Stock
to preclude, to the extent practicable, the enlargement or dilution of rights
and benefits under such Grants; provided, however, that any fractional shares
resulting from such adjustment shall be eliminated. Any adjustments determined
by the Committee shall be final, binding and conclusive.

4.       Eligibility for Participation

         (a) Eligible Persons. All employees of the Company and its subsidiaries
("Employees"), including Employees who are officers or members of the Board, and
members of the Board who are not Employees ("Non-Employee Directors") shall be
eligible to participate in the Plan. Consultants and advisors who perform
valuable services to the Company or any of its subsidiaries ("Consultants")
shall be eligible to participate in the Plan if the Consultants render bona fide
services and such services are not rendered in connection with the offer or sale
of securities in a capital-raising transaction.

         (b) Selection of Grantees. The Committee shall select the Employees,
Consultants, and Non-Employee Directors to receive Grants and determine the
number of shares of Company Stock subject to a particular Grant in such manner
as the Committee determines. Employees, Consultants, and Non-Employee Directors
who receive Grants under this Plan shall hereinafter be referred to as
"Grantees."

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5.       Granting of Options

         (a)    Number of Shares. The Committee, in its sole discretion, shall
determine the number of shares of Company Stock that will be subject to each
Grant of Options to any Employee, Consultant, or Non-Employee Director.

         (b)    Type of Option and Price.

                (i)    The Committee may grant Options that are intended to
qualify as "incentive stock options" within the meaning of section 422 of the
Code ("Incentive Stock Options") or Options which are not intended to so qualify
("Nonqualified Stock Options") or any combination of Incentive Stock Options and
Nonqualified Stock Options, all in accordance with the terms and conditions set
forth herein.

                (ii)   The purchase price (the "Exercise Price") of Company
Stock subject to an Option shall be determined by the Committee and shall not be
less than the Fair Market Value (as defined below) of a share of such Stock on
the date the Option is granted; provided, however, that an Incentive Stock
Option may not be granted to an Employee who, at the time of grant, owns stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or any "parent corporation" or "subsidiary
corporation" of the Company (within the meaning of sections 424(e) and 424(f) of
the Code, respectively), unless the Exercise Price per share is not less than
110% of the Fair Market Value of Company Stock on the date of grant.

                (iii)  If the Company Stock is publicly traded, then the Fair
Market Value per share shall be determined as follows: (1) if the principal
trading market for the Company Stock is a national securities exchange or the
Nasdaq National Market, the last reported sale price thereof on the relevant
date or (if there were no trades on that date) the latest preceding date upon
which a sale was reported, or (2) if the Company Stock is not principally traded
on such exchange or market, the mean between the last reported "bid" and "asked"
prices of Company Stock on the relevant date, as reported on Nasdaq or, if not
so reported, as reported by the National Daily Quotation Bureau, Inc. or as
reported in a customary financial reporting service, as applicable and as the
Committee determines. If the Company Stock is not publicly traded or, if
publicly traded, is not subject to reported transactions or "bid" or "asked"
quotations as set forth above, the Fair Market Value per share shall be as
determined by the Committee.

         (c)    Option Term. The Committee shall determine the term of each
Option. The term of any Option shall not exceed ten years from the date of
grant. However, an Incentive Stock Option that is granted to an Employee who, at
the time of grant, owns stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company, or any parent or
subsidiary of the Company, may not have a term that exceeds five years from the
date of grant.

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         (d)   Exercisability of Options. Options shall become exercisable in
accordance with such terms and conditions, consistent with the Plan, as may be
determined by the Committee, in its sole discretion, and specified in the Grant
Instrument. The Committee, in its sole discretion, may accelerate the
exercisability of any or all outstanding Options at any time for any reason.

         (e)   Termination of Employment or Service.

               (i)     Except as provided below, an Option may only be exercised
while the Grantee is employed by, or providing service to, the Company as an
Employee, Consultant, or Non-Employee Director. In the event that a Grantee
ceases to be employed by, or provide service to, the Company for any reason, any
Option which is otherwise exercisable by the Grantee shall terminate unless
exercised within such time period after the date on which the Grantee ceases to
be employed by, or provide service to, the Company as determined by the
Committee, but in any event no later than the date of expiration of the Option
term (Post-Termination Exercise Period). The Committee may specify the
Post-Termination Exercise Period applicable to a Grantee in the Grant Instrument
or at any time thereafter; provided, however, that the Post-Termination Exercise
Period shall extend for at least 30 days after the date on which the Grantee is
notified of the Post-Termination Exercise Period. Except as otherwise provided
by the Committee, any of the Grantee's Options that are not otherwise
exercisable as of the date on which the Grantee ceases to be employed by, or
provide service to, the Company shall terminate as of such date.

               (ii)    Notwithstanding the foregoing, in the event the Grantee
ceases to be employed by, or provide service to, the Company on account of
termination for cause by the Company, any Option held by the Grantee shall
terminate as of the date the Grantee ceases to be employed by, or provide
service to, the Company, and the Grantee shall automatically forfeit all shares
underlying any exercised portion of an Option for which the Company has not yet
delivered the share certificates, upon refund by the Company of the Exercise
Price paid by the Grantee for such shares.

               (iii)   For purposes of this Section 5(e) and Section 6,

                       (A)   The term "Company" shall refer to the Company and
its subsidiaries.

                       (B)   Employed by, or provide service to, the Company
shall mean employment or service as an Employee, Consultant or Non-Employee
Director (so that, for purposes of exercising Options and satisfying conditions
with respect to Restricted Stock, a Grantee shall not be considered to have
terminated employment or service until the Grantee ceases to be an Employee,
Consultant and/or a Non-Employee Director), unless the Committee determines
otherwise.

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                   (C)    Cause shall mean (i) the Grantee's willful misconduct
with respect to the business and affairs of the Company or any subsidiary or
affiliate thereof; (ii) the Grantee's gross neglect of duties or failure to act
which materially and adversely affects the business or affairs of the Company or
any subsidiary or affiliate thereof; (iii) the Grantee's commission of an act
involving embezzlement or fraud or conviction for any felony; or the (iv) the
Grantee's breach of an employment or consulting agreement with the Company or
any subsidiary or affiliate thereof.

         (f)   Exercise of Options. A Grantee may exercise an Option that has
become exercisable, in whole or in part, by delivering a notice of exercise to
the Committee with payment of the Exercise Price. The Grantee shall pay the
Exercise Price specified in the Grant Instrument (1) in cash, (2) with the
approval of the Committee, by delivering shares of Company Stock owned by the
Grantee (including Company Stock acquired in connection with the exercise of a
Option, subject to such restrictions as the Committee deems appropriate) and
having a Fair Market Value on the date of exercise equal to the Exercise Price,
or (3) by such other method as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board. Such notice may instruct the Company to deliver shares of
Company Stock due upon the exercise of the Option to any registered broker or
dealer designated by the Committee ("Designated Broker") in lieu of delivery to
the Grantee. Such instructions must designate the account into which the shares
are to be deposited. The Grantee may tender a notice of exercise, which has been
properly executed by the Grantee, and the aforementioned delivery instructions
to any Designated Broker. Shares of Company Stock used to exercise an Option
shall have been held by the Grantee for the requisite period of time to avoid
adverse accounting consequences to the Company with respect to the Option. The
Grantee shall pay the Exercise Price and the amount of any withholding tax due
at the time of exercise.

         (g)   Limits on Incentive Stock Options. Each Incentive Stock Option
shall provide that, if the aggregate Fair Market Value of the Company Stock on
the date of the grant with respect to which Incentive Stock Options are
exercisable for the first time by a Grantee during any calendar year, under the
Plan or any other stock option plan of the Company or subsidiary, exceeds
$100,000, then such Option, as to the excess, shall be treated as a Nonqualified
Stock Option. An Incentive Stock Option shall not be granted to any person who
is not an Employee of the Company or a parent corporation or a subsidiary
corporation (within the meaning of sections 424(e) and 424(f) of the Code,
respectively).

         (h)   Notwithstanding anything in the Plan to the contrary, the
Committee may not, at any time, take any of the following actions with regard to
any or all outstanding Options, unless such action is approved by a majority
vote of the shareholders of the Company; provided, however, that the following
provisions of this Section 5(h) shall not apply in the case of an adjustment
pursuant to Section 3(b) of the Plan:

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            (1)   Reduce the exercise price of an outstanding Option; provided,
however, that this Section 5(h)(1) shall not apply in the case of a Change of
Control pursuant to Section 10 of the Plan where the Company is not the
surviving entity;

            (2)   Cancel or obtain the consent of a Grantee to the Cancellation
of his or her outstanding Option in exchange for the grant of or the Company's
promise to grant a new Option at a lower exercise price or with an accelerated
vesting schedule (including any agreement whereby the Company grants a new
Option on the first day following the sixth month anniversary of the
cancellation date); provided, however, that in the case of a Change of Control
pursuant to Section 10 of the Plan, the Company may accelerate the
exercisability of an option pursuant to Section 11 of the Plan;

            (3)   Make a grant of Restricted Stock to replace an outstanding
Option that has an exercise price that is above the then Fair Market Value of
the Company Stock as part of an exchange, buy-back or similar transaction.

6.     Restricted Stock Grants

       The Committee may issue or transfer shares of Company Stock to any
Employee, Consultant, or Non-Employee Director under a Grant of Restricted
Stock, upon such terms as the Committee deems appropriate. The following
provisions are applicable to Restricted Stock:

       (a) General Requirements. Shares of Company Stock issued or transferred
pursuant to Restricted Stock Grants may be issued or transferred for cash
consideration or for no cash consideration, at the sole discretion of the
Committee. The Committee may establish conditions under which restrictions on
shares of Restricted Stock shall lapse over a period of time or according to
such other criteria as the Committee deems appropriate. The period of time
during which the Restricted Stock will remain subject to restrictions will be
designated in the Grant Instrument as the "Restriction Period."

       (b) Number of Shares. The Committee shall determine the number of shares
of Company Stock to be issued or transferred pursuant to a Restricted Stock
Grant and the restrictions applicable to such shares.

       (c) Requirement of Employment or Service. If the Grantee ceases to be
employed by, or provide service to, the Company (as defined in Section 5(e))
during a period designated in the Grant Instrument as the Restriction Period, or
if other specified conditions are not met, the Restricted Stock Grant shall
terminate as to all shares covered by the Grant as to which the restrictions
have not lapsed, and those shares of Company Stock must be immediately returned
to the Company. The Committee may, however, provide for complete or partial
exceptions to this requirement as it deems appropriate.

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       (d)   Restrictions on Transfer and Legend on Stock Certificate. During
the Restriction Period, a Grantee may not sell, assign, transfer, pledge or
otherwise dispose of the shares of Restricted Stock except to a Successor
Grantee under Section 9(a). Each certificate for a share of Restricted Stock
shall contain a legend giving appropriate notice of the restrictions in the
Grant. The Grantee shall be entitled to receive a stock certificate or
certificates, or have the legend removed from the stock certificate or
certificates covering any of the shares subject to restrictions, as applicable,
when all restrictions on such shares have lapsed. The Committee, in its sole
discretion, may determine that the Company will not issue certificates for
shares of Restricted Stock, or that the Company retain possession of
certificates for any shares issued pursuant to a Restricted Stock Grant, until
all restrictions on such shares have lapsed.

       (e)   Right to Vote and to Receive Cash Dividends. Unless the Committee
determines otherwise, during the Restriction Period, the Grantee shall have the
right to vote any shares of Restricted Stock which have been issued or
transferred to the Grantee on the stock transfer records of the Company and to
receive any dividends or other distributions paid on such shares, subject to any
restrictions deemed appropriate by the Committee.

       (f)   Lapse of Restrictions.  All restrictions imposed on Restricted
Stock shall lapse upon the expiration of the applicable Restriction Period and
the satisfaction of all conditions imposed by the Committee. The Committee may
determine, as to any or all Restricted Stock Grants, that all the restrictions
shall lapse without regard to any Restriction Period.

7.     Qualified Performance-Based Compensation

       (a)   Designation as Qualified Performance-Based Compensation. The
Committee may determine that Restricted Stock granted to an Employee shall be
considered qualified performance-based compensation under section 162(m) of the
Code. The provisions of this Section 7 shall apply to Grants of Restricted Stock
that are to be considered qualified performance-based compensation under section
162(m) of the Code.

       (b)   Performance Period and Performance Goals. When shares of Restricted
Stock that are to be considered qualified performance-based compensation are
granted, the Committee shall establish in writing (i) the objective performance
goals that must be met in order for restrictions on the Restricted Stock to
lapse (Performance Goals), (ii) the Performance Period during which the
Performance Goals must be met (Performance Period), (iii) the threshold, target
and maximum amounts that may be paid if the Performance Goals are met, and (iv)
any other conditions, including without limitation provisions relating to death,
disability, other termination of employment or Change of Control, that the
Committee deems appropriate and consistent with the Plan and section 162(m) of
the Code. The Performance Goals may relate to the Employee's business unit or
the performance of the Company and its subsidiaries as a whole, or any
combination of the foregoing. The Committee shall use objectively determinable
Performance Goals based on one or more of the following criteria: stock price,
earnings per share, net earnings, operating earnings, return on assets,
shareholder return, return on equity, growth in

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assets, unit volume, sales, market share, or strategic business criteria
consisting of one or more objectives based on meeting specified revenue goals,
market penetration goals, geographic business expansion goals, cost targets,
goals relating to acquisitions or divestitures, or goals relating to product
development objectives.

       (c)   Establishment of Performance Goals. The Committee shall establish
the Performance Goals in writing either before the beginning of the Performance
Period or during a period ending no later than the earlier of (i) 90 days after
the beginning of the Performance Period or (ii) the date on which 25% of the
Performance Period has been completed, or such other date as may be required or
permitted under applicable regulations under section 162(m) of the Code. The
Performance Goals shall satisfy the requirements for qualified performance-based
compensation, including the requirement that the achievement of the goals be
substantially uncertain at the time they are established and that the goals be
established in such a way that a third party with knowledge of the relevant
facts could determine whether and to what extent the Performance Goals have been
met. The Committee shall not have discretion to increase the amount of
compensation that is payable upon achievement of the designated Performance
Goals.

       (d)   Announcement of Grants.  The Committee shall certify and announce
the results for each Performance Period to all Grantees immediately following
the announcement of the Company's financial results for the Performance Period.
If and to the extent that the Committee does not certify that the Performance
Goals have been met, the grants of Restricted Stock for the Performance Period
shall not vest.

8.     Withholding of Taxes

       (a)   Required Withholding. All Grants under the Plan shall be subject to
applicable federal (including FICA), state and local tax withholding
requirements. The Company may require the Grantee or other person receiving
shares to pay to the Company the amount of any such taxes that the Company is
required to withhold with respect to such Grants, or the Company may deduct from
the amount payable under a Grant or from other wages paid by the Company the
amount of any withholding taxes due with respect to such Grants.

       (b)   Election to Withhold Shares. If the Committee so permits, a Grantee
may elect to satisfy the Company's income tax withholding obligation with
respect to an Option or Restricted Stock by having shares withheld up to an
amount that does not exceed the applicable withholding tax for federal
(including FICA), state and local tax liabilities. The election must be in the
form and manner prescribed by the Committee and is subject to the prior approval
of the Committee.

9.     Transferability of Grants

       (a)   Nontransferability of Grants. Except as provided below, only the
Grantee may exercise rights under a Grant during the Grantee's lifetime. The
Grantee may not transfer those rights except by will or by the laws of descent
and distribution or, with respect to Grants other

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than Incentive Stock Options, if permitted in any specific case by the Committee
in its sole discretion, pursuant to a qualified domestic relations order (as
defined under the Code or Title I of the Employee Retirement Income Security Act
of 1974, as amended or the regulations thereunder). When a Grantee dies, the
personal representative or other person entitled to succeed to the rights of the
Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee must
furnish proof satisfactory to the Company of his or her right to receive the
Grant under the Grantee's will or under the applicable laws of descent and
distribution.

       (b)   Transfer of Nonqualified Stock Options. Notwithstanding the
foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may
transfer Nonqualified Stock Options to family members, one or more trusts for
the benefit of family members, or one or more partnerships of which family
members are the only partners, or other persons or entities according to such
terms as the Committee may determine; provided that the Grantee receives no
consideration for the transfer of an Option and the transferred Option shall
continue to be subject to the same terms and conditions as were applicable to
the Option immediately before the transfer.

10.    Change of Control of the Company

       As used herein, a "Change of Control" shall mean the occurrence of any of
the following:

       (a)   Any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 40% or more of the voting power of the then outstanding securities
of the Company;

       (b)   During any period of two consecutive calendar years there is a
change of 25% or more in the composition of the Board of the Company in office
at the beginning of the period except for changes approved by at least
two-thirds of the Directors then in office who were Directors at the beginning
of the period;

       (c)   The shareholders of the Company approve an agreement providing for
(A) the merger or consolidation of the Company with another corporation where
the shareholders of the Company, immediately prior to the merger or
consolidation, will not beneficially own, immediately after the merger or
consolidation, shares entitling such shareholders to 50% or more of all votes
(without consideration of the rights of any class of stock to elect Directors by
a separate class vote) to which all shareholders of the corporation issuing cash
or securities in the merger or consolidation would be entitled in the election
of directors, or where the members of the Board, immediately prior to the merger
or consolidation, would not, immediately after the merger or consolidation,
constitute a majority of the Board of Directors of the corporation issuing cash
or securities in the merger or consolidation, or (B) the sale or other
disposition of all or substantially all the assets of the Company, or a
liquidation, dissolution or statutory exchange of the Company; or

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       (d)   Any person has commenced, or announced an intention to commence, a
tender offer or exchange offer for 40% or more of the voting power of the
then-outstanding securities of the Company.

11.    Consequences of a Change of Control

       (a)   Notice and Acceleration. Upon a Change of Control, unless the
Committee determines otherwise, (i) the Company shall provide each Grantee with
outstanding Grants written notice of such Change of Control, (ii) all
outstanding Options shall automatically accelerate and become fully exercisable,
and (iii) the restrictions and conditions on all outstanding Restricted Stock
shall immediately lapse.

       (b)   Assumption of Grants. Upon a Change of Control where the Company is
not the surviving corporation (or survives only as a subsidiary of another
corporation), unless the Committee determines otherwise, all outstanding Options
that are not exercised shall be assumed by, or replaced with comparable options
by, the surviving corporation.

       (c)   Other Alternatives.  Notwithstanding the foregoing, subject to
subsection (d) below, in the event of a Change of Control, the Committee may
take one or both of the following actions: the Committee may (i) require that
Grantees surrender their outstanding Options in exchange for a payment by the
Company, in cash or Company Stock as determined by the Committee, in an amount
equal to the amount by which the then Fair Market Value of the shares of Company
Stock subject to the Grantee's unexercised Options exceeds the Exercise Price of
the Options or (ii) after giving Grantees an opportunity to exercise their
outstanding Options, terminate any or all unexercised Options at such time as
the Committee deems appropriate. Such surrender or termination shall take place
as of the date of the Change of Control or such other date as the Committee may
specify.

       (d)   Limitations. Notwithstanding anything in the Plan to the contrary,
in the event of a Change of Control, the Committee shall not have the right to
take any actions described in the Plan (including without limitation actions
described in Subsection (c) above) that would make the Change of Control
ineligible for pooling of interest accounting treatment or that would make the
Change of Control ineligible for desired tax treatment if, in the absence of
such right, the Change of Control would qualify for such treatment and the
Company intends to use such treatment with respect to the Change of Control.

12.    Requirements for Issuance or Transfer of Shares

       No Company Stock shall be issued or transferred in connection with any
Grant hereunder unless and until all legal requirements applicable to the
issuance or transfer of such Company Stock have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any Grant made to any Grantee hereunder on such Grantee's undertaking in

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writing to comply with such restrictions on his or her subsequent disposition of
such shares of Company Stock as the Committee shall deem necessary or advisable
as a result of any applicable law, regulation or official interpretation
thereof, and certificates representing such shares may be legended to reflect
any such restrictions. Certificates representing shares of Company Stock issued
or transferred under the Plan will be subject to such stop-transfer orders and
other restrictions as may be required by applicable laws, regulations and
interpretations, including any requirement that a legend be placed thereon.

13.    Amendment and Termination of the Plan

       (a)   Amendment. The Board may amend or terminate the Plan at any time;
provided, however, that the Board shall not amend the Plan without shareholder
approval if such approval is required by section 422 of the Code or section
162(m) of the Code. Notwithstanding the foregoing, the Board may not, at any
time, amend Section 5(b)(ii) or 5(h) of the Plan, unless such amendment is
approved by a majority vote of the shareholders of the Company.

       (b)   Termination of Plan. The Plan shall terminate on the day
immediately preceding the tenth anniversary of its effective date, unless the
Plan is terminated earlier by the Board or unless extended by the Board with the
approval of the shareholders.

       (c)   Termination and Amendment of Outstanding Grants.  A termination or
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents or unless the
Committee acts under section 19(b) hereof. The termination of the Plan shall not
impair the power and authority of the Committee with respect to an outstanding
Grant. Whether or not the Plan has terminated, an outstanding Grant may be
terminated or amended under Section 19(b) hereof or may be amended by agreement
of the Company and the Grantee consistent with the Plan.

       (d)   Governing Document.  The Plan shall be the controlling document.
No other statements, representations, explanatory materials or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company and its successors and assigns.

14.    Funding of the Plan

       This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event shall
interest be paid or accrued on any Grant, including unpaid installments of
Grants.

15.    Rights of Participants

                                       12

<PAGE>

       Nothing in this Plan shall entitle any Employee, Consultant, Non-Employee
Director or other person to any claim or right to be granted a Grant under this
Plan. Neither this Plan nor any action taken hereunder shall be construed as
giving any individual any rights to be retained by or in the employ of the
Company or any other employment rights.

16.    No Fractional Shares

       No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Grant. The Committee shall determine whether cash,
other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto shall
be forfeited or otherwise eliminated.

17.    Headings

       Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.

18.    Effective Date of the Plan

       Subject to the approval of the Company's shareholders, this Plan shall be
effective on February 11, 1998.

19.    Miscellaneous

       (a)   Grants in Connection with Corporate Transactions and Otherwise.
Nothing contained in this Plan shall be construed to (i) limit the right of the
Committee to make Grants under this Plan in connection with the acquisition, by
purchase, lease, merger, consolidation or otherwise, of the business or assets
of any corporation, firm or association, including Grants to employees thereof
who become Employees of the Company, or for other proper corporate purposes, or
(ii) limit the right of the Company to grant stock options or make other awards
outside of this Plan. Without limiting the foregoing, the Committee may make a
Grant to an employee of another corporation who becomes an Employee by reason of
a corporate merger, consolidation, acquisition of stock or property,
reorganization or liquidation involving the Company or any of its subsidiaries
in substitution for a stock option or restricted stock grant made by such
corporation. The terms and conditions of the substitute grants may vary from the
terms and conditions required by the Plan and from those of the substituted
stock incentives. The Committee shall prescribe the provisions of the substitute
grants.

       (b)   Compliance with Law. The Plan, the exercise of Options and the
obligations of the Company to issue or transfer shares of Company Stock under
Grants shall be subject to all applicable laws and to approvals by any
governmental or regulatory agency as may be required. With respect to persons
subject to Section 16 of the Exchange Act, it is the intent of the Company that
the Plan and all transactions under the Plan comply with all applicable
provisions

                                       13

<PAGE>

of Rule 16b-3 or its successors under the Exchange Act. In addition, it is the
intent of the Company that the Plan and applicable grants under the Plan comply
with the applicable provisions of sections 162(m) and 422 of the Code. To the
extent that any legal requirement of section 16 of the Exchange Act or section
162(m) or 422 of the Code as set forth in the Plan ceases to be required under
section 16 of the Exchange Act or section 162(m) or 422 of the Code, that
provision shall cease to apply. The Committee may revoke any Grant if it is
contrary to law or modify a Grant to bring it into compliance with any valid and
mandatory government regulation. The Committee may, in its sole discretion,
agree to limit its authority under this Section.

       (c)   No Shareholder Rights. Except as otherwise provided by the
Committee, a Grantee or Successor Grantee shall have no rights as a shareholder
with respect to any shares of Company Stock covered by a Grant until the shares
are issued or transferred to the Grantee or Successor Grantee on the stock
transfer records of the Company.

       (d)   Governing Law.  The validity, construction, interpretation and
effect of the Plan and Grant Instruments issued under the Plan shall exclusively
be governed by and determined in accordance with the law of the Commonwealth of
Pennsylvania.

                                       14<PAGE>

                                                                    Exhibit 10.3

                                                                 FEDERAL EXPRESS
                                                                    CONFIDENTIAL

May 16, 2002

Ms. Angeline Shashlo

Dear Angie:

I am pleased to offer you the position of Vice President, Regulatory Affairs
with Genaera Corporation, reporting to Roy C. Levitt, President and Chief
Executive Officer. Your base salary will be $15,000 per month ($180,000/year).
Contingent upon your acceptance of this offer, it is expected that the
Compensation Committee of the Board of Directors will grant to you at its next
meeting, options to purchase 75,000 shares of Genaera Common Stock, exercisable
at the fair market value underlying common stock on the date of the next Board
of Directors meeting. These options will have a term of 10 years and vest at the
rate of 25% per year. As with all Genaera options, the grant will be subject to
execution of a stock option agreement in the form specified by the Compensation
Committee.

Upon the commencement of your employment with the Company, you will be expected
to execute the Company's Drug-Free Workplace Policy, Proprietary Information
Agreement, Policy Statement on Insider Information and Insider Trading, Sexual
Harassment Policy, and Conflicts of Interest Policy, each in the form previously
provided to you. Genaera may have already provided you with certain of its
confidential business or scientific information, which it expects you to keep
confidential, and to use only to further Genaera's legitimate business
interests. Just as Genaera expects you to keep confidential its business or
scientific information, Genaera also expects you to honor your obligations to
your former employers with respect to maintaining the confidentiality of their
business or scientific information.

You will be eligible for 20 days vacation per year. Vacation accrues
proportionate to months employed. Employees are encouraged to take their
vacations yearly. However, up to five (5) days of unused vacation time can be
carried over into next year with supervised approval. In addition, you will be
eligible for the benefits package available to all employees. Enclosed is a
summary of benefits.

<PAGE>

                                                                Angeline Shashlo
                                                                    May 16, 2002
                                                                          Page 2

All the terms and conditions of this Agreement shall be binding upon and inure
to the benefit and be enforceable by the respective heirs, representative heirs,
representatives, successors (including any successor as a result of a merger or
similar reorganization) and assigns of the parties hereto, except that your
duties and responsibilities hereunder are of a personal nature and shall not be
assignable in whole or in part by you.

We look forward to your joining us at Genaera Corporation. Please indicate your
acceptance of this offer, which is for at will employment, by your signature
below. This offer of employment will remain in effect until Saturday, May 25,
2002. We have agreed that your start date will be Wednesday, June 12, 2002. This
date is flexible, however, your start date should be no later than Monday, June
17, 2002. Please do not hesitate to speak with me concerning any questions you
may have.

                                       Sincerely,

                                       /s/ Roy C. Levitt, M.D.
                                       -----------------------
                                       Roy C. Levitt, M.D.
                                       President & Chief Executive Officer

RCL:jlb

Accepted: /s/ Angeline K. Shashlo
          --------------------------

Date: 05/22/02
      ------------------------------

<PAGE>

                                                                Angeline Shashlo
                                                                    May 16, 2002
                                                                          Page 3

Attachment A

Relocation Cost Reimbursement

Genaera Corporation will reimburse your expenses of relocation, including:

       a)     The reasonable, direct, out-of-pocket costs of moving yourself,
              your family and your household items from your current residence
              to your new residence located near Genaera. A total of three
              estimates will be solicited, from which a mutually agreeable lump
              sum will be determined.
       b)     Three months of temporary housing and storage expenses; not to
              exceed $10,000.
       c)     Commission paid to a licensed real estate broker, not to exceed
              the local average rate of 6% of the principal residence selling
              cost.
       d)     Transfer taxes (Transfer of title); not to exceed 1% of the
              principal residence selling cost.

All relocation-related expenses must be reimbursed within 12 months of date of
hire.

It is agreed and understood:
   .   If your employment with Genaera Corporation is terminated at any time,
       all relocation reimbursements received from Genaera Corporation will be
       forgiven and no repayment is expected.
   .   If you elect to leave the employment of Genaera Corporation at any time
       within 12 months of receiving reimbursement for relocation-related
       expenses, then the total costs reimbursed to you will be due payable to
       Genaera Corporation.
   .   If you elect to leave the employment of Genaera Corporation between 12
       and 36 months after receiving reimbursement for relocation-related
       expenses, you will be required to repay a pro-rated portion of the total
       cost of relocation.
   .   If you elect to leave the employment of Genaera Corporation 36 months
       after receiving reimbursement for relocation-related expenses, no
       repayment is expected.

Reimbursement will likely be considered taxable income for most relocation
expenses, please consult your tax advisor. Genaera will not reimburse you for
any taxes due on reimbursed relocation expenses.

Severance

If your employment is terminated without cause, you will receive your monthly
base salary, including health benefits through COBRA, for six (6) months
following the date of termination, or for such shorter period until you have
secured employment elsewhere.

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