<PAGE>

   As filed with the Securities and Exchange Commission on September 27, 1999
                                                    Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                               ----------------
                                    Form S-1
                             REGISTRATION STATEMENT
                                     Under
                           THE SECURITIES ACT OF 1933

                               ----------------
                         MAGAININ PHARMACEUTICALS INC.
             (Exact name of registrant as specified in its charter)

                               ----------------
         Delaware                     2834                   13-3445668
     (State or other           (Primary Standard          (I.R.S. Employer
     jurisdiction of       Industrial Classification    Identification No.)
     incorporation or                 No.)
      organization)

                               5110 Campus Drive
                           Plymouth Meeting, PA 19462
                                 (610) 941-4020
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)

                               ----------------
                              MICHAEL R. DOUGHERTY
                     President and Chief Executive Officer
                         Magainin Pharmaceuticals Inc.
                               5110 Campus Drive
                           Plymouth Meeting, PA 19462
                                 (610) 941-4020
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)


                               ----------------
   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 Title of each class of                     Proposed maximum   Proposed maximum
    securities to be         Amount to     offering price per      aggregate         Amount of
       registered          be registered          share         offering price   registration fee
-------------------------------------------------------------------------------------------------
<S>                      <C>               <C>                 <C>               <C>
Common Stock
 $.002 par value.......      5,000,000            $1.02(1)        $5,100,000(1)    $1,417.80(1)
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) Based on the average of the reported high and low sales of Common Stock
    reported on the Nasdaq National Market on September 23, 1999, estimated
    solely for the purpose of calculating the registration fee pursuant to Rule
    457(c).

                               ----------------
   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus in not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting an offer by buy these +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 1999

PROSPECTUS

                                5,000,000 Shares

                         Magainin Pharmaceuticals Inc.

                                  Common Stock

  We are offering up to 5,000,000 shares of our common stock, $0.002 par value
per share, on an all or none basis to selected institutional investors,
including current institutional holders of our common stock.

  Our common stock is quoted on the Nasdaq National Market under the symbol
MAGN. On September 24, 1999 the last reported closing price of our common stock
was $1.03 per share.

                                  -----------

  Investing in the shares involves substantial risks. Please refer to the Risk
Factors section beginning on page 7.

                                  -----------

<TABLE>
<CAPTION>
                                                                 Per
                                                                Share   Total
                                                                ----- ---------
<S>                                                             <C>   <C>
Public Offering Price.......................................... $     $
Expenses of the Offering....................................... $     $
Proceeds to Magainin Pharmaceuticals Inc....................... $     $
</TABLE>

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.

                The date of this prospectus is September  , 1999
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   1
Risk Factors.............................................................   7
Use of Proceeds..........................................................  17
Price Range of Common Stock..............................................  18
Dividend Policy..........................................................  18
Capitalization...........................................................  19
Dilution.................................................................  19
Selected Financial Data..................................................  20
Management's Discussion and Analysis of Results of Operations and
 Financial Condition.....................................................  21
Business.................................................................  25
Management...............................................................  35
Principal Stockholders...................................................  40
Description of Capital Stock.............................................  42
Plan of Distribution.....................................................  44
Where You Can Find More Information......................................  44
Legal Matters............................................................  45
Experts..................................................................  45
Change of Auditors.......................................................  45
</TABLE>

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

                             ABOUT THIS PROSPECTUS

   You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
<PAGE>

                               PROSPECTUS SUMMARY

                                  The Company

   Magainin Pharmaceuticals Inc. is a biopharmaceutical company engaged in the
development of medicines for serious diseases. Our development efforts are
focused on oncology, anti-infectives, and pulmonary and allergic disorders.

   Our research and drug development efforts are focused on two technology
platforms:

  .  Host-Defense Drug Discovery & Development

   We engage in the research and development of compounds derived from the
host-defense systems of animals. The host-defense system is the complex of
natural processes used by the body to protect itself against disease. This
system comprises physical barriers to infection, such as skin and mucosal
membranes and fluids, as well as more complex chemical and biological
components, such as the immune system. We believe that certain classes of small
molecules, such as the aminosterols, originally discovered in the shark and
naturally occurring peptides, such as the magainins, originally discovered in
the frog, are used by the host-defense system to provide a first line of
defense against disease.

  .  Respiratory Target Discovery & Product Development

   We employ a range of genomics techniques to identify genes associated with
the pathogenesis of asthma and allergy, with the objective of utilizing the
optimal biologic gene targets in the development of novel therapeutics.

Aminosterols

   The aminosterols are a novel class of small molecules with unique
pharmacological activities. Discovered in the dogfish shark, these small
molecules bind to and then enter endothelial and other activated cell types.
Upon entry into these cells, aminosterols can cause decreased motility,
cytoskeletal activity, cell adhesion, and can effect cellular response to
multiple growth factors. We believe that this results in anti-angiogenesis,
anti-tumor and anti-inflammatory activities.

 Squalamine

   Squalamine is our lead aminosterol drug candidate, and is currently being
evaluated in Phase II clinical studies for the treatment of non-small cell lung
cancer.

   The Phase II studies will test the safety and efficacy of squalamine in
combination with paclitaxel and carboplatin, the leading cytotoxic
chemotherapeutic regimen for the treatment of advanced non-small cell lung
cancer. Squalamine will be administered intravenously and concurrently with
each cycle of chemotherapy. Efficacy will be assessed by the number of patients
whose tumors stop growing, along with the number of individuals who experience
tumor shrinkage.

   Additional clinical studies for squalamine are being planned in ovarian
cancer, pediatric neuroblastoma, and other solid tumors.

   Squalamine is an angiogenesis inhibitor that has shown promising results in
preclinical models of cancer. Angiogenesis is the process of budding and growth
of new blood vessels from existing blood vessels under the stimulus of a
variety of growth factors. Angiogenesis is believed to be an essential event in
tumor

                                       1
<PAGE>

formation and growth. In tumor-induced angiogenesis, endothelial cells that
line blood vessels are activated by mitogens produced by the tumor cells and
surrounding stroma to form new blood vessels. These blood vessel endothelial
cells eventually grow into and around the tumor, nourishing it and enabling it
to thrive.

   We are also pursuing other research programs related to squalamine. Due to
its unique mechanism of action, squalamine may also have application in a
number of disease conditions characterized by abnormal blood vessel growth,
including diabetic retinopathy, age related macular degeneration, rheumatoid
arthritis and psoriasis.

 Other Aminosterols

   We have discovered a number of other aminosterol compounds in the shark,
each differing from squalamine in chemical structure and interacting with a
specific receptor. These compounds affect the intracellular metabolism in a
manner that disturbs the target cell responses to certain growth factors,
hormones and other signals. Therapeutic opportunities for these compounds may
include obesity, various malignancies, inflammatory diseases, and viral
infections.

Respiratory Program

   In 1996, we initiated a research program in the genomics of asthma and
allergy. These efforts led to the identification of interleukin-9 (IL9), a gene
that varies in DNA structure and function in asthmatic and allergic humans and
animals. We maintain a comprehensive research and development program to
identify additional genes which may be implicated in asthma and allergy. The
IL9 receptor has been discovered as a key second gene candidate, and we have
also identified other genes. We investigate the role of these genes in the
allergic inflammatory response, with the objective of utilizing the optimal
biologic gene targets in the development of novel therapeutics for asthma and
allergy.

   Asthma is a serious, chronic illness characterized by one or more symptoms,
including episodic shortness of breath, wheezing, coughing and chest tightness,
that appears to be increasing in prevalence and severity. The complex
pathophysiology of asthma is under intensive scrutiny; however, its precise
causes are not well understood. The recognition that specific genetic and
environmental factors are important in the etiology of asthma has prompted an
intensive search for genes that significantly influence susceptibility to this
common disorder. While genetic susceptibility to bronchial hyperresponsiveness
and asthma is likely due to multiple genes acting together, the identification
of specific susceptibility genes provides valuable insight into the molecular
pathways associated with this condition.

 Biologics Based Anti-IL9 Therapeutics

   In December 1998, we entered into a one-year collaborative research and
option agreement with Genentech, Inc. relating to development of a protein
therapeutic in asthma. Under this agreement, Genentech will be provided access
to a therapeutic target (IL9), which is in our proprietary Asthma Gene
Database, and the companies will conduct a collaborative program to evaluate
the utility of a blocking antibody to IL9 in suppressing the asthmatic
response.

 Asthma Gene Database (Screening Program)

   We also employ functional genomics to discover therapeutic targets for
asthma and allergy. Numerous targets have been identified, validated and added
to our Asthma Gene Database. These include genes and gene products that can be
antgonized by biological therapeutics, such as proteins, and traditional small
molecules. Chemical libraries can be screened for activity against these
targets using our comprehensive proprietary high throughput screening programs.

                                       2
<PAGE>


 Small Molecule Therapeutics

   We have identified aminosterols, including MSI-1432, that block T-cell
adhesion and proliferation in response to antigens. The effect of MSI-1432 in
reducing asthmatic response in animal models is comparable to systemic
corticosteroids with an improved side-effect profile and no measurable effect
on hematologic cells. Inhalation systems are being investigated and additional
preclinical studies are being conducted in preparation for possible clinical
testing.

Magainin Peptides

 LOCILEX(TM)

   LOCILEX(TM) CREAM has been our lead product development candidate.
LOCILEX(TM) is a topical cream antibiotic intended for the treatment of
infection in diabetic foot ulcers.

   On July 26, 1999, we announced that we received notification from the U.S.
Food and Drug Administration (FDA) that our New Drug Application (NDA) for
LOCILEX(TM) CREAM had been deemed not approvable. In order to again seek
approval of LOCILEX(TM) CREAM, the FDA has indicated that we must conduct
further development activities, including clinical and manufacturing
activities. We are currently considering the feasibility of continuing this
program.

 Other Peptides

   Our peptides have demonstrated in pre-clinical testing the potential for
broad application in a number of other indications:

  .  Cancer/Tumorcidal: MSI-1857 is a chemically modified magainin peptide
     formulated for systemic delivery. In preclinical animal models, MSI-1857
     enhances the cellular uptake and activity of standard chemotherapeutics
     against tumors. MSI-1596 is an antibiotic peptide with similar activity
     to MSI-1857. Preclinical testing of MSI-1596 in animal models is
     underway where demonstration of substantial anti-tumor activity may
     provide for a rapid clinical development program. These peptides appear
     to be useful against multi-drug resistant tumors.

  .  Systemic Infections: Magainin peptides are broad spectrum antibiotics
     that have shown no resistance or cross-resistance to other anti-
     infectives in testing to date. Preclinical data demonstrates activity
     against pathogens in various infectious disease models.

  .  Other Topical Infections: Various magainin peptides have shown promise
     in a broad variety of applications including eye infections, acne,
     sexually transmitted diseases and yeast infections. There may also be
     potential use against viruses, including rhinoviruses that cause the
     common cold.

  .  Agricultural Anti-fungal: Ornamental plants genetically altered to
     express certain magainins have shown resistance to fungal and other crop
     diseases. A variety of agricultural applications are being considered.

   An E.coli-based recombinant manufacturing process is under development at
Magainin. Recombinant methods would increase the availability, and decrease the
cost, of magainin peptides for various applications.

Defensins

   In the process of researching animal host-defenses across different species,
we have helped demonstrate that all species, including humans, utilize some
form of local antimicrobial defense beyond their systemic immune systems. In
humans, we have identified host-defense molecules (defensins) in the lungs, the
GI tract and skin. We have also identified several natural "inducers" of local
antimicrobial defenses. Some of these compounds are found in nature, are
generally regarded as safe (i.e., GRAS substances), and may possess novel
nutritional as well as pharmaceutical immunostimulant applications.

                                       3
<PAGE>

                                  The Offering

Shares offered....................  5,000,000 shares. See "Plan of
                                    Distribution."

Price per share...................  $    .

Common stock outstanding as of
June 30, 1999, as adjusted to
give effect to the offering.......
                                    27,911,616 shares (excludes 5,112,644
                                    shares issuable upon exercise of options
                                    and warrants outstanding at June 30, 1999).

Nasdaq National Market Symbol.....  MAGN (Common Stock)

Use of proceeds...................  We will use the net proceeds from the sale
                                    of the shares offered hereby to fund both
                                    ongoing and planned research and
                                    development activities, including clinical
                                    trials and manufacturing development
                                    efforts for squalamine, activities
                                    associated with our respiratory program and
                                    peptide program, and working capital to be
                                    used for general corporate purposes.

                                       4
<PAGE>

                             Summary Financial Data
                    (In thousands, except per share amounts)

   The following summary financial data has been derived from our audited and
unaudited financial statements and are not necessarily indicative of results to
be expected for any future period. This data should be read in conjunction with
our financial statements and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                                                         Six Months Ended
                                              Year Ended December 31,                        June 30,
                               --------------------------------------------------------  -----------------
                                   1998       1997         1996        1995      1994     1999      1998
                               ------------ --------  -------------- --------  --------  -------  --------
<S>                            <C>          <C>       <C>            <C>       <C>       <C>      <C>
Statement of Operations Data:
Revenues:
 Contract and government
  grant......................    $    --    $ 10,088     $    150    $  2,056  $     85  $   --   $    --
 Related party contract......         --         --           --          280       326      --        --
                                 --------   --------     --------    --------  --------  -------  --------
                                      --      10,088          150       2,336       411      --        --
                                 --------   --------     --------    --------  --------  -------  --------
Costs and expenses:
 Research and development....      21,456     22,875       22,326      18,160    11,258    5,666    11,905
 General and administrative..       3,292      3,246        3,488       3,137     3,468    1,632     1,878
 Charge for stock issuance
  relating to royalty
  buyout.....................         --         --         7,080         --        --       --        --
                                 --------   --------     --------    --------  --------  -------  --------
                                   24,748     26,121       32,894      21,297    14,726    7,298    13,783
                                 --------   --------     --------    --------  --------  -------  --------
Loss from operations.........     (24,748)   (16,033)     (32,744)    (18,961)  (14,315)  (7,298)  (13,783)
Interest income..............       1,640      1,770        2,172       1,778     1,207      388       944
Interest expense.............        (196)      (118)         (48)        (32)      (48)    (103)      (84)
                                 --------   --------     --------    --------  --------  -------  --------
Net loss.....................    $(23,304)  $(14,381)    $(30,620)   $(17,215) $(13,156) $(7,013) $(12,923)
                                 ========   ========     ========    ========  ========  =======  ========
Net loss per share--basic and
 diluted.....................    $  (1.05)  $  (0.73)    $  (1.71)   $  (1.17) $  (0.99) $ (0.31) $  (0.58)
                                 ========   ========     ========    ========  ========  =======  ========
Weighted average shares
 outstanding.................      22,235     19,679       17,938      14,696    13,301   22,911    22,174
                                 ========   ========     ========    ========  ========  =======  ========
<CAPTION>
                                                 June 30, 1999
                               December 31, ------------------------
                                   1998      Actual   As Adjusted(1)
                               ------------ --------  --------------
<S>                            <C>          <C>       <C>            <C>       <C>       <C>      <C>
Balance Sheet Data:
Cash and investments.........    $ 22,871   $ 15,693     $ 20,743
Working capital..............      11,897      5,367       10,417
Total assets.................      25,891     18,326       23,376
Total liabilities............      11,211     10,583       10,583
Accumulated deficit..........    (132,928)  (139,941)    (139,941)
Stockholders' equity.........      14,680      7,743       12,793
</TABLE>
--------
(1) Reflects the sale of 5,000,000 shares of Common Stock offered hereby at an
    assumed offering price of $1.03 per share, less estimated expenses of the
    offering of approximately $0.02 per share.

                                       5
<PAGE>

              Important Note Regarding Forward-Looking Statements

   Our disclosure and analysis in this prospectus contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In
particular, these include statements relating to present or anticipated
scientific progress, development of potential pharmaceutical products, future
revenues, capital expenditures, research and development expenditures, future
financing and collaborations, personnel, manufacturing requirements and
capabilities, and other statements regarding matters that are not historical
facts or statements of current condition.

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

   We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC. Also note that we
provide the following cautionary discussion of risks and uncertainties relevant
to our business. These are factors that we think could cause our actual results
to differ materially from expected results. Other unanticipated occurrences
besides those listed here could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.

                                       6
<PAGE>

                                  RISK FACTORS

   You should carefully consider the following risk factors and the other
information presented in this prospectus before deciding to invest in the
shares of common stock.

The FDA Has Deemed Our NDA for LOCILEX(TM) Cream to Be Not Approvable, Which
Will Prevent Near Term Commercialization of the Product.

   On July 26, 1999, we announced that we received notification from the FDA
that our New Drug Application (NDA) for LOCILEX(TM) Cream has been deemed not
approvable.

   LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of infection
in diabetic foot ulcers, has been our lead product development candidate. We
had hoped to commercialize LOCILEX(TM) Cream in the near term. However, with
the FDA's decision, near term commercialization of LOCILEX(TM) Cream will not
occur, and we will generate no revenues from LOCILEX(TM) Cream in the near
future.

   In order to again seek approval of LOCILEX(TM) Cream, the FDA has indicated
that we must conduct further development activities, including clinical and
manufacturing activities. The specific nature of the clinical activities will
be determined after consultations with the FDA. As a result of its review of
manufacturing of the cream product, the FDA issued certain observations of
deficiencies in compliance with good manufacturing procedures. In any
additional clinical studies to be conducted, new batches of the cream product
will need to be manufactured from the bulk drug substance, in compliance with
good manufacturing procedures, and meeting strict product specifications.
Further clinical and manufacturing development efforts may again not be
successful. The time required to conduct such activities may be lengthy, and
the costs considerable.

   We are currently considering the feasibility of continuing the program.

If We Do Not Raise Additional Capital in the Near Term, We May Not Be Able to
Continue Any of Our Research and Development Programs, and We May Never
Commercialize Any Products.

   We will need to raise substantial additional funds in the near 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 maintained cash and investments of $15.7 million at June 30, 1999. At
June 30, 1999, we had current liabilities of $10.5 million. In the absence of
raising additional funds or significantly reducing expenses, we do not have
sufficient resources to sustain operations beyond the first half of 2000.

   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. If we cannot obtain funding, we will
need to delay, scale back or eliminate research and development programs or
enter into collaborations with third parties to commercialize potential
products or technologies that we might otherwise seek to develop or
commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.

   Particularly with the lack of approval of LOCILEX(TM) Cream, our prospects
of completing future equity financings are diminished. As a result, we expect
to evaluate all available strategic alternatives to finance our programs and
technology, including broad-based alliances or mergers with better-financed
entities.


                                       7
<PAGE>

We Expect to Continue to Incur Substantial Losses and Continue to Have Negative
Results of Operations.

   To date, we have engaged solely in the research and development of drug
candidates. We have not generated any revenues from product sales and have
incurred losses in each year since our inception. As of June 30, 1999, we had
an accumulated deficit of approximately $139.9 million.

   Most of our proposed products are in a relatively early developmental stage
and will require significant research, development and testing. We must obtain
regulatory approvals for all of our proposed products prior to
commercialization. Our operations are also subject to various competitive and
regulatory risks. As a result, we are unable to predict when or if we will
achieve any product revenues. We expect to experience substantial losses in the
foreseeable future as we continue our significant research, development and
testing efforts, which will cause us to have continued negative results of
operations.

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

 1. Contract Manufacturing:

   We currently have neither the resources, facilities, nor the technical
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the
number of companies capable of producing our proposed products is limited. We
may be unable to maintain arrangements with qualified outside contractors to
manufacture materials at costs which are affordable to us, if at all.

   Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a
manufacturing process. In order to engage another manufacturer, we may need to
obtain a license or other technology transfer from the original contract
manufacturer. Even if a license is available from the original contract
manufacturer on acceptable terms, we may be unable to successfully effect the
transfer of the technology to the new contract manufacturer. Any such
technology transfer may also require the transfer of requisite data for
regulatory purposes, including information contained in a proprietary drug
master file held by a contract manufacturer. If we rely on a contract
manufacturer that owns the drug master file, our ability to change contract
manufacturers may be more limited.

 2. Abbott Laboratories:

   We had an arrangement with Abbott Laboratories providing for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream has not occurred, in September 1999 we
renegotiated this agreement with Abbott. As a result, we have agreed to pay
Abbott $4.2 million, of which $4.0 million has been paid to date, and we will
receive partial delivery of material. An additional $3.4 million is due to
Abbott and will be paid in the event that we successfully obtain additional
funds, and only then to the extent of 15% of amounts obtained in excess of $10
million in any year. We have no further purchase commitments to Abbott, and
Abbott has no further supply requirements to Magainin.

 3. Alternative Production Processes:

   The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of the traditional
antibiotics. We are pursuing alternative manufacturing sources, including
recombinant manufacturing, in order to improve the gross margins available to
us on any sales of these products. These programs, however, are at an early
stage and will require significant expenditures over an

                                       8
<PAGE>

extended period of time. Ultimately, we may be unable to develop a more cost-
effective manufacturing process and, even if we develop a more cost-effective
process, the FDA may not approve such a process.

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

 4. Alternative Future Uses of LOCILEX(TM) Cream

   There are no currently identified alternative uses of bulk drug substance
for LOCILEX(TM) Cream.

If We Do Not Obtain Required Regulatory Approvals, We Will Not Be Able to
Commercialize Any of Our Product Candidates.

   Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.

   Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which has
occurred for LOCILEX(TM) Cream, will materially affect our business. Even if we
receive approval of a product candidate, it may be conditioned upon certain
limitations and restrictions as to the drugs used and may be subject to
continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including:

  .  warning letters;

  .  fines;

  .  withdrawal of regulatory approval;

  .  product recalls;

  .  operating restrictions;

  .  injunctions; and

  .  criminal prosecution.

 1. FDA Marketing Approval:

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

  .  grant marketing approval;

  .  require additional testing or information; or

  .  deny the application.

 2. FDA Manufacturing Approval:

   Detailed manufacturing information is also required to be included in the
NDA for review and approval by the FDA. All manufacturing facilities and
processes must comply with the good manufacturing practices, or GMP,
regulations prescribed by the FDA. All manufacturers must, among other things,
pass manufacturing

                                       9
<PAGE>

plant inspections and provide records of detailed manufacturing processes.
Among other things, it must be demonstrated that:

  .  the drug product can be consistently manufactured at the same quality
     standard;

  .  the drug product is stable over time; and

  .  the level of chemical impurities in the drug product are under a
     designated level.

   As a result of its review of manufacturing of the cream product, the FDA
issued certain observations of deficiencies in compliance with good
manufacturing procedures. In any additional clinical studies to be conducted,
new batches of the cream product will need to be manufactured from the bulk
drug substance, in compliance with good manufacturing procedures, and meeting
strict product specifications.

 3. Ongoing FDA Oversight:

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

  .  require additional submissions if there are any modifications to the
     drug product including, for example, any changes in manufacturing
     process, labeling, or manufacturing facility;

  .  require post-marketing testing and surveillance to monitor the effects
     of approved drug products; and

  .  enforce conditional approvals that restrict the commercial applications
     of a drug product.

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

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

 4. Other Regulatory Bodies:

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

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

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

We Will Rely on Marketing and Development Partners and if They Do Not Perform
as Expected, We May Not Successfully Commercialize Our Products.

   We do not have our own sales and marketing staff. In order to successfully
develop and market our products, we must enter into marketing and distribution
arrangements with third parties. We also expect to delegate the responsibility
for all or a significant portion of the development and regulatory approval for
certain products to partners. If our partners do not develop an approvable or
marketable product or do not market a product successfully, we may not achieve
necessary product revenues. Additionally, we may be unable to enter into
successful arrangements like these, as is required in our business.

                                       10
<PAGE>

   We currently maintain a collaborative research and option agreement with
Genentech, Inc. in the asthma area, which expires in December 1999. Genentech
may choose not to exercise its option to negotiate a fuller asthma development
and commercialization agreement with us. We will need partners in this area to
assist us, and we may be unable to enter into a similar agreement or find as
effective a partner.

   We also have a development, supply distribution agreement with SmithKline
Beecham for LOCILEX(TM) Cream. Future milestone payments and sales proceeds
from SmithKline will occur only in the event that LOCILEX(TM) Cream is
eventually approved.

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

   We may also decide to establish our own sales force to market and sell
certain products. Although certain members of our management have limited
experience in the marketing of pharmaceutical products, we have no experience
with respect to marketing our products. If we choose to pursue this
alternative, we will need to spend significant additional funds and devote
significant management resources and time to establish a successful sales
force. Given our inexperience in establishing and managing a salesforce, this
effort may not be successful. Given our financial resources, efforts in this
area would likely be modest compared to our competitors.

If We Are Not Able to Innovate and Develop Products as Rapidly as Our
Competitors, Our Products May Not Achieve Market Acceptance.

   The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense
systems is being conducted by others. Many companies are also currently
involved in research and development activities focused on the pathogenesis of
disease, and the competition among companies attempting to find genes
responsible for disease is intense. Most of these entities have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources than we have. We will also face competition from companies using
different or advanced techniques that may render our products obsolete.

   We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that
have significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining
regulatory approvals of such products. Some of these companies may be in
advanced phases of clinical testing of various drugs that may be competitive
with our proposed products.

   Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that they
have developed, some of which may be directly competitive with our technology.
In addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting
highly qualified scientific personnel.

   Even if eventually approved, LOCILEX(TM) Cream may not be successfully
marketed against oral antibiotics for the treatment of infection in diabetic
foot ulcers. These infections have historically been treated with systemically
administered antibiotics, which may be perceived by some medical professionals
as having certain

                                       11
<PAGE>

advantages over LOCILEX(TM) Cream. In addition, we may be unable to manufacture
LOCILEX(TM) Cream at a cost which will allow it to be sold at a competitive
price relative to oral antibiotics or other topical antibiotics that may be
used for this indication.

   Many companies are working to develop and market products intended for the
additional disease areas being targeted by us, including cancer and asthma. A
number of major pharmaceutical companies have significant franchises in these
disease areas, and can be expected to invest heavily to protect their
interests. In the cancer field, anti-angiogenic agents are under development at
a number of companies. In the asthma field, other biopharmaceutical companies
have also reported the discovery of genes relating to asthma.

We Depend on Our Intellectual Property, and If We Are Unable to Protect Our
Intellectual Property We May Not Realize Optimal Value from Our Technology.

 1. Patents:

   Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon commercialization could be
diminished.

   We cannot be certain that:

  .  patents will issue from any of our patent applications;

  .  our patent rights will be sufficient to protect our technology;

  .  our patents will not be successfully challenged or circumvented by our
     competitors; or

  .  our patent rights will provide us with any commercial advantages.

   The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy until a patent issues and publications
in the scientific or patent literature lag behind actual discoveries.

   Even after we are issued patent rights, we cannot be certain that:

  .  others will not develop similar technologies or duplicate the
     technology;

  .  others will not design around the patented aspects of the technology;

  .  we will not be obliged to defend ourselves in court against allegations
     of infringement of third-party patents;

  .  our issued patents will be held valid in court; or

  .  an adverse outcome in a suit would not subject us to significant
     liabilities to third parties, require rights to be licensed from third
     parties, or require us to cease using such technology.

   The cost of litigation can be substantial, regardless of the outcome.

 2. Potential Ownership Disputes:

   There may be disputes arising as to the ownership of our technology. Most of
our research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies,

                                       12
<PAGE>

universities, or research institutions. These entities may raise questions as
to when technology was developed, and assert rights to the technology. These
kind of disputes have occurred in the past. We may not prevail in any such
disputes.

   Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be disputes as to the capacity in which consultants
are operating when they make certain discoveries. We may not prevail in any
such disputes.

 3. Other Intellectual Property:

   In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators, and other advisors.
We may find that these agreements will be breached, or that our trade secrets
have otherwise become known or independently developed or discovered by our
competitors.

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

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

   We depend to a considerable degree on a limited number of key personnel.
Many key responsibilities have been assigned to a relatively small number of
individuals. We do not maintain "key man" insurance on any of our employees.
The loss of certain management and technical personnel could adversely affect
our ability to develop and commercialize products.

We are Subject to Potential Product Liability Claims, Which Could Result in
Significant Expense if a Claim Arose.

   We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:

  .  our proposed products cause some undesirable side effects or injury
     during clinical trials;

  .  our proposed products cause undesirable side effects or injury; or

  .  third parties that we have agreed to indemnify incur liability.

   While we carry insurance, this coverage is expensive and we may be unable to
maintain adequate coverage on acceptable terms.

If We Do Not Receive Adequate Third-Party Reimbursement for Any of Our Drug
Candidates, Some Patients May Be Unable to Afford Our Products and Sales Could
Suffer.

   In both the United States and elsewhere, the availability of reimbursement
from third-party payers, such as government health administration authorities,
private health insurers and other organizations impacts prescription
pharmaceutical sales. These organizations are increasingly challenging the
prices charged for

                                       13
<PAGE>

medical products and services, particularly where they believe that there is
only an incremental therapeutic benefit which does not justify the additional
cost. Coverage and reimbursement may not be available for our proposed products
or, if available, may not be adequate. Without insurance coverage, many
patients may be unable to afford our products, and we may not reach optimal
sales levels.

   There has also been a trend toward government reforms intended to contain or
reduce the cost of health care. In certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been a number of federal and state proposals
to implement similar government control.

   We expect this trend to continue, but we cannot predict the nature or extent
of any reform that results. It is possible that reform could impact
pharmaceutical marketing and pricing. Not only would this affect possible
future profit margins, it could adversely affect our ability to obtain
financing for the continued development of our proposed products. Furthermore,
reforms could have a broader impact by limiting overall growth of health care
spending, such as Medicare and Medicaid spending, which could also adversely
effect our business.

Our Stock Price Is Extremely Volatile Due to a Number of Factors.

   The market prices and trading volumes for securities of biopharmaceutical
and biotechnology companies, including ours, have historically been, and will
likely continue to be, highly volatile. Future events affecting our business or
that of our competitors may significantly impact our stock price, including:

     .  product testing results,

     .  technological innovations,

     .  new commercial products,

     .  government regulations,

     .  proprietary rights,

     .  regulatory actions, and

     .  litigation.

We May Be Unable to Maintain the Standards for Listing on the Nasdaq National
Market, Which Could Make it More Difficult for Investors to Dispose of Our
Common Stock and Could Subject Our Common Stock to the "Penny Stock" Rules.

   Our common stock is listed on the Nasdaq National Market. Nasdaq requires
listed companies to maintain standards for continued listing, including either
a minimum bid price for shares of a company's stock or a minimum tangible net
worth. If we are unable to maintain these standards, our common stock could be
delisted. Trading in our stock would then be conducted on the Nasdaq Small Cap
Market unless we are unable to meet the requirements for inclusion. If we were
unable to meet the requirements for inclusion in the Small Cap Market, our
common stock would be traded on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in quotations
published by the National Quotation Bureau, Inc. that are commonly referred to
as the "pink sheets." As a result, it could be more difficult to sell, or
obtain an accurate quotation as to the price of, our common stock.

   In addition, if our common stock were delisted, it would be subject to the
so-called penny stock rules. The SEC has adopted regulations that define a
"penny stock" to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules impose additional sales practice
requirements on broker-dealers subject to certain exceptions.

                                       14
<PAGE>

   For transactions covered by the penny stock rules, a broker-dealer must make
a special suitability determination for the purchaser and must have received
the purchaser's written consent to the transaction prior to the sale. The penny
stock rules also require broker-dealers to deliver monthly statements to penny
stock investors disclosing recent price information for the penny stock held in
the account and information on the limited market in penny stocks. Prior to the
transaction, a broker-dealer must provide a disclosure schedule relating to the
penny stock market. In addition, the broker-dealer must disclose the following:

  .  commissions payable to the broker-dealer and the registered
     representative; and

  .  current quotations for the security as mandated by the applicable
     regulations.

   If our common stock were delisted and determined to be a "penny stock," a
broker-dealer may find it to be more difficult to trade our common stock, and
an investor may find it more difficult to acquire or dispose of our common
stock in the secondary market.

The Exercise of Options and Warrants and Other Issuances of Shares Could Have
Dilutive Effect on Our Stock Price.

   As of June 30, 1999, there were outstanding options to purchase an aggregate
of 3,552,000 shares of our common stock at prices ranging from $0.40 per share
to $16.75 per share, of which approximately 2,270,000 were exercisable as of
such date. Also outstanding at June 30, 1999 were warrants to purchase 229,739
shares of our common stock exercisable at $8.00 per share, a warrant to
purchase 300,000 shares of our common stock, exercisable at $7.50 per share,
and warrants to purchase an aggregate of 1,030,905 shares of our common stock,
currently exercisable from $5.99-$8.31 per share, subject to adjustment
(including as a result of this offering). Exercise of options and warrants at
prices below the market price of our common stock could adversely affect the
price of our common stock. Additional dilution may result from the issuance of
shares in connection with collaborations or manufacturing arrangements, or in
connection with other financing efforts.

Our Certificate of Incorporation and Delaware Law Contain Provisions that could
Discourage a Takeover.

   Our certificate of incorporation provides our board of directors the power
to issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock, and the board of directors has the power to
determine these voting rights. In addition, Section 203 of the Delaware General
Corporation Law contains provisions which impose restrictions on stockholder
action to acquire control of Magainin. The effect of these provisions of our
certificate of incorporation and Delaware law provisions would likely
discourage third parties from seeking to obtain control.

We May be Subject to Year 2000 Compliance Risks, Which Could Disrupt Our
Operations and the Operations of Our Collaborators.

   We use computers in various aspects of our business, and are therefore
exposed to year 2000, or Y2K, problems. If unresolved, these computer system
problems could result in operational delays, financial miscues, manufacturing
errors, lost clinical data or other unforeseen consequences. In mid-1998, we
initiated a compliance program with the following objectives:

  .  identifying potentially non-compliant internal systems;

  .  updating and/or replacing aging hardware;

  .  upgrading or updating software/network systems;

  .  assuring company-wide Y2K compliance;

  .  assessing third-party risks; and

  .  establishing contingency plans for any third-party risks identified.

                                       15
<PAGE>

   We have identified, through internal testing and discussions with
significant vendors, that some administrative computers and software, as well
as some laboratory systems used for research, are not Y2K compliant. In order
to make these systems compliant, we have elected to replace hardware or upgrade
software systems. We expect to have critical internal systems and computers Y2K
compliant by November 1, 1999 at a cost of less than $100,000. We would likely
have considered replacing or upgrading certain computers and systems
independent of Y2K concerns.

   We are in the process of contacting significant vendors to determine the
extent of third-party Y2K risks. Most third-parties have advised us that they
will make every effort to be compliant prior to December 31, 1999; however,
these third-parties could not provide us with assurances that they will be
compliant on a timely basis. We have important third-party relationships with
sales and marketing partners, manufacturers and clinical study administrators.
None of our contracts with these vendors address Y2K problems or their
remediation or prevention, and no assurances of compliance can be given by
these parties. We will continue to monitor the progress of these third-party
vendors and will adjust our contingency plans if any significant risks are
identified. Necessary contingency plans or remedies could be expensive.

   In a worst case scenario, we could experience delays in receiving R&D
supplies and accessing data on patients enrolled in clinical studies. These
delays could slow commercialization efforts and research and development
programs, or impact our ability to effectively manage and monitor these
programs. Our Y2K compliance program is expected to reduce our level of
uncertainty about internal Y2K problems and Y2K problems of significant third
parties with whom we conduct business.

                                       16
<PAGE>

                                USE OF PROCEEDS

   The net proceeds to us from the sale of the 5,000,000 shares of our common
stock in this offering are estimated to be approximately $5,050,000. This is
based on an assumed public offering price of $1.01 per share, which reflects
the deduction of estimated offering expenses payable by us. We will use the net
proceeds from the sale of the shares offered in this prospectus to fund both
ongoing and planned research and development activities, including clinical
trials and manufacturing development efforts for squalamine, activities
associated with our respiratory program and peptide program, and working
capital to be used for general corporate purposes.

   Although we anticipate the net proceeds of this offering, together with our
available cash, should be sufficient to finance our operations through the year
2000, we cannot be sure that these funds will be sufficient. Our projected
expenses and revenues may vary and are subject to change depending upon
numerous factors, including:

  .  the progress of our research and development programs,

  .  regulatory approvals,

  .  competitive and technological advances,

  .  the commercial viability of our products,

  .  the terms of collaborative arrangements, if any, that we may enter into,
     and

  .  other factors, many of which are beyond our control.

   Substantial additional funds will be needed to complete our current and
anticipated research and development programs and before we are able to bring
products to market.

   Pending the application of funds for the purposes described above, we intend
to invest the net proceeds of this offering in U.S. government and other
investment grade securities.

                                       17
<PAGE>

                          PRICE RANGE OF COMMON STOCK

   Our common stock trades on the Nasdaq Stock Market under the symbol MAGN.
The following table sets forth the quarterly range of high and low closing
sales prices of our common stock, as reported on the Nasdaq National Market,
for the periods indicated below.

<TABLE>
<CAPTION>
Year Ended December 31, 1997                                        High   Low
----------------------------                                       ------ -----
<S>                                                                <C>    <C>
1st Quarter....................................................... $10.50 $7.88
2nd Quarter....................................................... $ 8.50 $6.63
3rd Quarter....................................................... $11.81 $7.25
4th Quarter....................................................... $12.13 $7.50
<CAPTION>
Year Ended December 31, 1998                                        High   Low
----------------------------                                       ------ -----
<S>                                                                <C>    <C>
1st Quarter....................................................... $ 8.75 $5.38
2nd Quarter....................................................... $ 8.19 $4.38
3rd Quarter....................................................... $ 6.00 $2.31
4th Quarter....................................................... $ 3.88 $2.38
<CAPTION>
Year Ended December 31, 1999                                        High   Low
----------------------------                                       ------ -----
<S>                                                                <C>    <C>
1st Quarter....................................................... $ 4.44 $1.44
2nd Quarter....................................................... $ 2.56 $1.50
3rd Quarter (through September 24, 1999).......................... $ 3.69 $1.00
</TABLE>

                                DIVIDEND POLICY

   We have never paid, and do not intend to declare or pay in the foreseeable
future, any dividends on our common stock.

                                       18
<PAGE>

                                 CAPITALIZATION

   The following table sets forth our capitalization as of June 30, 1999, and
as adjusted to reflect the sale of the common stock offered hereby and the
receipt of the net proceeds from the sale.

<TABLE>
<CAPTION>
                                                           June 30, 1999
                                                     --------------------------
                                                      Actual   As Adjusted(/1/)
                                                     --------  ----------------
                                                          (in thousands)
   <S>                                               <C>       <C>
   Short-term debt.................................. $  2,500      $  2,500
   Stockholders' equity:
     Preferred stock; $.001 par value; 9,211,000
      shares authorized; no shares issued or
      outstanding...................................      --            --
     Common Stock, $.002 par value; 45,000,000
      shares authorized, 22,912,000 shares
      outstanding, actual; and 27,912,000 shares
      outstanding, as adjusted (2)..................       46            56
     Additional paid-in capital.....................  147,646       152,686
     Accumulated deficit............................ (139,941)     (139,941)
     Accumulated other comprehensive income--
      unrealized (loss) on investments..............       (8)           (8)
                                                     --------      --------
       Total stockholders' equity...................    7,743        12,793
                                                     --------      --------
       Total capitalization......................... $ 10,243      $ 15,293
                                                     ========      ========
--------
(1) Reflects the sale of 5,000,000 shares of common stock offered hereby at an
    assumed offering price of $1.03 per share, less estimated expenses of the
    offering of approximately $0.02 per share.
(2) Does not include 5,112,644 shares issuable as of June 30, 1999 upon
    exercise of outstanding options and warrants.

                                    DILUTION

   Our net tangible book value as of June 30, 1999 (based on our unaudited
financial statements) was approximately $7,743,000 or $0.34 per share. "Net
tangible book value" per share of common stock represents our total tangible
assets reduced by our total liabilities and divided by the number of shares of
common stock outstanding. Assuming completion of this offering at net offering
price of $1.01 per share, our adjusted net tangible book value as of June 30,
1999 would have been approximately $12,793,000 or approximately $0.46 per
share. The increase in net tangible book value of $0.12 per share would be due
solely to the purchase of the shares in this offering. Purchasers in this
offering will immediately incur a dilution of $0.57 per share from the assumed
$1.03 offering price of the shares. "Dilution" is determined by subtracting net
tangible book value per share after the offering from the offering price.

   Public offering price per share..................               $   1.03
     Net tangible book value per share as of June
      30, 1999...................................... $    .34
     Increase per share attributable to new
      investors.....................................      .12
                                                     --------
   Net tangible book value per share after the
    offering........................................                    .46
                                                                   --------
   Dilution per share to new investors..............               $    .57
                                                                   ========
</TABLE>

                                       19
<PAGE>

                            SELECTED FINANCIAL DATA

   The following selected financial data as of and for each of the five years
in the period ended December 31, 1998 are derived from our audited financial
statements. The statement of operations data for each of the six-month periods
ended June 30, 1999 and 1998, and the balance sheet data as of June 30, 1999
were derived from unaudited financial statements prepared by us. The unaudited
interim financial statements have been prepared on substantially the same basis
as the audited financial statements and, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results of operations for such periods. The
historical results are not necessarily indicative of results to be expected for
any future period. This data should be read in conjunction with our financial
statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
                                                                                     Six Months
                                       Year Ended December 31,                     Ended June 30,
                          -----------------------------------------------------  --------------------
                            1998       1997       1996       1995       1994       1999       1998
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                          (in thousands, except per share data)
<S>                       <C>        <C>        <C>        <C>        <C>        <C>        <C>
Statement of Operations
 Data:
Revenues:
  Contract and
   government grant.....  $     --   $  10,088  $     150  $   2,056  $      85  $     --   $     --
  Related party
   contract.............        --         --         --         280        326        --         --
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                --      10,088        150      2,336        411        --         --
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
Costs and expenses:
  Research and
   development..........     21,456     22,875     22,326     18,160     11,258      5,666     11,905
  General and
   administrative.......      3,292      3,246      3,488      3,137      3,468      1,632      1,878
  Charge for stock
   issuance relating to
   royalty buyout.......        --         --       7,080        --         --         --         --
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
                             24,748     26,121     32,894     21,297     14,726      7,298     13,783
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
Loss from operations....    (24,748)   (16,033)   (32,744)   (18,961)   (14,315)    (7,298)   (13,783)
Interest income.........      1,640      1,770      2,172      1,778      1,207        388        944
Interest expense........       (196)      (118)       (48)       (32)       (48)      (103)       (84)
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
Net loss................  $ (23,304) $ (14,381) $ (30,620) $ (17,215) $ (13,156) $  (7,013) $ (12,923)
                          =========  =========  =========  =========  =========  =========  =========
Net loss per share-basic
 and diluted............  $   (1.05) $   (0.73) $   (1.71) $   (1.17) $   (0.99) $   (0.31) $   (0.58)
                          =========  =========  =========  =========  =========  =========  =========
Weighted average shares
 outstanding............     22,235     19,679     17,938     14,696     13,301     22,911     22,174
                          =========  =========  =========  =========  =========  =========  =========
<CAPTION>
                                            December 31,
                          -----------------------------------------------------  June 30,
                            1998       1997       1996       1995       1994       1999
                          ---------  ---------  ---------  ---------  ---------  ---------
                                                 (in thousands)
<S>                       <C>        <C>        <C>        <C>        <C>        <C>        <C>
Balance Sheet Data:
Cash and investments....  $  22,871  $  39,061  $  33,340  $  43,666  $  25,921  $  15,693
Working capital.........     11,897     33,073     28,276     30,429     21,750      5,367
Total assets............     25,891     42,444     36,376     45,727     28,050     18,326
Total liabilities.......     11,211      7,574      6,433      4,534      4,137     10,583
Accumulated deficit.....   (132,928)  (109,624)   (95,243)   (64,623)   (47,408)  (139,941)
Stockholders' equity....     14,680     34,870     29,943     41,193     23,913      7,743
</TABLE>

                                       20
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION

General

   We are a biopharmaceutical company engaged in the development of medicines
for serious diseases. Our development efforts are focused on anti-infectives,
oncology, and pulmonary and allergic disorders.

   On July 26, 1999, we announced that we received notification from the FDA
that our NDA for LOCILEX(TM) Cream (formerly referred to as pexiganan acetate)
has been deemed not approvable.

   We are conducting research on an aminosterol class of compounds. One such
compound, squalamine, is currently being evaluated in Phase II clinical testing
in patients with non-small cell lung cancer. We are conducting additional
research efforts in the respiratory area.

   Since commencing operations in 1988, we have not generated any revenue from
product sales, and we have funded operations primarily from the proceeds of
public and private placements of securities. We have incurred a loss in each
year since our inception, and we expect to incur substantial additional losses
for at least the next several years. We expect that losses will fluctuate from
quarter to quarter, and that such fluctuations may be substantial. As such,
results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years. At June 30, 1999, our accumulated
deficit was approximately $139.9 million. We will need to raise additional
funds in the near future to continue our operations.

Results of Operations

 Revenues

   We have received no revenues from product sales. Revenues recorded to date
have consisted principally of revenues recognized under collaborations with
corporate partners. We recorded revenue of $10,000,000 in 1997 reflecting the
receipt of payments under the SmithKline Agreement entered into in February
1997 for LOCILEX(TM) Cream. We do not expect to realize additional milestone
revenues from our arrangement with SmithKline. We have no other currently
existing collaborations that will result in the realization of research and
development revenues.

 Research and Development Expenses

   Research and development expenses decreased in the year ended December 31,
1998 as compared to the same period a year ago due principally to a reduction
in clinical and preclinical costs associated with LOCILEX(TM) Cream and
squalamine, as well as a reduction in manufacturing development costs. These
decreases have been partially offset by an increase in personnel expenses.

   We have incurred significant expenses associated with the development and
scale-up of the manufacturing process for our products, as well as in the
production of materials for development and possible commercialization. We
contract with third parties for these activities, and such expenses amounted to
$7,652,000, $10,174,000 and $9,557,000 for 1998, 1997 and 1996, respectively.

   Research and development expenses decreased in the six months ended June 30,
1999 as compared to the same period a year ago, due principally to reductions
in manufacturing development, clinical and regulatory costs, and personnel
expenses. The level of research and development expenses in future periods will
depend principally upon the progress of our research programs.

 General and Administrative Expenses

   General and administrative expenses consist principally of personnel costs
and professional fees and have remained generally steady from 1996 through
1998.

   General and administrative expenses have decreased for the six months ended
June 30, 1999 as compared to the same period a year ago due principally to
reductions in personnel expenses.

                                       21
<PAGE>

 Other Income and Expense

   We recorded a non-cash charge to earnings of $7,080,000 in 1996 representing
the fair value of 550,000 shares of Common Stock issued by us in a buyout of
royalties which we would otherwise have owed on any sales of LOCILEX(TM) Cream.

   Interest income decreased during the year ended December 31, 1998 as
compared to the prior year, due to lower investment balances during this
period. The decrease in interest income in the year ended December 31, 1997 as
compared to December 31, 1996 is principally due to decreased investment
balances. The increase in interest expense for the years ended December 31,
1998 and 1997, as compared to the prior years, is due to higher debt balances.

   Interest income decreased in the six months ended June 30, 1999 as compared
to the same period of the prior year due to lower investment balances during
this period. The increase in interest expense for the six-month period ended
June 30, 1999 is due principally to higher debt balances in the first quarter
of 1999 compared to the same period a year ago.

 Loss

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

Financial Condition, Liquidity, and Capital Resources

   Cash and investments were $15,693,000 at June 30, 1999 as compared to
$22,871,000 at December 31, 1998. The primary use of cash was to finance our
operations.

   Since inception, we have funded our operations primarily from the proceeds
of public and private placements of securities, including:

  .  $17,080,000 raised from our initial public offering in December 1991;

  .  $21,469,000 raised from a public offering completed in February 1993;

  .  $18,023,000 raised from a private placement completed in October 1993;

  .  $32,627,000 raised from a public offering completed in August 1995;

  .  $11,932,000 raised from a private placement completed in August 1996;

  .  $19,172,000 raised from a public offering completed in December 1997;
     and

  .  $2,000,000 raised from a private placement completed in December 1998.

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

   Accounts payable and accrued expenses decreased $629,000 from December 31,
1998 to $8,024,000 at June 30, 1999, due principally to payments made under
certain manufacturing development agreements related to LOCILEX(TM) Cream.
Accounts payable and accrued expenses are expected to decrease in future
periods as we make payments for the purchase of bulk drug substance for
LOCILEX(TM) Cream.

   We refinanced our $2,500,000 note payable in the second quarter of 1999.
Under the terms of this arrangement, we make monthly interest-only payments at
a rate of 7.375%, with principal due in June 2000. We maintain investments of
$2,750,000 as collateral for the note payable.

                                       22
<PAGE>

   In February 1997, we entered into a development, supply and distribution
agreement in North America with SmithKline for LOCILEX(TM) Cream. SmithKline
has paid us $10,000,000 under this agreement, which we received in 1997.
SmithKline may make additional payments upon the occurrence of approval and
certain product milestones. We had hoped to commercialize LOCILEX(TM) Cream in
the near term. However, with the FDA's decision, near term commercialization of
LOCILEX(TM) Cream will not occur, and we will generate no revenues from
LOCILIX(TM) Cream in the near future. The SmithKline Agreement also gives
SmithKline rights to terminate the arrangement, and, under certain conditions,
the right to negotiate for rights to another Magainin product development
candidate.

   In December 1998, we entered into a collaborative research and option
agreement with Genentech, Inc. relating to a protein therapeutic in asthma.
Under this agreement, we will provide Genentech with access to a therapeutic
target (IL9), that is in our proprietary asthma gene database, and we will
jointly conduct a one-year collaborative program to evaluate the utility of a
blocking antibody to IL9 in suppressing the asthmatic response. Under this
collaborative agreement, Genentech made an initial equity investment of
$2,000,000 in our company, and has an option to enter into a future development
and commercialization agreement with our company. Any such future development
and commercialization agreement could provide for payments to us of up to
$35,000,000, upon terms to be negotiated, and royalty payments on sales of
products developed by Genentech in the field.

   We will need to raise substantial additional funds in the near 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 maintained cash and investments of $15.7 million at June 30, 1999. At
June 30, 1999, we had current liabilities of $10.5 million. In the absence of
raising additional funds or significantly reducing expenses, we do not have
sufficient resources to sustain operations beyond the first half of 2000.

   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 we cannot
obtain funding, we will need to delay, scale back or eliminate research and
development programs or enter into collaborations with third parties to
commercialize potential products or technologies that we might otherwise seek
to develop or commercialize ourselves, or seek other arrangements. If we engage
in collaborations, we will receive lower consideration upon commercialization
of such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.

   Particularly with the lack of approval of LOCILEX(TM) Cream, our prospects
of completing future equity financings are diminished. As a result, we expect
to evaluate all available strategic alternatives to finance our programs and
technology, including broad-based alliances or mergers with better-financed
entities.

   We currently have neither the resources, facilities nor capabilities to
manufacture any of our proposed products in the quantities and quality required
for commercial sale. We have no current plans to establish a manufacturing
facility. We depend upon contract manufacturers for commercial scale
manufacturing of our proposed products in accordance with regulatory standards.
This dependence may restrict our ability to develop and deliver products on a
timely, profitable and competitive basis. Additionally, the number of companies
capable of producing our products is limited. We may be unable to maintain
arrangements with qualified outside contractors to manufacture materials at
costs which are affordable to us, if at all.

   The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of the traditional
antibiotics. We are pursuing alternative manufacturing sources, including
recombinant manufacturing, in order to improve the gross margins available to
us on sales of these products. These programs, however, are at an early stage
and will require significant expenditures over an extended period of time.
Ultimately, we may be unable to develop a more cost-effective manufacturing
process and, even if we develop a more cost-effective process, the FDA may not
approve such a process.

                                       23
<PAGE>

   We had an arrangement with Abbott Laboratories providing for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream has not occurred, in September 1999 we
renegotiated this agreement with Abbott. As a result, we have agreed to pay
Abbott $4.2 million, of which $4.0 million has been paid to date, and we will
receive partial delivery of material. An additional $3.4 million is due to
Abbott and will be paid in the event that we successfully obtain additional
funds, and only then to the extent of 15% of amounts obtained in excess of $10
million in any year. We have no further purchase commitments to Abbott, and
Abbott has no further supply requirements to Magainin.

   Our capital expenditure requirements will depend upon numerous factors,
including the progress of our other research and development programs, the time
and cost required to obtain regulatory approvals, our ability to enter into
additional collaborative arrangements, the demand for products based on our
technology, if and when such products are approved, and possible acquisitions
of products, technologies and companies. We had no significant capital
commitments as of June 30, 1999.

   Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
available funds for investment. We do not believe that we currently have any
significant direct foreign currency exchange rate risk.

Year 2000

   We use computers in various aspects of our business, and are therefore
exposed to year 2000, or Y2K, problems. If unresolved, these computer system
problems could result in operational delays, financial miscues, manufacturing
errors, lost clinical data or other unforeseen consequences. In mid-1998, we
initiated a compliance program with the following objectives:

  .  identifying potentially non-compliant internal systems;

  .  updating and/or replacing aging hardware;

  .  upgrading or updating software/network systems;

  .  assuring company-wide Y2K compliance;

  .  assessing third-party risks; and

  .  establishing contingency plans for any third-party risks identified.

   We have identified, through internal testing and discussions with
significant vendors, that some administrative computers and software, as well
as some laboratory systems used for research, are not Y2K compliant. In order
to make these systems compliant, we have elected to replace hardware or upgrade
software systems. We expect to have critical internal systems and computers Y2K
compliant by November 1, 1999 at a cost of less than $100,000. We would likely
have considered replacing or upgrading certain computers and systems
independent of Y2K concerns.

   We are in the process of contacting significant vendors to determine the
extent of third-party Y2K risks. Most third-parties have advised us that they
will make every effort to be compliant prior to December 31, 1999; however,
these third-parties could not provide us with assurances that they will be
compliant on a timely basis. We have important third-party relationships with
sales and marketing partners, manufacturers and clinical study administrators.
None of our contracts with these vendors address Y2K problems or their
remediation or prevention, and no assurances of compliance can be given by
these parties. We will continue to monitor the progress of these third-party
vendors and will adjust our contingency plans if any significant risks are
identified. Necessary contingency plans or remedies could be expensive.

   In a worst case scenario, we could experience delays in receiving R & D
supplies and accessing data on patients enrolled in clinical studies. These
delays could slow commercialization efforts and research and development
programs, or impact our ability to effectively manage and monitor these
programs. Our Y2K compliance program is expected to reduce our level of
uncertainty about internal Y2K problems and Y2K problems of significant third
parties with whom we conduct business.

                                       24
<PAGE>

                                    BUSINESS

Background

   Our biopharmaceutical research and development efforts are focused on two
technology platforms: host-defense drug discovery, and a gene-based target and
drug discovery program in respiratory disease. In our host-defense programs, we
seek to isolate and develop therapeutically active compounds from the host-
defense systems of animals for the treatment of human diseases. In our gene-
based target and drug discovery program, we employ a range of genomics
techniques to identify genes associated with the pathogenesis of asthma and
allergy, with the objective of utilizing the optimal biologic gene targets in
the development of novel therapeutics.

 Host-Defense System

   We were formed to engage in the research, development and commercialization
of compounds derived from the host-defense systems of animals. The host-defense
system is the complex of natural processes and mechanisms used by the body to
protect itself against disease. This system comprises physical barriers to
infection, such as skin and mucosal membranes and fluids, as well as more
complex chemical and biological components, such as the immune system. We
believe that certain classes of naturally occurring peptides, such as
magainins, and certain small molecules, such as aminosterols, both described
below, are used by the host-defense system to provide a first line of defense
against disease.

   Our approach to identifying pharmaceutically active compounds in the host-
defense systems of animals involves the extraction of compounds from animal
tissues. The extracts are assayed for activity against selected pathogens, such
as bacteria, fungi, viruses and certain cancers. We then purify the active
compounds and determine the precise chemical structure of the purified
molecule. Once naturally occurring molecules have been isolated, we analyze the
relationship between the molecular structure of the compound and its biological
activity. In general, this requires that we identify the structures in the
compound that are believed to have therapeutic effects and analyze how the
compounds could be modified to improve the desired therapeutic effects. We then
utilize our combinatorial chemistry capabilities to modify the molecules to
alter biological activity or increase stability.

   Magainins While conducting genetic and molecular biological research at the
National Institutes of Health in 1987, Dr. Michael A. Zasloff, presently our
Vice Chairman and Executive Vice President, isolated the first magainins from
the African frog Xenopus laevis. In connection with his research, Dr. Zasloff
was performing surgery on African clawed frogs in his laboratory. After
suturing the frogs and returning them to their aquarium tank, he noticed that
the incisions healed without infection, inflammation or notable scarring,
despite being exposed to the bacteria-filled aquarium water. Dr. Zasloff
deduced that the frogs produced a substance that protected them against
infection. Eventually, he isolated, from the frog's skin, two related peptides,
which he called magainins, and which were later shown to kill a variety of
pathogens, including bacteria, amoebae, fungi and parasites.

   Magainins are peptides. A peptide is a chain of molecules, known as amino
acids, that are considered to be one of the basic building blocks of the human
body. Chains of 2 to 50 amino acids are generally referred to as peptides,
while longer chains are referred to as proteins. We have modified natural
peptides by rearranging the order and combination of amino acids and by
substituting and deleting additional amino acids to produce magainins having a
broader spectrum of therapeutic activity and improved potency.

   In the presence of a cell membrane rich in acidic phospholipids and poor in
cholesterol, such as bacterial membranes, magainins twist into two-sided,
spiral shaped molecules (helices), with one side soluble in the fat-like
substance that comprise cell membranes and the other side soluble in water.
Individual magainin peptides

                                       25
<PAGE>

then aggregate and form a channel in the membrane of a pathogen. Once formed,
this aggregation of magainin peptides punctures the cell membrane, breaks down
the integrity of the cell and kills the pathogen. By rupturing bacteria and
targeting a fundamental difference in cell membrane composition, magainins
target and kill bacteria differently than traditional antibiotics. In certain
cases, cancer cells also exhibit sufficient acidic phospolipids on their
external membranes to be lysed by magainin peptides.

   Aminosterols and Angiogenesis  Squalamine was discovered in the body tissues
of the dogfish shark. The shark was initially examined because of its known
resistance to infection and cancer. The chemical structure of squalamine
uniquely combines a steroid and a polyamine, two classes of systemic agents
that are generally well-tolerated in humans. Beyond squalamine, we have
discovered several other aminosterol compounds in the shark. In preclinical
testing, some of these compounds have demonstrated an ability to control cell
growth, along with other pharmacologic properties. These properties may have
application in the treatment of a number of disease indications characterized
by cell proliferation, including cancer.

   Within the human body, a network of arteries, capillaries and veins, known
as the vasculature, functions to transport blood throughout the body. The basic
network of the vasculature is developed through angiogenesis, a fundamental
process by which new blood vessels are formed. This growth process primarily
occurs during the first three months of embryonic development. Once the general
network of the blood vessels is complete, certain inhibitory factors balance
and stabilize the stimulators of new blood vessel formation. Although
angiogenesis occurs in human embryonic development, wound healing and in
certain reproductive processes in women, angiogenesis is also associated with
several diseases, including diabetic retinopathy and macular degeneration, both
of which are major causes of blindness, and cancer.

   Cancer includes many different types of uncontrolled cellular growth.
Clusters of cancer cells, referred to as tumors, may invade and destroy
surrounding organs, impair physiological function and lead to death. In order
to survive, cancer cells require oxygen and nutrients, which are received from
the body's blood supply. In order to access this blood supply, cancer cells
initiate a biochemical mechanism that stimulates angiogenesis, which provides
the blood supply that nourishes the tumor. As cancer cells grow and metastasize
(spread from primary sites to secondary sites) they require continuous
angiogenesis. Anti-angiogenic substances are intended to inhibit the growth of
new blood vessels and may therefore be effective in treating certain cancers,
with potentially less serious and fewer adverse side effects than traditional
therapies.

 Genomics and Drug Discovery

   Advances in genetics and molecular biology have significantly enhanced the
ability of scientists to clone and sequence genes and identify the causes of
disease at the molecular level. Genomics, or the study of the genome, can be
applied to the examination of the genetic influences on human disease.
Functional genomics refers to the determination of the manner in which disease
genes specifically impact the disease process. In contrast to traditional drug
discovery and development, a genetic approach commences by identifying those
genes that are responsible for the initiation or progression of disease.
Analysis of DNA (deoxyribonucleic acid) helps characterize the specific role of
genes in the disease process. The information stored in the DNA of a gene acts
as a set of instructions to living cells of the organism. These instructions
direct the cells to synthesize specific proteins, such as hormones or enzymes
that perform the basic biochemical and physiological functions of the cells.
Disease may occur when a defect (mutation) occurs in a gene or genes, resulting
in incorrect instructions being sent to cells, and disrupting the normal
balance or function of these essential proteins. The ability to detect such a
mutation and to understand how the disruption of normal protein function
contributes to the initiation and progression of the resultant disease are
potentially valuable aids to pharmaceutical discovery and development. To
identify an appropriate molecular target for therapeutic intervention, it may
also be necessary to characterize fully the biochemical pathway in which the
disease gene functions.

   We employ a functional genomics approach to understand the genetic basis of
disease and to develop potential drug leads. Through these efforts we seek to
identify appropriate targets for pharmaceutical

                                       26
<PAGE>

intervention that aim to control the root cause of human disease. We believe
that pharmaceuticals developed for use against these specific targets have the
potential for greater effectiveness and fewer side effects than pharmaceuticals
developed through more traditional processes.

Product Development and Research Programs

 Squalamine--Solid Tumors

   Squalamine is the lead product development candidate in our aminosterol
program. Our initial disease focus for squalamine is solid tumors. We are
currently conducting Phase II clinical testing of squalamine in patients with
non-small cell lung cancer.

   The Phase II studies will test the safety and efficacy of squalamine in
combination with paclitaxel and carboplatin, the leading cytotoxic
chemotherapeutic regimen for the treatment of advanced non-small cell lung
cancer. Squalamine will be administered intravenously with each cycle of
chemotherapy. Efficacy will be assessed by the number of patients whose tumors
stop growing, along with the number of individuals who experience tumor
shrinkage.

   Additional clinical studies for squalamine are being planned in ovarian
cancer, pediatric neuroblastoma, and other solid tumors.

   Cancer is the second most common cause of death in the Western world,
exceeded only by coronary heart disease. Cancer patients are usually treated
with a combination of surgery, radiation therapy and chemotherapy. Surgery and
radiation therapy can be particularly effective in patients in which the
disease has not yet spread to other tissue or organs. Chemotherapy is the
principal treatment for tumors that have metastasized. Chemotherapy involves
the administration of so-called cytotoxic drugs designed to kill cancer cells,
or the administration of hormone analogues to either reduce the production of,
or block the action of, certain hormones, such as estrogens and androgens,
which affect the growth of tumors. Because chemotherapeutic agents generally
attack rapidly dividing cells indiscriminately, damaging both normal and
cancerous cells, chemotherapy patients often suffer serious side effects.
Additionally, resistance to chemotherapy inevitably occurs over time.

   With advances in the understanding of the genesis and development of cancer,
there are several new approaches to cancer treatment. One such approach is the
control of angiogenesis, or new blood vessel growth. Angiogenesis is a key
stage in the development of tumor malignancy, and its inhibition may contribute
to the tumor becoming or remaining dormant.

   Squalamine may be of benefit in the treatment of solid tumors by inhibiting
new blood vessel growth required for tumor nourishment. Squalamine has
exhibited anti-angiogenic properties in a number of in vitro and in vivo
assays, and in animal models. Squalamine is believed to inhibit the growth of
primitive or embryonic capillaries associated with tumor growth. Squalamine has
the potential to be used in combination with a number of cytotoxic drugs in the
treatment of solid tumors, and we have observed synergies with certain such
cytotoxic therapies in animal testing.

   We are also pursuing other research programs related to squalamine. Due to
its unique mechanism of action, squalamine may also have application in a
number of disease conditions characterized by abnormal blood vessel growths,
including diabetic retinopathy, age-related macular degeneration, rheumatoid
arthritis and psoriasis

 Respiratory Target Discovery and Product Development Program

   Asthma is characterized clinically by wheezing and shortness of breath due
to reversible bronchospasm. It is a chronic, disabling disorder that appears to
be increasing in prevalence and severity. The complex pathophysiology of asthma
is under intensive scrutiny by scientists and researchers; however, its precise
causes

                                       27
<PAGE>

are not well understood. A number of studies suggest asthma may have a genetic
basis, but family studies have been difficult to interpret due to other
influences, including allergens and pollutants. Allergic diseases, including
allergic rhinitis, are often present in individuals with asthma, but are also
individually important diseases. We believe the genetic susceptibility factors
for asthma and allergy will be, at least in part, related to one another.
Current treatment for asthma and allergies principally focuses on controlling
inflammation or treating airway constriction through use of bronchodilators and
steroids.

   In 1996, we initiated a research program in the genomics of asthma and
allergy. Our research program is primarily focussed on IL9, a gene which varies
in DNA structure and function in asthmatic and allergic humans and animals. We
maintain a comprehensive research and development program to identify
additional genes which may be implicated in asthma and allergy. The IL9
receptor has been discovered in humans as a key second gene candidate, and we
have also identified other genes. We continue to investigate the role of these
genes in the allergic inflammatory response, with the objective of utilizing
the optimal biologic gene targets in the development of novel therapeutics for
asthma and allergy.

   Biologics Based Anti-IL9 Therapeutics. In December 1998, we entered into a
collaborative research and option agreement with Genentech, Inc. relating to
development of a protein therapeutic in asthma. Under this agreement, Genentech
will be provided access to a therapeutic target (IL9), which is in our
proprietary Asthma Gene Database, and the companies will conduct a
collaborative one-year program to evaluate the utility of a blocking antibody
to IL9 in suppressing the asthmatic response.

   Asthma Gene Database (Screening Program). We also employ functional genomics
to discover small molecule targets for asthma and allergy. Numerous targets
have been identified, validated and added to our Asthma Gene Database.
Libraries can be screened for activity against these targets using our
comprehensive proprietary high throughput screening programs. We are engaged in
discussions regarding potential collaborations in this area.

   Small Molecule Therapeutics. We have identified aminosterols, including MSI-
1432, that block T-cell adhesion and proliferation in response to antigens. The
effect of MSI-1432 in reducing asthmatic response in animal models is
comparable to systemic corticosteroids with an improved side-effect profile and
no measurable effect on hematologic cells. Inhalation systems are being
investigated and additional preclinical studies are being conducted in
preparation for clinical development.

 LOCILEX(TM)

   LOCILEX(TM) Cream has been our lead product development candidate.
LOCILEX(TM) is a topical cream antibiotic intended for the treatment of
infection in diabetic foot ulcers.

   On July 26, 1999, we announced that we received notification from the FDA
that our NDA for LOCILEX(TM) Cream had been deemed not approvable. In order to
again seek approval of LOCILEX(TM) Cream, the FDA has indicated that we must
conduct further development activities, including clinical and manufacturing
activities. We are currently considering the feasibility of continuing the
program.

 Other Pre-Clinical Research Programs

   Other Peptides. Our peptides have demonstrated in pre-clinical testing the
potential for broad application in a number of other indications:

  .  Cancer / Tumorcidal: MSI-1857 is a chemically modified magainin peptide
     formulated for systemic delivery. In preclinical animal models, MSI-1857
     enhances the cellular uptake and activity of standard chemotherapeutics
     against tumors. MSI-1596 is an antibiotic peptide with similar activity
     to MSI-1857. Preclinical testing of MSI-1596 in animal models is
     underway where demonstration of substantial anti-tumor activity may
     provide for a rapid clinical development program. These peptides appear
     to be useful against multi-drug resistant tumors.

                                       28
<PAGE>

  .  Systemic Infections: Magainin peptides are broad spectrum antibiotics
     that have shown no resistance or cross-resistance to other anti-
     infectives in testing to date. Preclinical data demonstrates activity
     against pathogens in various infectious disease models.

  .  Other Topical Infections: Various magainin peptides have shown promise
     in a broad variety of applications including eye infections, acne,
     sexually transmitted diseases and yeast infections. There may also be
     potential use against viruses, including rhinoviruses that cause the
     common cold.

  .  Agricultural Anti-fungal: Ornamental plants genetically altered to
     express certain magainins have shown resistance to fungal and other crop
     diseases. A variety of agricultural applications are being considered.

   An E.coli-based recombinant manufacturing process is under development at
Magainin. Recombinant methods would increase the availability, and decrease the
cost, of magainin peptides for various applications.

   Other Aminosterols. We have discovered a number of other aminosterol
compounds in the shark, each differing from squalamine in chemical structure
and interacting with a specific receptor. These compounds affect the
intracellular metabolism in a manner that disturbs the target cell responses to
certain growth factors, hormones and other signals. Therapeutic opportunities
for these compounds may include obesity, various malignancies, inflammatory
diseases, and viral infections.

   Defensins. In the process of researching animal host-defenses across
different species, we have helped demonstrate that all species, including
humans, utilize some form of local antimicrobial defense beyond their systemic
immune systems. In humans, we have identified host-defense molecules
(defensins) in the lungs, the GI tract and skin. We have also identified
several natural "inducers" of local antimicrobial defenses. Some of these
compounds are found in nature, are generally regarded as safe (i.e., GRAS
substances), and may possess novel nutritional as well as pharmaceutical
immunostimulant applications.

Collaborative Arrangements

 Development and Marketing Collaborations

   Collaborations may allow us to leverage our scientific and financial
resources and gain access to markets and technologies that would not otherwise
be available to us. In the long term, development and marketing arrangements
with established companies in the markets in which potential products will
compete may allow our potential products more efficient access to intended
markets and may accordingly conserve our resources. We expect that we will
enter into development and marketing arrangements for most of the products we
may develop. From time to time, we hold discussions with various potential
partners.

   In February 1997, we entered into a development, supply and distribution
agreement in North America with SmithKline for LOCILEX(TM) Cream. SmithKline
has paid us $10,000,000 under this agreement, which we received in 1997.
SmithKline may make additional payments to us upon the occurrence of approval
and certain product milestones. We had hoped to commercialize LOCILEX(TM) Cream
in the near term. However, with the FDA's decision, near term commercialization
of LOCILEX(TM) Cream will not occur, and we will generate no revenues from
LOCILEX(TM) Cream in the near future. The SmithKline Agreement also gives
SmithKline rights to terminate the arrangement, and, under certain conditions,
the right to negotiate for rights to another Magainin product development
candidate.

   In December 1998, we entered into a collaborative research and option
agreement with Genentech, Inc. relating to a protein therapeutic in asthma.
Under this agreement, we will provide Genentech with access to a therapeutic
target (IL9), that is in our proprietary asthma gene database, and we will
jointly conduct a one-year collaborative program to evaluate the utility of a
blocking antibody to IL9 in suppressing the asthmatic response. Under this
collaborative agreement, Genentech made an initial equity investment of
$2,000,000 in our

                                       29
<PAGE>

company, and has an option to enter into a future development and
commercialization agreement with our company. Any such future development and
commercialization agreement could provide for payments to us of up to
$35,000,000, upon terms to be negotiated, and royalty payments on sales of
products developed by Genentech in the field.

 Research and License Agreements

   We have rights under license agreements to several patents and patent
applications under which we expect to owe royalties on sales of any products
that are covered by issued patent claims. Additionally, certain of these
agreements also provide that if we elect not to pursue the commercial
development of any licensed technology, or do not adhere to an acceptable
schedule of commercialization, then our exclusive rights to such technology
would terminate. We also fund research at certain institutions, and these
relationships may provide us with an option to license any results of the
research.

Manufacturing

   We currently have neither the resources, the facilities, nor the technical
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no current plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the
number of companies that are capable of producing our proposed products is
limited. We may be unable to maintain arrangements with qualified outside
contractors to manufacture materials at costs which are affordable to us, if at
all.

   Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a
manufacturing process. In order to engage another manufacturer, we may need to
obtain a license or other technology transfer from the original contract
manufacturer. Even if a license is available from the original contract
manufacturer on acceptable terms, we may be unable to successfully effect the
transfer of the technology to the new contract manufacturer. Any such
technology transfer may also require the transfer of requisite data for
regulatory purposes, including information contained in a proprietary drug
master file held by a contract manufacturer. If we rely on a contract
manufacturer that owns the drug master file, our ability to change contract
manufacturers may be limited.

   The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of traditional antibiotics.
We are pursuing alternative manufacturing sources, including recombinant
manufacturing, in order to improve the gross margins available to us on any
sales of these products. These programs, however, are at an early stage and
will require significant expenditures over an extended period of time.
Ultimately, we may be unable to develop a more cost-effective manufacturing
process, and even if we develop a more cost-effective process, the FDA may not
approve such a process.

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

Government Regulation

   Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.

   Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A

                                       30
<PAGE>

delay or denial of regulatory approval for any of our drug candidates, such as
that which has occurred for LOCILEX(TM) Cream, will materially affect our
business. Even if we receive approval of a product candidate, it may be
conditioned upon certain limitations and restrictions as to how the drug is
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.

 FDA Marketing Approval

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

  .  grant marketing approval;

  .  require additional testing or information; or

  .  deny the application.

 FDA Manufacturing Approval

   Detailed manufacturing information is also required to be included in the
NDA for review and approval by the FDA. All manufacturing facilities and
processes must comply with the good manufacturing practice regulations
prescribed by the FDA. All manufacturers must, among other things, pass an
inspection of their plants and detailed manufacturing records and processes.
Among other things, it must be demonstrated that:

  .  the drug product can be consistently manufactured at the same quality
     standard;

  .  the drug product is stable over time; and

  .  the level of chemical impurities in the drug product are under a
     designated level.

   As a result of its review of manufacturing of LOCILEX(TM) Cream, the FDA
issued certain observations of deficiencies in compliance with good
manufacturing procedures. In any additional clinical studies to be conducted,
new batches of the cream product will need to be manufactured from the bulk
drug substance, in compliance with good manufacturing procedures, and meeting
strict product specifications.

 Ongoing FDA Oversight

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

  .  require additional submissions if there are any modifications to the
     drug product, including, for example, any changes in manufacturing
     process, labeling, or manufacturing facility;

  .  require post-marketing testing and surveillance to monitor the effects
     of approved drug products; and

  .  enforce conditional approvals that restrict the commercial applications
     of a drug product.

                                       31
<PAGE>

   Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting that may adversely affect our
business.

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

 Other Regulatory Bodies

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

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

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

Patent and Proprietary Rights; Licensed Technology

 Patents

   Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon commercialization could be
diminished.

   We cannot be certain that:

  .  patents will issue from any of our patent applications;

  .  our patent rights will be sufficient to protect our technology;

  .  our patents will not be successfully challenged or circumvented by our
     competitors; or

  .  our patent rights will provide us with any commercial advantages.

   The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because United States
patent applications are maintained in secrecy until a patent issues, and
publications in the scientific or patent literature lag behind actual
discoveries.

   Even after we are issued patent rights, we cannot be certain that:

  .  others will not develop similar technologies;

  .  others will not design around the patented aspects of the technology;

  .  we will not be obliged to defend ourselves in court against allegations
     of infringement of third-party patents;

  .  our issued patents will be held valid in court; and

                                       32
<PAGE>

  .  an adverse outcome in a suit would not subject us to significant
     liabilities to third parties, require rights to be licensed from third
     parties, or require us to cease using such technology.

   The cost of litigation can be substantial, regardless of the outcome.

 Potential Ownership Disputes

   There may be disputes arising as to the ownership of our technology. Most of
our research and development team previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when the technology was developed, and
assert rights to the technology. These kind of disputes have occurred in the
past. We may not prevail in any such disputes.

   Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be a dispute as to the capacity in which consultants
are operating when they make certain discoveries. We may not prevail in any
such disputes.

 Other Intellectual Property

   In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators and sponsored
researchers and other advisors. We may find that these agreements will be
breached, or that our trade secrets have otherwise become known or
independently developed or discovered by our competitors.

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

Competition

   The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense
systems is being conducted by others. Many companies are also currently
involved in research and development activities focused on the pathogenesis of
disease, and the competition among companies attempting to find genes
responsible for disease is intense. Most of these entities have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources than we have. We will also face competition from companies using
different or advanced techniques that may render our products obsolete.

   We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that
have significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining
regulatory approvals of such products. Some of these companies may be in
advanced phases of clinical testing of various drugs that may be competitive
with our proposed products.

   Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that they
have developed, some of which may be directly competitive with our technology.
In addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting
highly qualified scientific personnel.

                                       33
<PAGE>

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

   Many companies are working to develop and market products intended for the
additional disease areas we are targeting, including cancer and asthma. A
number of major pharmaceutical companies have significant franchises in these
disease areas, and can be expected to invest heavily to protect their
interests. In the cancer field, anti-angiogenic agents are under development at
a number of companies. In the asthma field, other biopharmaceutical companies
have also reported the discovery of genes relating to asthma.

Legal Proceedings

   We are not a party to any material legal proceedings.

Employees

   As of September 24, 1999, we had 49 full-time employees. No employees are
covered by collective bargaining agreements, and we consider relations with our
employees to be good.

Properties

   We lease an aggregate of approximately 26,000 square feet of space in
Plymouth Meeting, Pennsylvania for office and laboratory space. Our leases
expire in 2001 and 2002, and provide for minimum annual payments of
approximately $411,000 in 1999 and annual increases thereafter.

                                       34
<PAGE>

                                   MANAGEMENT

Directors, Executive Officers and Key Employees

   The following table sets forth certain information with respect to our
directors, executive officers and key employees:

<TABLE>
<CAPTION>
               Name                Age Position
               ----                --- --------
 <C>                               <C> <S>
 Michael R. Dougherty.............  41 President, Chief Executive Officer,
                                       Chief Financial Officer and Director
 Roy C. Levitt, M.D...............  46 Executive Vice President, Chief
                                       Operating Officer and Director
 Michael A. Zasloff, M.D., Ph.D...  53 Vice Chairman, Executive Vice President
                                       and Director
 Kenneth J. Holroyd, M.D..........  41 Senior Vice President
 Zola P. Horovitz, Ph.D...........  64 Chairman of the Board
 Bernard Canavan, M.D.............  63 Director
 Charles A. Sanders, M.D..........  67 Director
 Robert F. Shapiro................  64 Director
 James B. Wyngaarden, M.D.........  74 Director
</TABLE>

   Mr. Dougherty has served as our President and Chief Executive Officer since
August 1998. Mr. Dougherty served as Executive Vice President from March 1995
through August 1998, and as a Director since August 1997. From August 1993,
when he joined us, until March 1995, Mr. Dougherty served as Senior Vice
President. Mr. Dougherty has also served as our Chief Financial Officer since
August 1993. Prior to joining us, Mr. Dougherty served in the following
capacities at Centocor, Inc. (a biopharmaceutical company): Senior Vice
President, Chief Financial Officer and Treasurer, from February 1992 to August
1993, Vice President Corporate Finance from May 1990 to February 1992 and
Treasurer from June 1986 to May 1990.

   Dr. Levitt has served as our Executive Vice President and Chief Operating
Officer since August 1998. Dr. Levitt was appointed our head of Research and
Development, and a Director in August 1997. Dr. Levitt has served as Executive
Vice President since joining us on a full-time basis in January 1996. Prior to
joining, Dr. Levitt served as a consultant to Magainin beginning in 1995. Dr.
Levitt served as a faculty member at Johns Hopkins University in the Department
of Anesthesiology and Critical Care Medicine, from 1986 to 1995, in
Neurological Surgery from 1995 to 1996 and in the Department of Environmental
Health Sciences in the Johns Hopkins School of Public Health and Hygiene from
1988 to 1996.

   Dr. Zasloff has served as our Executive Vice President since July 1992. In
July 1996, Dr. Zasloff was appointed Vice Chairman of the Board. From 1988
until Dr. Zasloff joined us on a full-time basis in July 1992, Dr. Zasloff was
our Chief Scientific Advisor and served as the Charles E.H. Upham Professor,
Department of Pediatrics and Genetics, University of Pennsylvania School of
Medicine, and Chief, Division of Human Genetics and Molecular Biology, The
Children's Hospital of Philadelphia. From 1982 until 1988, Dr. Zasloff was
Chief, Human Genetics Branch, National Institutes of Child Health and Human
Development, National Institutes of Health. Dr. Zasloff currently also serves
as Adjunct Professor, Department of Human Genetics and Orthopedics, University
of Pennsylvania School of Medicine.

   Dr. Holroyd has served as Senior Vice President, Clinical Research and
Regulatory Affairs since June 1998. Dr. Holroyd has held various positions,
including Vice President of Respiratory Discovery Research, Product Development
and Business Development, since joining us in February 1997. Prior to joining
us, Dr. Holroyd was a faculty member and head of respiratory care services at
Johns Hopkins University School of Medicine and Hospital in the Department of
Anesthesiology and Critical Care Medicine. Dr. Holroyd earned his M.D. from
Johns Hopkins in 1984 and completed his residency training at Johns Hopkins
serving as chief resident of the Osler Medical Service and at the National
Heart, Lung and Blood Institute.

   Dr. Horovitz has served as Chairman of the Board of Directors since August
1998, and a director of Magainin since 1995. Dr. Horovitz was employed by
Bristol-Myers Squibb Company and its predecessor,

                                       35
<PAGE>

Squibb Corporation, for over thirty years. At the time of his retirement in
1994, Dr. Horovitz was Vice President of Business Development at Bristol-Myers.
Dr. Horovitz is currently a consultant to the pharmaceutical and biotechnology
industries, and is a director of Avigen, Inc., Clinicor, Inc., Procept, Inc.,
Synaptic Pharmaceutical Corporation, Diacrin, Inc., BioCryst Pharmaceuticals,
Inc. and Roberts Pharmaceutical Corporation.

   Dr. Canavan has served as a director of Magainin since 1994. Dr. Canavan was
employed by American Home Products Corporation for over twenty-five years until
his retirement in February 1994. From June 1990 until January 1994, he was
President of American Home Products Corporation and was responsible for all
operations, including its pharmaceutical businesses worldwide. Previously, Dr.
Canavan was Chairman and Chief Executive Officer of American Home Products
Corporation's pharmaceutical company, Wyeth-Ayerst Laboratories. Dr. Canavan is
also a director of Alpha-Beta Technology, Inc. and BioChem Pharma Inc.

   Dr. Sanders has served as a director of Magainin since September 1996. Dr.
Sanders is the retired Chairman and Chief Executive Officer of Glaxo Inc.,
where he was employed from 1989 to 1995. Previously, Dr. Sanders was Vice
Chairman of Squibb Corporation and also served as General Director of
Massachusetts General Hospital. Dr. Sanders is a director of Scios Inc., Vertex
Pharmaceuticals Incorporated, StaffMark, Inc., Kendle International Inc.,
Pharmacopeia, Inc. and Trimeris, Inc.

   Mr. Shapiro has served as a director of Magainin since September 1996. In
1997, Mr. Shapiro joined Klingenstein, Fields and Co., LLC, an investment
management firm, as Vice Chairman and Partner. Since 1988, Mr. Shapiro has also
served as President of RFS & Associates, Inc., a private investment and
consulting firm. Previously, Mr. Shapiro served as President and Co-Chairman of
Wertheim Schroder & Co., Inc. and Chairman of New Street Capital Corporation,
investment banking firms. Mr. Shapiro is a director of American Buildings
Company, The Burnham Fund, Inc., Equitable Capital Partners, L.P. and The TJX
Companies, Inc.

   Dr. Wyngaarden has served as a director of Magainin since September 1996.
Since 1998, Dr. Wyngaarden has served as a Professor of Medicine at Duke
University Medical School. Since 1996, Dr. Wyngaarden has been a partner in the
Washington Advisory Group, a consulting firm. From 1995 to 1997, Dr. Wyngaarden
was a Senior Associate Dean, International Affairs, University of Pennsylvania
Medical School. From 1990 to 1994, Dr. Wyngaarden was Foreign Secretary of the
U.S. National Academy of Sciences and Institute of Medicine. From 1990 to 1994,
Dr. Wyngaarden also served as Associate Dean at Duke University Medical School.
Dr. Wyngaarden previously served in several capacities, including as the
Director of the National Institutes of Health. Dr. Wyngaarden is a director of
Hybridon, Inc. and Human Genome Sciences, Inc.

   Officers are elected or appointed by the Board of Directors to serve until
the appointment or election and qualification of their successors or their
earlier termination or resignation.

   Our board of directors consists of such number of directors as is fixed from
time to time by resolution adopted by the board of directors. All directors
hold office until the next annual meeting of stockholders or until the election
and qualification of their successor.

   The board of directors annually elects from its members an Executive
Committee, Audit Committee, Compensation Committee and Nominating Committee.

   The Executive Committee may exercise, with certain exceptions, all of the
authority of the board in the management of our business and affairs. The
Executive Committee is intended to serve in the event that action must be taken
by the board of directors at a time when convening a meeting of the entire
board is not feasible. The current members of the Executive Committee are Mr.
Dougherty and Dr. Horovitz.

   The Audit Committee is responsible for providing general oversight with
respect to the accounting principles employed in our financial reporting. The
Audit Committee meets at least annually with our principal financial and
accounting officers and independent public accountants to review the scope of
auditing procedures, our policies relating to internal auditing and accounting
procedures and controls, and to discuss results of the annual audit of our
financial statements. The current members of the Audit Committee are
Dr. Horovitz and Mr. Shapiro, both non-employee members of the board of
directors.

                                       36
<PAGE>

   The Compensation Committee has general supervisory power over, and the power
to grant awards under, our equity compensation plans. In addition, the
Compensation Committee recommends to the board the compensation of our
President and Chief Executive Officer, reviews and takes action on the
recommendations of the President and Chief Executive Officer as to the
compensation of our other officers and key personnel, approves the grants of
any bonuses to officers, and reviews other compensation matters generally. The
current members of the Compensation Committee are Dr. Canavan and Dr. Sanders.

   The Nominating Committee is authorized to consider candidates for directors
of Magainin. It is the policy of the Nominating Committee to consider director
nominees recommended by stockholders. The current members of the Nominating
Committee are Mr. Dougherty and Dr. Wyngaarden.

   All non-employee directors receive an annual fee of $15,000 for their
services to Magainin as directors, and are reimbursed for expenses incurred in
connection with attending meetings of the board of directors. As Chairman of
the Board, Dr. Horovitz receives an additional annual fee of $45,000.

Compensation of Executive Officers and Directors

   The following table sets forth for the years ended December 31, 1998, 1997
and 1996 information regarding compensation paid by us to our Chief Executive
Officer, our four other most highly paid executive officers as of December 31,
1998 and our former Chief Executive Officer.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                        Long-Term Compensation
                                                        -----------------------
                                 Annual Compensation    Restricted  Securities
                                 ----------------------   Stock     Underlying   All Other
   Name and Principal
        Position            Year  Salary        Bonus     Awards   Options/SARs Compensation
   ------------------       ---- ----------   --------- ---------- ------------ ------------
<S>                         <C>  <C>          <C>       <C>        <C>          <C>           <C>
Michael R. Dougherty....    1998 $ 246,132    $  40,000    $ 0       170,000      $     0
   President, Chief
   Executive Officer        1997   215,507       66,000      0        50,000            0
   and Chief Financial
   Officer                  1996   197,380       77,000      0        90,000            0

Roy C. Levitt, M.D......    1998 $ 246,164    $  30,000    $ 0       150,000      $37,188(1)
   Executive Vice
   President and........    1997   230,098       66,000      0        60,000            0
   Chief Operating
   Officer..............    1996   194,063       77,000      0        95,000       27,800

Michael A. Zasloff,
 M.D., Ph.D.............    1998 $ 250,350    $  20,000    $ 0        60,000      $     0
   Vice Chairman and
   Executive............    1997   237,356       67,000      0        40,000            0
   Vice President.......    1996   225,072       90,000      0        95,000            0

Thomas J. Bigger........    1998 $ 223,860    $   5,000    $ 0        20,000      $     0
   Senior Vice President
   (2)..................    1997   214,200       40,000      0        27,000            0
                            1996   105,000       30,000      0       125,000       29,500

Kenneth J. Holroyd,
 M.D....................    1998 $ 196,646    $  20,000    $ 0       120,000      $     0
   Senior Vice President
   (3)

Jay Moorin..............    1998 $ 171,124(4) $       0    $ 0             0      $     0
   Former Chairman,
   President and........    1997   294,053      100,000      0        70,000            0
   Chief Executive
   Officer..............    1996   266,500      125,000      0       105,000            0
</TABLE>
--------
(1) Dr. Levitt was issued 8,500 shares of common stock in July, 1998 pursuant
    to his employment agreement.
(2)  Mr. Bigger joined Magainin in July 1996 and resigned in 1999.
(3)  Dr. Holroyd became an executive officer in 1998.
(4)  Mr. Moorin ceased to be an executive officer and director upon his
     resignation from Magainin on August 3, 1998. Mr. Moorin was retained as a
     consultant to Magainin through July 1999. See "Other Compensation."

                                       37
<PAGE>

Stock Option Information

   The following table sets forth certain information regarding stock options
granted during 1998 to the persons named in the Summary Compensation Table.

                             Option Grants in 1998

<TABLE>
<CAPTION>
                                   Individual Grants(1)
                         ----------------------------------------- Potential Realizable
                                    Percent of                       Value At Assumed
                         Number of    Total                        Annual Rates of Stock
                         Securities  Options                        Price Appreciation
                         Underlying Granted to                      for Option Term(2)
                          Options   Employees  Exercise Expiration ---------------------
          Name            Granted    in 1998    Price      Date              5%             10%
          ----           ---------- ---------- -------- ---------- --------------------- --------
<S>                      <C>        <C>        <C>      <C>        <C>                   <C>
Michael R. Dougherty....   70,000       8%      $4.63    7/13/2008       $203,605        $515,974
                          100,000      11%      $3.25   12/14/2008       $204,391        $517,996
Roy C. Levitt, M.D......   60,000       7%      $4.63    7/13/2008       $174,518        $442,264
                           90,000      10%      $3.25   12/14/2008       $183,952        $466,170
Michael A. Zasloff,
 M.D., Ph.D.............   40,000       4%      $5.75    7/24/2008       $144,646        $366,561
                           20,000       2%      $3.25   12/14/2008       $ 40,878        $103,593
Thomas J. Bigger........   20,000       2%      $5.75    7/24/2008       $ 72,323        $183,280
Kenneth J. Holroyd,
 M.D....................   50,000       5%      $5.56    6/16/2008       $165,085        $418,357
                           30,000       3%      $5.75    7/24/2008       $108,484        $274,921
                           40,000       4%      $3.25   12/14/2008       $ 81,756        $207,187
Jay Moorin (3)..........        0       0%      $0.00          --        $      0        $      0
</TABLE>
--------
(1) Options are non-qualified stock options to acquire shares of common stock
    with a stated term of ten years, vesting in four annual installments
    beginning one year after the date of grant. If a "change in control" (as
    defined in the 1992 Stock Option Plan and 1998 Equity Compensation Plan)
    were to occur, these options would become immediately exercisable in full.
(2) Potential Realizable Values are based on an assumption that the stock price
    of the common stock starts equal to the exercise price shown for each
    particular option grant and appreciates at the annual rate shown
    (compounded annually) from the date of grant until the end of the term of
    the option. These amounts are reported net of the option exercise price,
    but before any taxes associated with exercise or subsequent sale of the
    underlying stock. The actual value, if any, an option holder may realize
    will be a function of the extent to which the stock price exceeds the
    exercise price on the date the option is exercised and also will depend on
    the option holder's continued employment through the vesting period. The
    actual value to be realized by the option holder may be greater or less
    than the values estimated in this table.
(3) Mr. Moorin ceased to be an executive officer and director upon his
    resignation from Magainin on August 3, 1998.

                                       38
<PAGE>

   The following table sets forth certain information regarding stock option
exercises during 1998 and the value of vested and unvested options for the
persons named in the Summary Compensation Table as of December 31, 1998. Year-
end values are based upon a price of $3.188 per share, which was the closing
market price of a share of our common stock on December 31, 1998.

         Aggregated Option Exercises in 1998 and Year-End Option Values

<TABLE>
<CAPTION>
                                                                          Value of Unexercised
                                                Number of Unexercised         In-the-Money
                                                     Options at                Options at
                           Shares                 December 31, 1998         December 31, 1998
                         Acquired on  Value   ------------------------- -------------------------
Name                      Exercise   Realized Exercisable Unexercisable Exercisable Unexercisable
----                     ----------- -------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>      <C>         <C>           <C>         <C>
Michael R. Dougherty....         0   $      0   207,000      265,000     $      0       $   0
Roy C. Levitt, M.D......         0   $      0   172,500      282,500     $      0       $   0
Michael A. Zasloff,
 M.D., PhD..............   137,758   $843,768   211,250      151,750     $      0       $   0
Thomas J. Bigger........         0   $      0    69,375      103,125     $      0       $   0
Kenneth J. Holroyd,
 M.D....................         0   $      0    28,275      156,625     $      0       $   0
Jay Moorin(1)...........         0   $      0   816,862      121,750     $707,587       $   0
</TABLE>
--------
(1) Mr. Moorin ceased to be an executive officer and director upon his
    resignation from Magainin on August 3, 1998.

Other Compensation

   We have entered into an employment agreement with Dr. Zasloff pursuant to
which, among other things, Dr. Zasloff will receive a $50,000 bonus upon
approval by the FDA of the first product developed by us under his direction.

   In January 1996, we entered into an employment agreement with Dr. Levitt
pursuant to which, among other things, Dr. Levitt will receive up to an
additional 75,000 options in the event certain milestones are achieved in a
certain area of research.

   In August 1998, we entered into a consulting agreement with Mr. Moorin in
connection with his resignation from Magainin. The agreement covered the period
August 1998 to August 1999 and provided for cash compensation to Mr. Moorin of
$343,355, a continuation of Mr. Moorin's stock options, other than the option
described below, through the term of the consulting agreement, and payments
equal to the cost of health insurance for a twelve month period. Under a
previous agreement Mr. Moorin was granted an option, which is currently
exercisable in full, to acquire 595,612 shares of common stock at an exercise
price of $2.00 per share. This option will remain exercisable through 2001,
notwithstanding the termination of Mr. Moorin's employment relationship.

   The 1998 Equity Compensation Plan provides for the issuance of up to 375,000
shares of common stock. In 1998, we reserved a total of 146,000 shares for
issuance under the plan, as follows: 50,000 shares to Mr. Dougherty, 36,000
shares to Dr. Levitt, 20,000 shares to Dr. Zasloff, 20,000 shares to Mr. Bigger
and 20,000 shares to Dr. Holroyd subject to certain conditions. Shares will be
issued to each executive officer at a rate of 25% each year beginning in July
1999, provided that the officer is still employed by Magainin.

   We do not currently grant any long-term incentives, other than stock options
and awards, to its executives or other employees. Similarly, we do not sponsor
any defined benefit or actuarial plans at this time.

   Our executive officers are entitled to receive six to twelve months' base
salary in the event we terminate their employment without "cause." In addition,
in the event that Dr. Levitt is terminated prior to January 1, 2001 for reasons
other than "cause", we will be obligated to pay royalties to Dr. Levitt with
respect to certain intellectual property transferred by Dr. Levitt to Magainin.

                                       39
<PAGE>

                             PRINCIPAL STOCKHOLDERS

   The following table sets forth certain information as of September 23, 1999,
except as otherwise noted, regarding the ownership of our common stock by:

  .  each person known by us to be the beneficial owner of more than five
     percent of the outstanding common stock;

  .  each of our directors;

  .  each of our executive officers named in the Summary Compensation Table
     included elsewhere in this prospectus; and

  .  all of our current executive officers and directors as a group.

<TABLE>
<CAPTION>
                                                           Percentage
                                                      Beneficially Owned(2)
                                                      ------------------------
                                  Number of Shares     Prior to       After
Beneficial Owner                Beneficially Owned(1)  Offering      Offering
----------------                --------------------- ----------    ----------
<S>                             <C>                   <C>           <C>
Wellington Management Company,
 LLP("Wellington")(3)(4)......        3,119,900               12.6%         10.4%
  75 State Street
  Boston, MA 02109
Vanguard Specialized Funds-
 Vanguard Health Care
 Fund("Vanguard")(3)(4).......        1,278,100                5.1%          4.3%
  P.O. Box 2600
  Valley Forge, PA 19482
Healthcare Ventures V,
 L.P.("Healthcare
 Ventures")(3)(5).............        2,073,500                8.3%          6.9%
Healthcare Partners V,
 L.P.("Healthcare
 Partners")(3)(5).............        2,073,500                8.3%          6.9%
James H. Cavanaugh,
 Ph.D.(3)(5)(6)...............        2,217,037                8.9%          7.4%
Harold R. Werner (3)(5)(6)....        2,219,575                8.9%          7.4%
John W. Littlechild
 (3)(5)(6)....................        2,214,716                8.9%          7.4%
William Crouse (3)(5)(6)......        2,214,716                8.9%          7.4%
Mark Leschly (3)(5)...........        2,073,500                8.3%          6.9%
Larry N. Feinberg (3).........        1,790,300                7.2%          6.0%
  c/o Oracle Investment
   Management Inc.
  712 Fifth Avenue, 45th Floor
  New York, NY 10019
Jay Moorin (7)................          869,612                3.5%          2.9%
Michael A. Zasloff, M.D.,
 Ph.D.(8).....................          606,070                2.4%          2.0%
Roy C. Levitt, M.D.(9)........          294,625                1.2%          1.0%
Michael R. Dougherty (10).....          282,000                1.1%            *
Robert F. Shapiro (11)........          109,250                  *             *
Kenneth J. Holroyd, M.D.(12)..           66,750                  *             *
Zola P. Horovitz, Ph.D.(13)...           38,750                  *             *
Bernard Canavan, M.D.(14).....           29,750                  *             *
Charles A. Sanders, M.D.(15)..           21,250                  *             *
James B. Wyngaarden,
 M.D.(15).....................           16,750                  *             *
Thomas J. Bigger(16)..........                0                  *             *
All current executive officers
 and directors as a group (9
 persons)(17).................        1,465,195                5.9%          4.9%
</TABLE>
--------
  * Less than one percent.
 (1) Nature of ownership consists of sole voting and investment power unless
     otherwise indicated. The number of shares indicated includes shares
     issuable upon the exercise of outstanding stock options and warrants held
     by each individual or group to the extent such options and warrants are
     exercisable within sixty days of September 23, 1999.

                                       40
<PAGE>

 (2) The percentage for each individual or group is based on the aggregate of
     the shares outstanding as of September 23, 1999 (22,911,616 shares) and
     all shares issuable upon the exercise of outstanding stock options and
     warrants held by such individual or group to the extent such options and
     warrants are exercisable within sixty days of September 23, 1999.
 (3) This information is presented in reliance on information disclosed in a
     Schedule 13G filed with the Commission and reporting as of December 31,
     1998.
 (4) Of the shares reported, Wellington shares dispositive power with respect
     to all 3,119,900 shares and shares voting power with respect to 1,644,100
     shares. The Wellington shares include 1,278,100 shares reported separately
     by Vanguard for which shared dispositive power was claimed by Vanguard.
 (5) Healthcare Ventures is a Delaware limited partnership of which Healthcare
     Partners is the general partner. Dr. Cavanaugh and Messrs. Werner,
     Littlechild, Crouse and Leschly were the general partners of Healthcare
     Partners as of the date of its Schedule 13G. The business address for
     Healthcare Ventures, Healthcare Partners, Dr. Cavanuagh, and Messrs.
     Werner and Crouse is 44 Nassau Street, Princeton, NJ 08542. The business
     address for Messrs. Littlechild and Leschly is One Kendall Square,
     Building 300, Cambridge, MA 02139. Beneficial ownership reported includes
     2,073,500 shares held by Healthcare Ventures. Voting and dispositive power
     are shared among Healthcare Ventures, Healthcare Partners, Dr. Cavanuagh
     and Messrs. Werner, Littlechild, Crouse and Leschly.
 (6) Beneficial ownership includes warrants to purchase 141,216 shares, for
     which voting and dispositive power are shared among Dr. Cavanaugh and
     Messrs. Werner, Littlechild and Crouse.
 (7) To the best of our knowledge, this includes 869,112 shares of Common Stock
     issuable upon exercise of options, and 500 shares of Common Stock owned by
     Mr. Moorin's wife as to which shares Mr. Moorin disclaimed beneficial
     ownership.
 (8) Includes 261,000 shares of Common Stock issuable upon exercise of options,
     172,312 shares of Common Stock held by Mr. Zasloff's wife and 30,000
     shares of Common Stock in trusts for the benefit of certain members of Dr.
     Zasloff's family.
 (9) Includes 262,500 shares of Common Stock issuable upon exercise of options
     and 2,120 shares of Common Stock held in accounts of family members.
(10) Includes 264,500 shares of Common Stock issuable upon exercise of options.
(11) Includes 16,250 shares of Common Stock issuable upon exercise of options,
     5,000 shares of Common Stock held in an account for a foundation for which
     Mr. Shapiro is a trustee, and 10,000 shares owned by Mr. Shapiro's wife,
     as to which shares Mr. Shapiro disclaims beneficial ownership.
(12) Includes 52,750 shares of Common Stock issuable upon exercise of options
     and 9,000 shares of Common Stock held in a joint account where voting and
     investment power are shared.
(13) Includes 35,000 shares of Common Stock issuable upon exercise of options.
(14) Includes 28,750 shares of Common Stock issuable upon exercise of options.
(15) Includes 16,250 shares of Common Stock issuable upon exercise of options.
(16) Mr. Bigger resigned from Magainin in May 1999.
(17) See (8) through (15) above.

                                       41
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

Our Authorized Capital Stock

  .  45,000,000 shares of common stock, par value $0.002 per share, of which
     22,911,616 were outstanding as of June 30, 1999.

  .  9,211,031 shares of preferred stock, par value $0.001 per share, none of
     which were outstanding as of June 30, 1999.

  .  immediately after the sale of the shares of common stock in this
     offering, we will have 27,911,616 shares of common stock outstanding and
     no shares of preferred stock outstanding.

  .  as of June 30, 1999, we had outstanding options to purchase an aggregate
     of 3,552,000 shares of our common stock and warrants to purchase an
     aggregate of 1,560,644 shares of our common stock.

Common Stock

 Voting:

  .  one vote for each share held of record on all matters submitted to a
     vote of stockholders;

  .  no cumulative voting rights;

  .  election of directors by plurality of votes cast; and

  .  all other matters by majority of the votes cast.

 Dividends:

  .  subject to preferential dividend rights of outstanding shares of
     preferred stock, common stockholders are entitled to receive ratably
     declared dividends; and

  .  the board of directors may only declare dividends out of legally
     available funds.

 Additional Rights:

  .  subject to the preferential liquidation rights of outstanding shares of
     preferred stock, common stockholders are entitled to receive ratably net
     assets, available after the payment of all debts and liabilities, upon
     our liquidation, dissolution or winding up;

  .  no preemptive rights;

  .  no subscription rights;

  .  no redemption rights;

  .  no sinking fund rights; and

  .  no conversion rights.

   The rights and preferences of common stockholders are subject to the right
of any series of preferred stock we may issue in the future.

Preferred Stock

   We may, by resolution of our board of directors, and without any further
vote or action by our stockholders, authorize and issue, subject to certain
limitations prescribed by law, up to an aggregate of 9,211,031 shares of
preferred stock. The preferred stock may be issued in one or more classes or
series of shares of any class or series. With respect to any classes or series,
the board of directors may determine the designation and the number of shares,
preferences, limitations and special rights, including dividend rights,
conversion rights, voting rights, redemption rights and liquidation
preferences. Because of the rights that may be granted, the issuance of
preferred stock may delay, defer or prevent a change of control. There are no
shares of preferred stock outstanding as of the date of this prospectus.

                                       42
<PAGE>

Limitation on Liability

   As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors shall not be personally liable to us
or our stockholders for monetary damages for a breach of fiduciary duty as a
director, except for liability:

  .  for any breach of such person's duty of loyalty;

  .  for acts or omissions not in good faith or involving intentional
     misconduct or a knowing violation of law;

  .  for the payment of unlawful dividends and certain other actions
     prohibited by Delaware corporate law; and

  .  for any transaction resulting in receipt by such person of an improper
     personal benefit.

   Our certificate of incorporation also contains provisions indemnifying our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law.

   We currently carry directors' and officers' liability insurance to provide
our directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, errors and other wrongful acts.

Certain Anti-Takeover Provisions

   Our certificate of incorporation provides that our board of directors may
establish the rights of, and cause us to issue, substantial amounts of
preferred stock without the need for stockholder approval. The issuance of
preferred stock may have the effect of discouraging, delaying or preventing a
change in control of Magainin. We have no present plans to issue any shares of
preferred stock.

   Section 203 of the Delaware General Corporation Law applies to Magainin.
Section 203 of the Delaware General Corporation Law generally prohibits
certain "business combinations" between a Delaware corporation and an
"interested stockholder." An "interested stockholder" is generally defined as
a person who, together with any affiliates or associates of such person,
beneficially owns, or within the preceeding three years did own, directly or
indirectly, 15% or more of the outstanding voting shares of a Delaware
corporation. The statute broadly defines business combinations to include:

  .  mergers;

  .  consolidations;

  .  sales or other dispositions of assets having an aggregate value in
     excess of 10% of the consolidated assets of the corporation or 10% of
     the aggregate market value of all outstanding stock of the corporation;
     and

  .  specified transactions that would increase the "interested
     stockholder's" proportionate share ownership in the corporation.

   The statute prohibits any such business combination for a period of three
years commencing on the date the "interested stockholder" becomes an
"interested stockholder," unless:

  .  the business combination is approved by the corporation's board of
     directors prior to the date the "interested stockholder" becomes an
     "interested stockholder";

  .  the "interested stockholder" acquired at least 85% of the voting stock
     of the corporation (other than stock held by directors who are also
     officers or by certain employee stock plans) in the transaction in which
     it becomes an "interested stockholder"; or

  .  the business combination is approved by a majority of the board of
     directors and by the affirmative vote of at least two-thirds of the
     outstanding voting stock that is not owned by the "interested
     stockholder."

Transfer Agent and Registrar

   The transfer agent and registrar for our common stock is Continental Stock
Transfer and Trust Company.

                                      43
<PAGE>

                              PLAN OF DISTRIBUTION

   We are offering the shares, on an all or none basis, to selected
institutional investors, including current institutional holders of our common
stock. We may sell the common stock offered in this prospectus directly to
investors on our own behalf in jurisdictions where we are authorized to do so,
acting through our officers and directors. Our officers and directors will not
be separately compensated for their services in connection with this offering.
Alternatively, we may offer the shares through agents who may receive
compensation from us in the form of commissions, which may be in excess of
ordinary brokerage commissions, and who may be reimbursed for certain expenses.
We have no agreements with or commitments from any such agents as of the date
of this prospectus. Any agents that participate in the distribution of the
shares may be deemed to be "underwriters" as defined in the Securities Act, and
any profit on the sale of shares by them and any selling commissions received
by any such agents may be deemed to be underwriting discounts and selling
commissions under the Securities Act.

   We will obtain indications of interest from potential investors for the
amount of the offering. We will distribute confirmations and definitive
prospectuses to all investors at the time of pricing, informing investors of
the closing date, which will be scheduled for three business days after
pricing. We will not accept any investor funds prior to effectiveness of the
registration statement. The offering will not continue after the closing date,
and we will deregister any shares not sold.

   We will pay all of the expenses incurred in this offering. In order to
comply with certain states' securities laws, if applicable, the shares will be
sold in such jurisdictions only through registered or licensed brokers or
dealers. In certain states the shares may not be sold unless previously
registered under the "blue sky" laws of the state.

                      WHERE YOU CAN FIND MORE INFORMATION

   We have filed a registration statement on Form S-1, of which this prospectus
forms a part, to register the securities with the Securities and Exchange
Commission. As allowed by SEC rules, this prospectus does not contain all the
information you can find in the registration statement or the exhibits to the
registration statement. We file annual, quarterly and current reports, proxy
statements and other information with the SEC. Copies of the registration
statement are on file at the offices of the SEC and may be inspected without
charge at the Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of the registration statement may be obtained from the Public
Reference Section of the SEC upon payment of the fee prescribed by the SEC.
Information on Magainin can be obtained from the Public Reference Room by
calling 1-800-SEC-0330. The Commission maintains a Web site that contains all
information filed electronically by us, including reports, proxy and
information statements. The address of the SEC's Web site is
(http://www.sec.gov).


                                       44
<PAGE>

                                 LEGAL MATTERS

   Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, will pass on the
validity of the shares.

                                    EXPERTS

   Our financial statements as of December 31, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1998 are included in this
prospectus and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, also included in this
prospectus and in the registration statement, and upon the authority of KPMG
LLP as experts in accounting and auditing.

                               CHANGE OF AUDITORS

   Richard A. Eisner & Company, LLP served as our independent accountants from
our inception in June 1987 through 1998. On January 4, 1999, we dismissed
Richard A. Eisner & Company, LLP as our independent public accountants and
auditors and engaged KPMG LLP to serve as our independent public accountants
and auditors. The dismissal of Richard A. Eisner & Company, LLP and the
engagement of KPMG LLP was approved by our Audit Committee of the Board of
Directors. The reports of Richard A. Eisner & Company, LLP on our financial
statements for the years ended December 31, 1997 and 1996 did not contain an
adverse opinion and were not qualified or modified as to uncertainty, audit
scope or accounting principles. During the years ended December 31, 1996 and
1997 and for the period from January 1, 1998 to January 4, 1999, there were no
(i) disagreements between us and Richard A. Eisner & Company, LLP on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Richard A. Eisner & Company, LLP, would have caused Richard A.
Eisner & Company, LLP to make reference to the subject matter of such
disagreement in connection with its report or (ii) "reportable events" as that
term is described in Item 304(a)(1)(v) of Regulation S-K.

                                       45
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                        <C>
Audited Financial Statements:
  Independent Auditors' Report............................................  F-2
  Balance Sheets as of December 31, 1998 and 1997.........................  F-3
  Statements of Operations for the years ended December 31, 1998, 1997 and
   1996...................................................................  F-4
  Statements of Changes in Stockholders' Equity and Comprehensive Loss
   for the years ended December 31, 1998, 1997 and 1996...................  F-5
  Statements of Cash Flows for the years ended December 31, 1998, 1997 and
   1996...................................................................  F-6
  Notes to Financial Statements...........................................  F-7
Unaudited Financial Statements:
  Balance Sheet as of June 30, 1999....................................... F-16
  Statements of Operations for the six months ended June 30, 1999 and June
   30, 1998............................................................... F-17
  Statements of Cash Flows for the six months ended June 30, 1999 and June
   30, 1998............................................................... F-18
  Notes to Financial Statements........................................... F-19
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Magainin Pharmaceuticals Inc.:

   We have audited the accompanying balance sheets of Magainin Pharmaceuticals
Inc. as of December 31, 1998 and 1997, and the related statements of
operations, changes in stockholders' equity and comprehensive loss and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Magainin Pharmaceuticals
Inc. as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting principles.

                                          /s/ KPMG LLP

Princeton, New Jersey
February 12, 1999

                                      F-2
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                                 BALANCE SHEETS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1998      1997
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
Current assets:
  Cash and cash equivalents................................ $  4,495  $    487
  Short-term investments...................................   18,376    38,574
  Prepaid expenses and other...............................      179       490
                                                            --------  --------
    Total current assets...................................   23,050    39,551
Fixed assets, net..........................................    2,765     2,824
Other assets...............................................       76        69
                                                            --------  --------
      Total assets......................................... $ 25,891  $ 42,444
                                                            ========  ========
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.................... $  8,653  $  5,944
  Current portion of note payable..........................    2,500       500
  Current potion of capital lease obligations..............      --         34
                                                            --------  --------
    Total current liabilities..............................   11,153     6,478
Note payable-long-term.....................................      --      1,000
Deferred rent..............................................       58        96
                                                            --------  --------
      Total liabilities....................................   11,211     7,574
                                                            --------  --------
Commitments, contingencies and other matters
Stockholders' equity:
  Preferred stock--$.001 par value; shares authorized--
   9,211; none issued
  Common stock--$.002 par value; shares authorized--45,000;
   shares issued and outstanding--22,910 and 21,980,
   respectively............................................       46        44
  Additional paid-in capital...............................  147,553   144,444
  Accumulated other comprehensive income--unrealized gains
   on investments..........................................        9         6
  Accumulated deficit...................................... (132,928) (109,624)
                                                            --------  --------
    Total stockholders' equity.............................   14,680    34,870
                                                            --------  --------
      Total liabilities and stockholders' equity........... $ 25,891  $ 42,444
                                                            ========  ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-3
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                            STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1998      1997      1996
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Contract Revenues................................ $    --   $ 10,088  $    150
Costs and Expenses:
  Research and development.......................   21,456    22,875    22,326
  General and administrative.....................    3,292     3,246     3,488
  Charge for stock issuance relating to royalty
   buyout........................................      --        --      7,080
                                                  --------  --------  --------
                                                    24,748    26,121    32,894
                                                  ========  ========  ========
Loss from operations.............................  (24,748)  (16,033)  (32,744)
Interest income..................................    1,640     1,770     2,172
Interest expense.................................     (196)     (118)      (48)
                                                  --------  --------  --------
Net loss......................................... $(23,304) $(14,381) $(30,620)
                                                  ========  ========  ========
Net loss per share--basic and diluted............ $  (1.05) $  (0.73) $  (1.71)
                                                  ========  ========  ========
Weighted average shares outstanding..............   22,235    19,679    17,938
                                                  ========  ========  ========
</TABLE>


                See accompanying notes to financial statements.

                                      F-4
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                     Accumulated
                           Common Stock                 Other                 Total
                         ---------------- Additional   Compre-               Stock-
                          Number           Paid-in     hensive   Accumulated holders
                         of Shares Amount  Capital     Income      Deficit   Equity
                         --------- ------ ---------- ----------- ----------- -------
<S>                      <C>       <C>    <C>        <C>         <C>         <C>
Balance at January 1,
 1996..................   17,052    $34    $105,662     $120      $ (64,623) $41,193
  Common stock issued
   pursuant to private
   placement...........    1,557      3      11,929      --             --    11,932
  Fair value of shares
   issued pursuant to
   royalty buyout......      550      1       7,059      --             --     7,060
  Common stock issued,
   exercise of options
   and warrants........      205      1         484      --             --       485
  Comprehensive loss
    Net loss...........      --     --          --       --         (30,620) (30,620)
    Carrying value
     adjustment........      --     --          --      (107)           --      (107)
                          ------    ---    --------     ----      ---------  -------
      Total
       comprehensive
       loss............      --     --          --       --             --   (30,727)
                          ------    ---    --------     ----      ---------  -------
Balance at December 31,
 1996..................   19,364     39     125,134       13        (95,243)  29,943
  Common stock issued
   pursuant to public
   offering............    2,587      5      19,167      --             --    19,172
  Common stock issued,
   exercise of options
   and warrants........       29    --          143      --             --       143
  Comprehensive loss
    Net loss...........      --     --          --       --         (14,381) (14,381)
    Carrying value
     adjustment........      --     --          --        (7)           --        (7)
                          ------    ---    --------     ----      ---------  -------
      Total
       comprehensive
       loss............      --     --          --       --             --   (14,388)
                          ------    ---    --------     ----      ---------  -------
Balance at December 31,
 1997..................   21,980     44     144,444        6       (109,624)  34,870
  Common stock issued
   pursuant to research
   and option
   agreement...........      620      1       1,999      --             --     2,000
  Fair value of shares
   issued to contract
   manufacturer........      125    --          859      --             --       859
  Common stock issued
   by/upon exercise of
   options, warrants
   and stock awards....      185      1         251      --             --       252
  Comprehensive loss
    Net loss...........      --     --          --       --         (23,304) (23,304)
    Carrying value
     adjustment........      --     --          --         3            --         3
                          ------    ---    --------     ----      ---------  -------
      Total
       comprehensive
       loss............      --     --          --       --             --   (23,301)
                          ------    ---    --------     ----      ---------  -------
Balance at December 31,
 1998..................   22,910    $46    $147,553     $  9      $(132,928) $14,680
                          ======    ===    ========     ====      =========  =======
</TABLE>

                See accompanying notes to financial statements.

                                      F-5
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 ----------------------------
                                                   1998      1997      1996
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Cash Flows From Operating Activities:
Net loss........................................ $(23,304) $(14,381) $(30,620)
Adjustments to reconcile loss to net cash used
 in operating activities:
  Fair value of stock, options and warrants
   issued.......................................      859       --      7,060
  Depreciation and amortization.................    1,140       976       625
  Amortization of investment
   discounts/premiums...........................     (782)     (752)     (718)
  Compensation expense under stock awards.......      114       --        --
Changes in operating assets and liabilities:
  Prepaid expenses and other....................      298       (29)       55
  Accounts payable and accrued expenses.........    2,709       799     1,065
  Deferred rent.................................      (38)      (31)      (16)
                                                 --------  --------  --------
    Net cash used in operating activities.......  (19,004)  (13,418)  (22,549)
                                                 --------  --------  --------
Cash Flows From Investing Activities:
Purchase of investments.........................  (45,317)  (72,313)  (27,301)
Proceeds from maturities and sales of
 investments....................................   66,300    65,752    38,430
Capital expenditures............................   (1,081)   (1,294)   (1,655)
                                                 --------  --------  --------
    Net cash provided by (used in) investing
     activities.................................   19,902    (7,855)    9,474
                                                 --------  --------  --------
Cash Flows From Financing Activities:
Proceeds from notes payable.....................    1,000       500     1,000
Payments on capitalized equipment leases........      (28)     (127)     (150)
Proceeds from sale of stock and exercise of
 options and warrants...........................    2,138    19,315    12,417
                                                 --------  --------  --------
    Net cash provided by financing activities...    3,110    19,688    13,267
                                                 --------  --------  --------
Net increase (decrease) in cash and cash
 equivalents....................................    4,008    (1,585)      192
Cash and cash equivalents at beginning of
 period.........................................      487     2,072     1,880
                                                 --------  --------  --------
Cash and cash equivalents at end of period...... $  4,495  $    487  $  2,072
                                                 ========  ========  ========
Supplemental Cash Flow Information:
Cash paid during the period for interest........ $    185  $    106  $     48
                                                 ========  ========  ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-6
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                         NOTES TO FINANCIAL STATEMENTS

1. The Company

   Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company's development efforts are focused
on anti-infectives, oncology, and pulmonary and allergic disorders.

   The Company has submitted a New Drug Application ("NDA") with the United
States Food and Drug Administration ("FDA") for its lead product development
candidate, pexiganan acetate (formerly called "Cytolex"), a topical cream
antibiotic intended for the treatment of infection in diabetic foot ulcers. The
Company is also conducting research on an aminosterol class of compounds. One
such compound, squalamine, is currently being evaluated in Phase I clinical
testing in cancer. The Company conducts additional research efforts in the
genomics of asthma.

   The Company has not generated any revenues from product sales, and has
funded operations primarily from the proceeds of public and private placements
of securities. Substantial additional financing will be required by the Company
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.

2. Summary of Significant Accounting Policies

   Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and related notes. Actual results could differ from those estimates.

   Cash and Cash Equivalents. The Company considers all highly liquid
investment instruments purchased with a maturity of three months or less to be
cash equivalents.

   Investments. Investments purchased with a maturity of more than three
months, and which mature less than twelve months from the balance sheet date,
are classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity, however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company classifies
its investments as available-for-sale as defined by Statement of Financial
Accounting Standards ("SFAS"), No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Available-for-sale securities are carried at
market value with unrealized gains and losses reported as a separate component
of stockholders' equity. Gross realized gains and losses on the sales of
investment securities are determined on the specific identification method and
are included in interest income.

   Fixed Assets and Depreciation. Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets including: three (3) years for computers/software, five (5) years
for laboratory and office equipment and seven (7) years for furniture and
fixtures. Equipment under capital leases and leasehold improvements are
amortized using the straight-line method over the term of the respective lease,
or their estimated useful lives, whichever is shorter. Expenditures for
maintenance and repairs are charged to expense as incurred.

   Revenue Recognition. Any revenues from research and development arrangements
are recognized pursuant to the terms of the related agreements, either as work
is performed, or as milestones are achieved.

   Research and Development. Research and development costs are expensed as
incurred.


                                      F-7
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   Patent Costs. Patent-related costs are expensed as incurred.

   Lease Expense. Expense related to the facility lease is recorded on a
straight-line basis over the lease term. The difference between rent expense
incurred and the amount paid is recorded as deferred rent and is amortized over
the lease term.

   Stock Based Compensation. The Company accounts for stock-based employee
compensation under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Effective January 1, 1996, the Company adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation".

   Income Taxes. The Company accounts for income taxes using the asset and
liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes".
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period in which tax rate changes
are enacted.

   Loss Per Share. The Company calculates loss per share under the provisions
of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires a dual
presentation of "basic" and "diluted" loss per share on the face of the income
statement. Basic loss per share is computed by dividing income (loss) by the
weighted average number of shares of common stock outstanding during each
period. Diluted loss per share includes the dilutive effect, if any, from the
potential exercise or conversion of securities, such as stock options and
warrants, which would result in the issuance of shares of common stock. Basic
and diluted loss per share amounts are the same because the Company reported a
loss for all periods presented.

   Reclassification. Certain reclassifications have been made to prior years'
financial statements to conform to the current year presentation.

   Comprehensive Income. Effective January 1, 1998 the Company adopted SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
the reporting of comprehensive income and its components. Comprehensive income
consists of reported net income or loss and "other comprehensive income" (i.e.
other gains and losses affecting stockholders' equity that, under generally
accepted accounting principals, are excluded from net income or loss as
reported on the statement of operations). With regard to the Company, other
comprehensive income consists of unrealized gains and losses on marketable
securities. The adoption of SFAS No. 130 affects only the presentation of the
Company's balance sheet, and does not affect the Company's reported results of
operations or cash flows.

3. Investments

   The Company invests in securities of the U.S. Treasury and U.S. Government
agencies. Excess cash is invested on a short-term basis in U.S. government
based money market funds. Unrealized gains at December 31, 1998 and 1997 total
$9,000 and $6,000, respectively. The Company has not realized any losses on its
investments.

                                      F-8
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


4. Fixed Assets

   Fixed assets are stated at cost and are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                                      December 31, December 31,
                                                          1998         1997
                                                      ------------ ------------
   <S>                                                <C>          <C>
   Laboratory and office equipment...................   $ 3,354       $3,147
   Leasehold improvements............................     2,886        2,625
                                                        -------       ------
     Total...........................................     6,240        5,772
   Less accumulated depreciation and amortization....    (3,475)      (2,948)
                                                        -------       ------
                                                        $ 2,765       $2,824
                                                        =======       ======
</TABLE>

5. Accounts Payable and Accrued Expenses

   Accounts payable and accrued expenses consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           1998         1997
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Accounts payable...................................   $   179       $  215
   Clinical and regulatory costs......................       448        1,197
   Manufacturing development costs....................     7,171        3,507
   Preclinical costs..................................       117          338
   Professional fees..................................       253          258
   Other..............................................       485          429
                                                         -------       ------
                                                         $ 8,653       $5,944
                                                         =======       ======
</TABLE>

   Accrued manufacturing development costs consist primarily of amounts related
to various third-party manufacturing agreements.

6. Note Payable

   The Company has entered into a credit arrangement with a commercial bank.
Borrowings under this credit arrangement bear interest at rates ranging from
8.0% to 8.5%. As of December 31, 1998, the Company had borrowed $2,500,000
under this credit arrangement, including $1,000,000 borrowed in 1998. Any
amounts outstanding under this credit arrangement shall become immediately due
and payable under certain circumstances, including the failure by the Company
to maintain certain minimum cash and investment balances, as well as certain
financial ratios. Under the terms of the credit arrangement, the Company makes
monthly interest-only payments with all principal due in May 1999. The
Company's current intention is to refinance this loan prior to its maturity.

7. Stockholders' Equity

   In May 1996, the Company increased the number of its authorized common
shares to 45,000,000.

   In August 1996, the Company completed a private placement of 1,556,763
shares of common stock, together with warrants as described below, with
proceeds to the Company (after offering expenses) of approximately $11,932,000.

   In September 1996, pursuant to a buyout of a royalty arrangement, the
Company issued 550,000 shares of common stock with a fair value of $12.87 per
share. In connection, therewith, the Company recorded a non-cash charge to
earnings of $7,060,000.

                                      F-9
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   In December 1997, the Company consummated a public offering of 2,587,500
shares of common stock with proceeds to the Company (after underwriting
discounts and offering expenses) of approximately $19,172,000.

   In January 1998, pursuant to an arrangement with a contract manufacturer,
the Company issued to such manufacturer 125,000 shares of common stock with a
fair value of $6.125 per share. In connection therewith, the Company recorded a
non-cash charge to earnings of $859,000.

   In December 1998, pursuant to a collaboration, the Company sold 620,540
shares of common stock to Genentech, Inc. ("Genentech"), with proceeds to the
Company of approximately $2,000,000.

   Warrants. Under a 1991 credit agreement with certain stockholders, the
Company granted warrants to the lenders to purchase an aggregate of 250,000
shares of common stock at $8 per share. These warrants expire in 2001. At
December 31, 1998, 229,739 of these warrants are outstanding.

   In October 1994, pursuant to an arrangement with a contract manufacturer,
the Company granted to such manufacturer a warrant to purchase 300,000 shares
of common stock at $7.50 per share. The warrant expires in 1999.

   In connection with its August 1996 private placement, the Company issued
common stock, together with warrants to purchase 1,011,896 shares of the
Company's common stock. The warrants contain provisions to decrease the
exercise price, and increase shares, under certain circumstances. Such
circumstances include the issuance of shares of common stock by the Company for
a consideration per share less than the exercise price of the warrants, and the
issuance by the Company of securities convertible into shares of common stock
for which the exercise or conversion price is less than the exercise price of
the warrants. The warrant holders also have a one-time right, in the event the
average price of the Company's common stock in any month prior to August 1999
falls below a certain level, to reduce the exercise price of the warrant to
110% of such average price. Warrants to purchase 1,030,905 shares of common
stock at prices ranging from $5.99 to $8.31 per share are currently
exercisable.

   Stock option plans. In May 1991, the stockholders approved the 1990 Stock
Option Plan (the "1990 Plan") which provides for the granting of options for
the purchase of up to 160,000 shares of common stock. In May 1996, the
stockholders approved the amended 1992 Stock Option Plan (the "1992 Plan")
which provides for the granting of options for the purchase of up to 2,500,000
shares of common stock. In May 1998, the stockholders approved the 1998 Equity
Compensation Plan (the "1998 Plan") which provides for the granting of options,
and stock awards, of up to 1,500,000 shares of common stock.

   The plans provide for the granting of incentive stock options and
nonqualified stock options and are administered by a committee of the Board of
Directors. The committee has the authority to determine the term during which
an option may be exercised (provided that no option may have a term of more
than 10 years), the exercise price of an option and the rate at which options
may be exercised. Incentive stock options may be granted only to employees of
the Company. Nonqualified stock options may be granted to employees, directors
or consultants of the Company. For nonqualified stock options under the 1992
and 1998 Plans and incentive stock options, the exercise price can not be less
than the fair market value of the underlying common stock on the date of the
grant.

   In addition to the shares of common stock issuable upon exercise of options
granted under the Company's stock option plans, 596,625 shares of common stock
are issuable upon exercise of outstanding options granted pursuant to written
agreements. The exercise price for these options was set by the Board of
Directors, or a committee designated by the Board, based upon an evaluation of
the fair market value of the Company's common stock on the date of grant.


                                      F-10
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   A summary of the status of the Company's stock options as of December 31,
1998, 1997 and 1996, and changes during the years ended on those dates, is
presented below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                   1998                     1997                    1996
                          ------------------------ ----------------------- ------------------------
                                  Weighted Average        Weighted Average         Weighted Average
Options                   Shares   Exercise Price  Share   Exercise Price  Shares   Exercise Price
-------                   ------  ---------------- -----  ---------------- ------  ----------------
<S>                       <C>     <C>              <C>    <C>              <C>     <C>
Outstanding at beginning
 of year................  2,974        $6.33       2,466       $6.07       2,048        $ 3.97
Granted.................    976        $4.29         576       $7.51         782        $10.56
Exercised...............   (176)       $0.78         (29)      $4.91        (196)       $ 2.56
Forfeited...............   (186)       $8.40         (39)      $8.46        (168)       $ 5.01
                          -----                    -----                   -----
Outstanding at end of
 year...................  3,588        $5.94       2,974       $6.33       2,466        $ 6.07
Exercisable at end of
 year...................  2,022        $5.76       1,586       $4.29       1,203        $ 3.00
</TABLE>

   The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1998 (in thousands, except per share data):

<TABLE>
<CAPTION>
                            Options Outstanding                    Options Exercisable
               --------------------------------------------- --------------------------------
Range of                   Weighted Average                    Shares
Exercise       Outstanding    Remaining     Weighted Average Exercisable Weighted Average
Prices         At 12/31/98 Contractual Life  Exercise Price  At 12/31/98  Exercise Price
--------       ----------- ---------------- ---------------- ----------- ----------------
<S>            <C>         <C>              <C>              <C>         <C>              <C>
$.002--$.40           8        2 Years           $ 0.35             8         $ 0.35
$2.00--$3.75      1,523        6 Years           $ 2.88           983         $ 2.68
$4.63--$8.25      1,212        8 Years           $ 6.65           499         $ 6.88
$9.13--$11.63       830        7 Years           $10.37           517         $10.30
$16.75               15        5 Years           $16.75            15         $16.75
                  -----                                         -----
$.002--$16.75     3,588        7 Years           $ 5.94         2,022         $ 5.76
</TABLE>

   The Company applies APB Opinion 25 and related Interpretations in accounting
for options. Accordingly, no compensation cost has been recognized for employee
stock option grants. Had compensation cost for employee stock option grants
been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS No. 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below
(in thousands, except per share data):

<TABLE>
<CAPTION>
                                                   1998      1997      1996
                                                 --------  --------  --------
   <S>                               <C>         <C>       <C>       <C>
   Net loss......................... As reported $(23,304) $(14,381) $(30,620)
                                     Pro forma   $(26,208) $(16,649) $(31,816)
   Net loss per share--basic and
    diluted......................... As reported $  (1.05) $  (0.73) $  (1.71)
                                     Pro forma   $  (1.18) $  (0.85) $  (1.77)
</TABLE>

                                      F-11
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   The resulting effect on pro forma loss and pro forma loss per share
disclosed above is not likely to be representative of the effects on a pro
forma basis in future years, because 1998, 1997 and 1996 pro forma results
include the impact of only four, three and two years, respectively, of grants
and related vesting, while subsequent years will include additional years of
grants and vesting. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
                                                 1998       1997       1996
                                              ---------- ---------- ----------
   <S>                                        <C>        <C>        <C>
   Range of risk free interest rates......... 4.4%--5.7% 5.8%--6.6% 6.1%--6.8%
   Dividend yield............................     0%         0%         0%
   Volatility factor.........................    78%        75%        79%
   Expected life of options (in years).......     6          6          6
   Weighted-average fair value of options
    granted during the year..................   $3.04      $5.31      $7.54
</TABLE>

   The 1998 Plan also provides for the issuance of common stock awards, up to a
maximum of 375,000 shares. Such awards shall be made subject to such
performance requirements, vesting provisions, transfer restrictions or other
restrictions and conditions as the Compensation Committee may determine. A
total of 146,000 shares have been awarded under the 1998 Plan, vesting over a
four year period beginning in 1999. The cost of these awards will be recognized
as expense over the vesting period. As of December 31, 1998, no shares have
been issued under this program.

8. Income Taxes

   As of December 31, 1998 the Company had approximately $116.4 million of net
operating loss ("NOL") carry-forwards for federal income tax purposes (expiring
in years 2003 through 2018). In addition, the Company had NOL carryforwards for
state income tax purposes of approximately $58.1 million (expiring in years
1999 through 2001). Pennsylvania has a $1.0 million annual limitation on the
utilization of NOL carryforwards, thus the Company is not likely to utilize
most of its state NOL carryforwards. The Company also had approximately $7.4
million of research and development tax credits carryforwards available to
offset future federal income tax liability (expiring in years 2005 through
2018). The NOL carryforward differs from the accumulated deficit principally
due to differences in the recognition of certain expenses between financial and
federal tax reporting.

   Under the Tax Reform Act of 1986, the utilization of a corporation's NOL
carryforward and research and development tax credits are limited following a
change in ownership of greater than 50% within a three year period. Due to the
Company's prior equity transactions, the Company's net operating loss and tax
credit carryforwards may be subject to an annual limitation generally
determined by multiplying the market value of the Company on the date of the
ownership change by the federal long-term tax exempt rate. Any amount exceeding
the annual limitation may be carried forward to future years for the balance of
the NOL and tax credit carryforward period.

   Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
reliability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the Company's ability to realize the benefit of the
deferred tax asset, the deferred tax assets are fully offset by a valuation
allowance at December 31, 1998 and 1997. The net change in the valuation
allowance for deferred tax assets at December 31, 1998 and 1997 was an increase
of $12.0 million and an increase of $11.8 million, respectively.

                                      F-12
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   Significant components of the net deferred tax assets as of December 31,
1998 and 1997 consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                              1998      1997
                                                            --------  --------
   <S>                                                      <C>       <C>
   Deferred tax assets:
     Net operating losses.................................. $ 46,534  $ 37,091
     Research credits......................................    7,395     5,675
     Capitalized research and development..................    2,748     2,936
     Accrued expenses and other............................    3,247     2,190
     Depreciation..........................................      372       414
                                                            --------  --------
                                                              60,296    48,306
     Valuation allowance................................... $(60,296) $(48,306)
                                                            --------  --------
       Deferred tax assets, net............................ $      0  $      0
                                                            ========  ========
</TABLE>

9. Collaborative Agreements

   In February 1997, the Company entered into a development, supply and
distribution agreement (the "SmithKline Agreement") in North America with
SmithKline Beecham ("SmithKline") for pexiganan acetate. SmithKline has paid
the Company $10.0 million under this agreement, and may make additional
payments to Magainin of up to $22.5 million, upon the occurrence of certain
product milestones. SmithKline will also fund a percentage of any development
expenses for any additional indications for pexiganan acetate. Upon the
commencement of commercial sales by SmithKline, Magainin will be responsible
for the supply of pexiganan acetate and SmithKline will be responsible for the
marketing and sale of pexiganan acetate. Magainin will receive certain
percentages of SmithKline sales revenues under agreed upon terms. The
SmithKline Agreement gives SmithKline the right to negotiate for rights to
another Magainin product development candidate, under certain terms and
conditions. The SmithKline Agreement also gives SmithKline the right to
terminate the arrangement on a country-by-country basis if SmithKline
determines it is not economical to distribute pexiganan acetate in those areas.

   In December 1998, the Company entered into a collaborative research and
option agreement with Genentech Inc. relating to a protein therapeutic in
asthma. Under this agreement, Genentech will be provided access to a
therapeutic target (IL9), which is in Magainin's proprietary asthma gene
database, and the companies will conduct a collaborative program to evaluate
the utility of a blocking antibody to IL9 in suppressing the asthmatic
response. Under this collaboration, Genentech made an initial equity investment
in Magainin of $2.0 million, and has an option to enter into a development and
commercialization agreement with the Company. Any such development and
commercialization agreement could provide for payments to the Company of up to
$35.0 million, upon terms to be negotiated, and royalty payments on sales of
products developed by Genentech in the field.

   In August 1994, the Company entered into a collaboration in the nutritional
field with Abbott Laboratories ("Abbott"). The Company recorded revenue of $0,
$88,000, $150,000 in the years ended December 31, 1998, 1997 and 1996,
respectively, under this arrangement. This agreement has expired.

   The Company has rights under license agreements to certain patents and
patent applications under which the Company expects to owe royalties on sales
of any products which are covered by issued patent claims. Additionally,
certain of these agreements also provide that if the Company elects not to
pursue the commercial development of any licensed technology, or does not
adhere to an acceptable schedule of commercialization, then the Company's
exclusive rights to such technology would terminate. We also fund research at
certain institutions, and these relationships may provide us with an option to
license any results of the research.

                                      F-13
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


10. 401(K) Plan

   The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. No such contributions have been made through December 31, 1998.

11. Fair Value of Financial Instruments

   The following disclosures of estimated fair value were determined by
management, using available market information and valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair market value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize on
disposition of the financial instruments. The use of different market
assumptions or estimation methodologies may have an effect on the estimated
fair value amounts.

   Cash equivalents, accounts payable, accrued expenses and investments are
carried at amounts which reasonably approximate their fair values due to the
short term nature of these instruments. The estimated fair value of the
Company's note payable is estimated to be approximately equal to its carrying
value of $2.5 million at December 31, 1998.

   Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1998. Although
management is not aware of any factors that would significantly affect the
reasonable fair value amounts, such amounts have not been comprehensively
revalued for the purposes of these financial statements since December 31,
1998, and current estimates of fair value may differ from the amounts
presented herein.

12. Commitments, Contingencies and Other Matters

 Rent

   The Company has entered into two operating leases for its laboratory and
corporate office facilities. These leases provide for minimum annual rent
payments through 2002 as follows (in thousands):

<TABLE>
<CAPTION>
              Year
             Ending
            December
               31,
            --------
            <S>                                     <C>
             1999.................................. $  411
             2000..................................    427
             2001..................................    327
             2002..................................    299
                                                    ------
                                                    $1,464
                                                    ======
</TABLE>

   The leases provide for escalations relating to increases in real estate
taxes and certain operating expenses.

   Rent expense was approximately $394,000, $295,000 and $310,000, for the
years ended December 31, 1998, 1997 and 1996, respectively.

                                     F-14
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Manufacturing

   The Company has an arrangement with Abbott initially providing for the
purchase of approximately $10.0 million of bulk drug substance for pexiganan
acetate. As FDA approval of pexiganan acetate has not occurred, the Company has
recorded charges to research and development expense related to this contract.
No amounts have been paid under this arrangement to date, and payments are
expected to be made in 1999 and 2000. The Company's prior development
arrangement with Abbott provided for the issuance to Abbott of up to 500,000
shares of Magainin Common Stock and the obligation to pay a royalty on any
future sales of pexiganan acetate. Stock issuances by the Company to Abbott
result in a charge to earnings, representing the fair value of the shares when
issued. As of December 31, 1998, the Company has issued 250,000 shares of
common stock to Abbott, including 125,000 shares issued during the year ended
December 31, 1998. The issuance of such shares resulted in the recording of an
earnings charge of $859,000 in 1998. Future stock issuances are related to the
achievement by Abbott of contractual performance milestones.

                                      F-15
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                                 BALANCE SHEETS
                                  (Unaudited)
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                     June 30,
                                                                       1999
                                                                     ---------
<S>                                                                  <C>
                               ASSETS
Current assets:
  Cash and cash equivalents......................................... $     743
  Short-term investments (Note 3)...................................    14,950
  Prepaid expenses and other........................................       198
                                                                     ---------
    Total current assets............................................    15,891
  Fixed assets, net.................................................     2,266
  Other assets......................................................       169
                                                                     ---------
      Total assets.................................................. $  18,326
                                                                     =========
                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses (Note 7).................... $   8,024
  Note payable (Note 3).............................................     2,500
                                                                     ---------
    Total current liabilities.......................................    10,524
Deferred rent.......................................................        59
                                                                     ---------
      Total liabilities.............................................    10,583
                                                                     ---------
Commitments, contingencies and other matters
Stockholders' equity (Note 4):
  Preferred stock--$.001 par value; shares authorized--9,211; none
   issued...........................................................       --
  Common stock--$.002 par value; shares authorized--45,000; shares
   issued and
   outstanding--22,912 at June 30, 1999.............................        46
  Additional paid-in capital........................................   147,646
  Accumulated other comprehensive income--unrealized (loss) gain on
   investments......................................................        (8)
  Accumulated deficit...............................................  (139,941)
                                                                     ---------
    Total stockholders' equity......................................     7,743
                                                                     ---------
      Total liabilities and stockholders' equity.................... $  18,326
                                                                     =========
</TABLE>

                See accompanying notes to financial statements.

                                      F-16
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                            STATEMENTS OF OPERATIONS
                                  (unaudited)
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                            Six Months Ended
                                                                June 30,
                                                           -------------------
                                                             1999      1998
                                                           --------  ---------
<S>                                                        <C>       <C>
Revenues.................................................. $    --   $     --
Costs and expenses:
  Research and development................................    5,666     11,905
  General and administrative..............................    1,632      1,878
                                                           --------  ---------
                                                              7,298     13,783
                                                           --------  ---------
Loss from operations......................................   (7,298)   (13,783)
Interest income...........................................      388        944
Interest expense..........................................     (103)       (84)
                                                           --------  ---------
Net loss.................................................. $ (7,013) $ (12,923)
                                                           ========  =========
Net loss per share--basic and diluted..................... $  (0.31) $   (0.58)
                                                           ========  =========
Weighted average shares outstanding.......................   22,911     22,174
                                                           ========  =========
</TABLE>


                See accompanying notes to financial statements.

                                      F-17
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                            STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                            Six Months Ended
                                                                June 30,
                                                            -----------------
                                                             1999      1998
                                                            -------  --------
<S>                                                         <C>      <C>
Cash Flows From Operating Activities:
Net loss................................................... $(7,013) $(12,923)
Adjustments to reconcile net loss to net cash used in
 operating activities:
  Fair value of stock, options and warrants issued.........     --        859
  Depreciation and amortization............................     535       598
  Amortization of investment discounts/premiums............    (291)     (360)
  Compensation expense under stock and option awards.......      93       --
Changes in operating assets and liabilities:
  (Increase) decrease in prepaid expenses and other
   assets..................................................    (112)       36
  Increase (decrease) in accounts payable and accrued
   expenses................................................    (629)    1,022
  Increase (decrease) in deferred rent.....................       1       (19)
                                                            -------  --------
    Net cash used in operating activities..................  (7,416)  (10,787)
                                                            -------  --------
Cash Flows From Investing Activities:
Purchase of investments.................................... (17,300)  (22,644)
Proceeds from maturities and sales of investments..........  21,000    33,900
Capital expenditures.......................................     (36)     (913)
                                                            -------  --------
    Net cash provided by investing activities..............   3,664    10,343
                                                            -------  --------
Cash Flows From Financing Activities:
Payment of notes payable...................................  (2,500)      --
Proceeds from notes payable................................   2,500     1,000
Payments on capitalized equipment leases...................     --        (28)
Proceeds from sale of stock and exercise of options and
 warrants..................................................     --        127
                                                            -------  --------
    Net cash provided by financing activities..............     --      1,099
                                                            -------  --------
Net increase (decrease) in cash and cash equivalents.......  (3,752)      655
Cash and cash equivalents at beginning of period...........   4,495       487
                                                            -------  --------
Cash and cash equivalents at end of period................. $   743  $  1,142
                                                            =======  ========
Supplemental Cash Flow Information:
Cash paid during the period for interest................... $    99  $     80
                                                            =======  ========
</TABLE>

                See accompanying notes to financial statements.

                                      F-18
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                         NOTES TO FINANCIAL STATEMENTS

                                  (unaudited)

1. The Company

   Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company's development efforts are focused
on oncology, anti-infectives, and pulmonary and allergic disorders.

   On July 26, 1999, the Company announced that it had received notification
from the U.S. Food and Drug Administration (FDA) that its New Drug Application
(NDA) for its lead product candidate, LOCILEX(TM) Cream (formerly referred to
as pexiganan acetate), had been deemed not approvable. In order to again seek
approval of LOCILEX(TM) Cream, the FDA has indicated that the Company must
conduct further development activities, including clinical and manufacturing
activities. We are currently considering the feasibility of continuing this
program.

   The Company is conducting research on an aminosterol class of compounds. One
such compound, squalamine, is currently being evaluated in Phase II clinical
studies for the treatment of non-small cell lung cancer. The Company conducts
additional research efforts in the genomics of asthma.

   The Company has not generated any revenues from product sales, and has
funded operations primarily from the proceeds of public and private placements
of securities. Substantial additional financing will be required by the Company
in the near term to continue to fund its research and development programs and
to commercialize any of our proposed products. 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 does not have
sufficient resources to sustain operations beyond the first half of 2000.

2. Basis of Presentation

   The accompanying financial statements are unaudited and have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations. The Company believes that the financial
statements include all adjustments of a normal and recurring nature necessary
to present fairly the results of operations, financial position, changes in
stockholders' equity and cash flows for the periods presented. Results of
operations for interim periods are not necessarily indicative of those to be
achieved for full fiscal years. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
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, 1998.

3. Note Payable

   The Company refinanced its $2,500,000 note payable in the second quarter of
1999. Under the terms of this arrangement, the Company makes monthly interest-
only payments at a rate of 7.375%, with principal due in June 2000. The Company
maintains investments of $2,750,000 at the bank as collateral for the note
payable.

                                      F-19
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                                  (unaudited)


4. Stockholders' Equity

   The changes in stockholders' equity from December 31, 1998 to June 30, 1999
are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                           Common Stock               Accumulated                Total
                         ---------------- Additional     Other                   Stock-
                          Number           Paid-in   Comprehensive Accumulated  holders'
                         of Shares Amount  Capital      Income       Deficit     Equity
                         --------- ------ ---------- ------------- -----------  --------
<S>                      <C>       <C>    <C>        <C>           <C>          <C>
Balance at December 31,
 1998...................  22,910    $46    $147,553      $  9      $ (132,928)  $14,680
  Exercise of stock
   options, and
   compensation expense
   under stock and
   options awards.......       2    --           93       --              --         93
  Comprehensive loss
    Net loss............     --     --          --        --           (7,013)   (7,013)
    Carrying value ad-
     justment...........     --     --          --        (17)            --        (17)
                                                                                -------
  Total comprehensive
   loss.................     --     --          --        --              --     (7,030)
                          ------    ---    --------      ----      ----------   -------
Balance at June 30,
 1999...................  22,912    $46    $147,646      $ (8)     $ (139,941)  $ 7,743
                          ======    ===    ========      ====      ==========   =======
</TABLE>

5. Manufacturing Agreement

   The Company had an arrangement with Abbott providing for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. Through
June 30, 1999, the Company paid Abbott $656,000 under this arrangement. The
Company's prior development arrangement with Abbott provides for the issuance
to Abbott of up to 500,000 shares of Magainin Common Stock and the obligation
to pay a royalty on any future sales of LOCILEX(TM) Cream. When the Company
issued stock to Abbott it was required to record a charge to earnings
representing the fair value of the shares when issued. As of June 30, 1999, the
Company has issued 250,000 shares of common stock to Abbott, including 125,000
shares issued during the six months ended June 30, 1998. The issuance of such
shares resulted in the recording of an earnings charge of $859,000 in the six
months ended June 30, 1998. See footnote 8 for subsequent event.

6. Collaborative Agreements

   In February 1997, the Company entered into a development, supply and
distribution agreement (the "SmithKline Agreement") in North America with
SmithKline Beecham ("SmithKline") for LOCILEX(TM) Cream. SmithKline has paid
the Company $10.0 million under this agreement, and may make additional
payments upon the occurrence of approval and certain product milestones. The
Company had hoped to commercialize LOCILEX(TM) Cream in the near term. However,
with the FDA's decision, near term commercialization of LOCILEX(TM) Cream will
not occur, and the Company will generate no revenues from LOCILEX(TM) Cream in
the near future. The SmithKline Agreement also gives SmithKline rights to
terminate the arrangement, and, under certain conditions, the right to
negotiate for rights to another Magainin product development candidate. (see
"Note 1" regarding LOCILEX(TM) Cream FDA notification on July 26, 1999)

                                      F-20
<PAGE>

                         MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                                  (unaudited)


   In December 1998, the Company entered into a collaborative research and
option agreement with Genentech Inc. ("Genentech") relating to a protein
therapeutic in asthma. Under this agreement, the Company will provide Genentech
with access to a therapeutic target (IL9), which is in Magainin's proprietary
asthma gene database, and the companies will jointly conduct a one-year
collaborative program to evaluate the utility of a blocking antibody to IL9 in
suppressing the asthmatic response. Genentech made an initial equity investment
in the Company of $2.0 million, and has an option, exercisable prior to April
2000, to enter into a development and commercialization agreement with the
Company. Any such development and commercialization agreement could provide for
payments to the Company of up to $35.0 million, upon terms to be negotiated,
and royalty payments on sales of products developed by Genentech in the field.

   The Company has rights under license agreements to certain patents and
patent applications under which the Company expects to owe royalties on sales
of any products which are covered by issued patent claims. Additionally,
certain of these agreements also provide that if the Company elects not to
pursue the commercial development of any licensed technology, or does not
adhere to an acceptable schedule of commercialization, then the Company's
exclusive rights to such technology would terminate. The Company also funds
research at certain institutions, and these relationships may provide us with
an option to license any results of the research.

7. Accounts Payable and Accrued Expenses

   Accounts payable and accrued expenses consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                        June 30,
                                                                          1999
                                                                        --------
   <S>                                                                  <C>
   Accounts payable.................................................... $   131
   Clinical and regulatory costs.......................................     323
   Manufacturing development costs.....................................   6,709
   Preclinical costs...................................................     146
   Professional fees...................................................     190
   Other...............................................................     525
                                                                        -------
                                                                        $ 8,024
                                                                        =======
</TABLE>

   Manufacturing development costs principally include amounts accrued under
the Company's agreement with Abbott, providing for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream.

8. Subsequent Event

   The Company's contract with Abbott Laboratories provided for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream has not occurred, in September 1999, the Company
renegotiated this agreement with Abbott. As a result, the Company has agreed to
pay Abbott $4.2 million, of which $4.0 million has been paid to date, and will
receive partial delivery of material. An additional $3.4 million is due to
Abbott and will be paid in the event that the Company successfully obtains
additional funds, and then only to the extent of 15% of amounts obtained in
excess of $10 million in any year, The Company has no further purchase
commitments to Abbott, and Abbott has no further supply requirements to the
Company. In addition, Abbott will retain ownership of the manufacturing process
developed by it.

                                      F-21
<PAGE>


                                5,000,000 Shares

                         MAGAININ PHARMACEUTICALS INC.

                                  Common Stock

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

                                   PROSPECTUS
                               September  , 1999

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

<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table shows the estimated expenses of the issuance and
distribution of the securities offered hereby.

<TABLE>
            <S>                                <C>
            Commission fee...................  $  1,417.80
            Nasdaq listing fee...............  $ 17,500.00
            Legal fees, accounting fees and
             expenses........................  $ 81,082.20
                                               -----------
              Total..........................  $100,000.00
                                               ===========
</TABLE>

   All of the amounts shown are estimates except for the fees payable to the
Securities and Exchange Commission and the National Association of Securities
Dealers.

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations.
Section 145 empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director, officer
or agent of the corporation or another enterprise if serving at the request of
the corporation. Depending on the character of the proceeding, a corporation
may indemnify against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if the person indemnified acted in good
faith and in respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. In the case of an action by or in
the right of the corporation, no indemnification may be made with respect to
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director, officer, employee
or agent of a corporation has been successful in the defense of any action,
suit or proceeding referred to above or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.

   Article 9 of the Company's By-Laws provides for the indemnification of
directors, officers, employees and agents of the Company to the maximum extent
permitted by the Delaware General Corporation Law. The Company's By-laws permit
it to purchase insurance on behalf of such person against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status a such, whether or not the Company would have the power to
indemnify him against such liability under the foregoing provision of the By-
laws.

Item 15. Recent Sales of Unregistered Securities

   The Registrant has sold and issued the following securities during the past
three years:

   In September 1996, pursuant to a buyout of a royalty arrangement, the
Registrant issued 550,000 shares of common stock with a fair value of $12.87
per share.

                                      II-1
<PAGE>

   In January, 1998, pursuant to an arrangement with Abbott Laboratories, the
Registrant issued 125,000 shares of common stock with a fair value of $6.125
per share.

   In December, 1998, pursuant to a collaborative research and option
agreement, the Registrant sold 620,540 shares of common stock to Genentech,
Inc. with proceeds to the Registrant of approximately $2,000,000.

   The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under Section 4(2) of the Securities Act as
transactions not involving any public offering because such issuances were made
to a limited group of persons, each of whom was believed to have been a
sophisticated investor or had a pre-existing business or personal relationship
with the Registrant or its management and because each such person was
purchasing for investment without a view to further distribution. Restrictive
legends were placed on stock certificates and are contained in agreements
evidencing the securities described above. No underwriters were involved in
connection with the sales of securities referred to in this Item 15.

Item 16. List of Exhibits

   The exhibits filed as part of this registration statement are as follows:

<TABLE>
<CAPTION>
 Exhibit
 Number  Description
 ------- -----------
 <C>     <S>
  3.1    Restated Certificate of Incorporation of the Registrant (Exhibit 3.1)(1)
  3.2    Certificate of Amendment of Restated Certificate of Incorporation of
         the Registrant (Exhibit 3.2)(13)
  3.3    By-laws of the Registrant (Exhibit 3.2)(2)
  4.1    Specimen copy of stock certificate for shares of Common Stock of the
         Registrant (Exhibit 4.1)(3)
  5.1  * Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
         securities being issued
 10.1  # 1990 Stock Option Plan of the Registrant (Exhibit 10.1)(2)
 10.2  # 1992 Stock Option Plan of the Registrant, as amended (4)
 10.3  # Stock Option Agreement with Jay Moorin (Exhibit 10.24)(3)
 10.4  # Stock Option Agreement with Jay Moorin (Exhibit 10.24)(1)
 10.5  # Form of Stock Option Agreement under Stock Option Plans (Exhibit
         4.6)(2)
 10.6  # Employment Agreement with Jay Moorin (Exhibit 10.2)(2)
 10.7  # Employment Agreement with Michael A. Zasloff, M.D., Ph.D. (Exhibit
         10.23)(3)
 10.8  # Employment Agreement with Michael A. Zasloff, M.D., Ph.D. (Exhibit
         10.9)(3)
 10.9  # Employment Agreement with Michael R. Dougherty (Exhibit 10.26)(7)
 10.10 # Employment Agreement with Roy C. Levitt, M.D. (Exhibit 10.24)(5)(9)
 10.11 # Employment Agreement with Thomas J. Bigger (Exhibit 10.12)(13)
 10.12 # Employment Agreement with Kenneth J. Holroyd, M.D. (Exhibit 10.12)(16)
 10.13 # Consulting Agreement with Jay Moorin, Dated August 3, 1998 (Exhibit
         10.2)(16)
 10.14   Lease with respect to Plymouth Meeting, Pennsylvania offices and
         laboratories (Exhibit 10.16)(2)
 10.15   Lease with respect to Plymouth Meeting, Pennsylvania office (Exhibit
         10.13)(14)
 10.16   Amendment to lease with respect to Plymouth Meeting, Pennsylvania
         offices and laboratories (Exhibit 10.16)(16)
 10.17   Patent License Agreement and Sponsored Research Agreement with The
         Children's Hospital of Philadelphia (Exhibit 10.15)(2)
 10.18   License Agreement with Multiple Peptide Systems, Inc. (Exhibit
         10.12)(3)
 10.19   Second Amendment to License Agreement with Multiple Peptide Systems,
         Inc. (Exhibit 10.30)(12)
 10.20   Stock Issuance Agreement between Magainin Pharmaceuticals, Inc. and
         The Scripps Research Institute (Exhibit 10.2)(11)
 10.21   Stock Issuance Agreement between Magainin Pharmaceuticals, Inc. and
         Houghten Pharmaceuticals, Inc. (Exhibit 10.1)(11)
 10.22   Form of Credit Agreement, including form of Promissory Note and
         Warrant (Exhibit 10.22)(2)
 10.23   Form of Amendment to Credit Agreement Warrant (Exhibit 10.18)(6)
</TABLE>

                                      II-2
<PAGE>

<TABLE>
 <C>     <S>
 10.24   Research and Development Agreement with Abbott Laboratories (Exhibit
         10.23)(7)
 10.25   Warrant Agreement with Abbott Laboratories (Exhibit 10.25)(7)
 10.26   Manufacturing Agreement with Abbott Laboratories, dated October 4,
         1995 (Exhibit 10.27)(5)(8)
 10.27   Stock Issuance Agreement with Abbott Laboratories, dated October 4,
         1995 (Exhibit 10.28)(5)(8)
 10.28   Assignment Agreement between Magainin Pharmaceuticals Inc., Roy C.
         Levitt, M.D. and GeneQuest, Inc. (Exhibit 10.25)(5)(9)
 10.29   Form of Purchase Agreement relating to the issuance by Magainin
         Pharmaceuticals, Inc. of units consisting of shares of Magainin
         Pharmaceuticals, Inc. Common Stock and warrants to purchase shares of
         Common Stock (Exhibit 10.1)(10)
 10.30   Form of Warrant to purchase shares of Magainin Pharmaceuticals, Inc.
         Common Stock (Exhibit 10.2)(10)
 10.31   Development, Supply and Distribution Agreement, effective as of
         February 12, 1997 with SmithKline Beecham Corporation (Exhibit
         10.29)(5)(13)
 10.32   Collaborative Research and Option Agreement with Genentech, Inc.,
         effective as of December 30, 1998
 10.33   Stock Purchase Agreement between Magainin Pharmaceuticals, Inc. and
         Genentech Inc., dated December 30, 1998 (Exhibit 10.33)(16)
 10.34   Supply Agreement between Abbott Laboratories Inc. and Magainin
         Pharmaceuticals, Inc., effective January 1, 1999 (Exhibit 10.34)(16)
 10.35 # 1998 Equity Compensation Plan(15)
 10.36 # Summary of Oral Agreements with Executive Officers
 10.37   Settlement and Termination Agreement with Abbott Laboratories, dated
         September 8, 1999 (Exhibit 99.1)(17)
 23.1  * Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
         as Exhibit 5.1 hereto)
 23.2  * Consent of KPMG LLP
 24    * Power of Attorney (included on signature page)
</TABLE>
--------

Explanation of Footnotes to Listing of Exhibits

*  Filed herewith.
#  Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
    June 30, 1992 filed with the Securities and Exchange Commission on
    September 24, 1992.
(2) Filed as an Exhibit to Registration Statement (No. 33-43579) on Form S-1
    filed with the Securities and Exchange Commission on October 24, 1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
    Statement (No. 33-43579) on Form S-1 filed with the Securities and Exchange
    Commission on November 27, 1991.
(4) Filed as Exhibit A to the Proxy Statement for the 1996 Annual Meeting of
    Stockholders.
(5) Portions of this Exhibit were omitted and filed separately with the
    Securities and Exchange Commission pursuant to an order granting
    confidential treatment.
(6) Filed as an Exhibit to the Transition Report on Form 10-K for the year
    ended December 31, 1993 filed with the Securities and Exchange Commission
    on March 9, 1994.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
    December 31, 1994 filed with the Securities and Exchange Commission on
    March 31, 1995.
(8) Filed as an Exhibit to the Form 10-Q for the quarter ended September 30,
    1995 filed with the Securities and Exchange Commission on November 9, 1995.
(9) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
    December 31, 1995 filed with the Securities and Exchange Commission on
    March 29, 1996.
(10) Filed as an Exhibit to Registration Statement (No. 333-09927) on Form S-3
     filed with the Securities and Exchange Commission on August 9, 1996.
(11) Filed as an Exhibit to Registration Statement (No. 333-14555) on Form S-3
     filed with the Securities and Exchange Commission on October 21, 1996.

                                      II-3
<PAGE>

(12) Filed as an Exhibit to the Form 10-Q for the quarter ended September 30,
     1996 filed with the Securities and Exchange Commission on November 14,
     1996.
(13) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
     December 31, 1996 filed with the Securities and Exchange Commission on
     March 31, 1997.
(14) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
     December 31, 1997, filed with the Securities and Exchange Commission on
     March 13, 1998.
(15) Filed as Exhibit A to the Proxy Statement for the 1998 Annual Meeting of
     Stockholders.
(16) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
     December 31, 1998, filed with the Securities and Exchange Commission on
     March 3, 1999.
(17) Filed as an Exhibit to the Current Report on Form 8-K filed with the
     Securities and Exchange Commission on September 28, 1999.

Item 17. Undertakings

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against a public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.

   The undersigned Registrant hereby undertakes that:

   (1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

   (2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

                                      II-4
<PAGE>

                        SIGNATURES AND POWER OF ATTORNEY

   Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Plymouth Meeting, Pennsylvania, on
this 27th day of September, 1999.

                                          MAGAININ PHARMACEUTICALS INC.

                                                 /s/ Michael R. Dougherty
                                          By: _________________________________
                                                   Michael R. Dougherty
                                                President, Chief Executive
                                               Officer, and Chief Financial
                                                   Officer and Director

   KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Zola P. Horovitz, Chairman, and Michael R.
Dougherty, President, Chief Executive Officer, Chief Financial Officer and
Director, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement, and to file the same, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

<TABLE>
<CAPTION>
             Signature                            Title                       Date
             ---------                            -----                       ----
 <C>                               <S>                                 <C>
       /s/ Zola P. Horowitz        Chairman of the Board               September 27, 1999
 _________________________________
      Zola P. Horovitz, Ph.D.
        /s/ Bernard Canavan        Director                            September 27, 1999
 _________________________________
       Bernard Canavan, M.D.
     /s/ Michael R. Dougherty      President, Chief Executive          September 27, 1999
 _________________________________  Officer,
       Michael R. Dougherty         Chief Financial Officer and
                                    Director
                                    (Principal Executive, Financial
                                    and Accounting Officer)
         /s/ Roy C. Levitt         Chief Operating Officer and         September 27, 1999
 _________________________________ Director
        Roy C. Levitt, M.D.
      /s/ Charles A. Sanders       Director                            September 27, 1999
 _________________________________
     Charles A. Sanders, M.D.
       /s/ Robert F. Shapiro       Director                            September 27, 1 999
 _________________________________
         Robert F. Shapiro
     /s/ James B. Wyngaarden       Director                            September 27, 1999
 _________________________________
     James B. Wyngaarden M.D.
      /s/ Michael A. Zasloff       Vice Chairman, Executive Vice       September 27, 1999
 _________________________________  President
  Michael A. Zasloff, M.D., Ph.D.   and Director
</TABLE>

                                      II-5
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number  Document
 ------- --------
 <C>     <S>
  5.1*   Opinion of Morgan, Lewis & Bockius LLP regarding legality of
         Securities being registered.
 23.1*   Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
         as Exhibit 5.1 hereto).
 23.2*   Consent of KPMG LLP
 24.1*   Powers of Attorney (included on the signature page).
</TABLE>
--------
*  Filed herewith.

                                      II-6
[{"type": "S-1", "sequence": "1", "description": "FORM S-1 MAGAININ PHARMACEUTICALS, INC.", "secsgml_size_bytes": 260243}]
{"company-data": {"conformed-name": "MAGAININ PHARMACEUTICALS INC", "cik": "0000880431", "assigned-sic": "2836", "irs-number": "133445668", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-87933", "film-number": "99718464"}, "business-address": {"street1": "5110 CAMPUS DR", "city": "PLYMOUTH MEETING", "state": "PA", "zip": "19462", "phone": "6109415231"}}
As filed with the Securities and Exchange Commission on September 27, 1999
                                                    Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                               ----------------
                                    Form S-1
                             REGISTRATION STATEMENT
                                     Under
                           THE SECURITIES ACT OF 1933

                               ----------------
                         MAGAININ PHARMACEUTICALS INC.
             (Exact name of registrant as specified in its charter)

                               ----------------
         Delaware                     2834                   13-3445668
     (State or other           (Primary Standard          (I.R.S. Employer
     jurisdiction of       Industrial Classification    Identification No.)
     incorporation or                 No.)
      organization)

                               5110 Campus Drive
                           Plymouth Meeting, PA 19462
                                 (610) 941-4020
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)

                               ----------------
                              MICHAEL R. DOUGHERTY
                     President and Chief Executive Officer
                         Magainin Pharmaceuticals Inc.
                               5110 Campus Drive
                           Plymouth Meeting, PA 19462
                                 (610) 941-4020
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                               ----------------
   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                        CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Title of each class of                     Proposed maximum   Proposed maximum
    securities to be         Amount to     offering price per      aggregate         Amount of
       registered          be registered          share         offering price   registration fee
-------------------------------------------------------------------------------------------------
Common Stock
 $.002 par value.......      5,000,000            $1.02(1)        $5,100,000(1)    $1,417.80(1)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) Based on the average of the reported high and low sales of Common Stock
    reported on the Nasdaq National Market on September 23, 1999, estimated
    solely for the purpose of calculating the registration fee pursuant to Rule
    457(c).

                               ----------------
   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus in not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting an offer by buy these +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 1999

PROSPECTUS

                                5,000,000 Shares

                         Magainin Pharmaceuticals Inc.

                                  Common Stock

  We are offering up to 5,000,000 shares of our common stock, $0.002 par value
per share, on an all or none basis to selected institutional investors,
including current institutional holders of our common stock.

  Our common stock is quoted on the Nasdaq National Market under the symbol
MAGN. On September 24, 1999 the last reported closing price of our common stock
was $1.03 per share.

                                  -----------

  Investing in the shares involves substantial risks. Please refer to the Risk
Factors section beginning on page 7.

                                  -----------
Per
                                                                Share   Total
                                                                ----- ---------
Public Offering Price.......................................... $     $
Expenses of the Offering....................................... $     $
Proceeds to Magainin Pharmaceuticals Inc....................... $     $
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.

                The date of this prospectus is September  , 1999
TABLE OF CONTENTS
Page
                                                                          ----
Prospectus Summary.......................................................   1
Risk Factors.............................................................   7
Use of Proceeds..........................................................  17
Price Range of Common Stock..............................................  18
Dividend Policy..........................................................  18
Capitalization...........................................................  19
Dilution.................................................................  19
Selected Financial Data..................................................  20
Management's Discussion and Analysis of Results of Operations and
 Financial Condition.....................................................  21
Business.................................................................  25
Management...............................................................  35
Principal Stockholders...................................................  40
Description of Capital Stock.............................................  42
Plan of Distribution.....................................................  44
Where You Can Find More Information......................................  44
Legal Matters............................................................  45
Experts..................................................................  45
Change of Auditors.......................................................  45
----------------

                             ABOUT THIS PROSPECTUS

   You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
PROSPECTUS SUMMARY

                                  The Company

   Magainin Pharmaceuticals Inc. is a biopharmaceutical company engaged in the
development of medicines for serious diseases. Our development efforts are
focused on oncology, anti-infectives, and pulmonary and allergic disorders.

   Our research and drug development efforts are focused on two technology
platforms:

  .  Host-Defense Drug Discovery & Development

   We engage in the research and development of compounds derived from the
host-defense systems of animals. The host-defense system is the complex of
natural processes used by the body to protect itself against disease. This
system comprises physical barriers to infection, such as skin and mucosal
membranes and fluids, as well as more complex chemical and biological
components, such as the immune system. We believe that certain classes of small
molecules, such as the aminosterols, originally discovered in the shark and
naturally occurring peptides, such as the magainins, originally discovered in
the frog, are used by the host-defense system to provide a first line of
defense against disease.

  .  Respiratory Target Discovery & Product Development

   We employ a range of genomics techniques to identify genes associated with
the pathogenesis of asthma and allergy, with the objective of utilizing the
optimal biologic gene targets in the development of novel therapeutics.

Aminosterols

   The aminosterols are a novel class of small molecules with unique
pharmacological activities. Discovered in the dogfish shark, these small
molecules bind to and then enter endothelial and other activated cell types.
Upon entry into these cells, aminosterols can cause decreased motility,
cytoskeletal activity, cell adhesion, and can effect cellular response to
multiple growth factors. We believe that this results in anti-angiogenesis,
anti-tumor and anti-inflammatory activities.

 Squalamine

   Squalamine is our lead aminosterol drug candidate, and is currently being
evaluated in Phase II clinical studies for the treatment of non-small cell lung
cancer.

   The Phase II studies will test the safety and efficacy of squalamine in
combination with paclitaxel and carboplatin, the leading cytotoxic
chemotherapeutic regimen for the treatment of advanced non-small cell lung
cancer. Squalamine will be administered intravenously and concurrently with
each cycle of chemotherapy. Efficacy will be assessed by the number of patients
whose tumors stop growing, along with the number of individuals who experience
tumor shrinkage.

   Additional clinical studies for squalamine are being planned in ovarian
cancer, pediatric neuroblastoma, and other solid tumors.

   Squalamine is an angiogenesis inhibitor that has shown promising results in
preclinical models of cancer. Angiogenesis is the process of budding and growth
of new blood vessels from existing blood vessels under the stimulus of a
variety of growth factors. Angiogenesis is believed to be an essential event in
tumor

                                       1
formation and growth. In tumor-induced angiogenesis, endothelial cells that
line blood vessels are activated by mitogens produced by the tumor cells and
surrounding stroma to form new blood vessels. These blood vessel endothelial
cells eventually grow into and around the tumor, nourishing it and enabling it
to thrive.

   We are also pursuing other research programs related to squalamine. Due to
its unique mechanism of action, squalamine may also have application in a
number of disease conditions characterized by abnormal blood vessel growth,
including diabetic retinopathy, age related macular degeneration, rheumatoid
arthritis and psoriasis.

 Other Aminosterols

   We have discovered a number of other aminosterol compounds in the shark,
each differing from squalamine in chemical structure and interacting with a
specific receptor. These compounds affect the intracellular metabolism in a
manner that disturbs the target cell responses to certain growth factors,
hormones and other signals. Therapeutic opportunities for these compounds may
include obesity, various malignancies, inflammatory diseases, and viral
infections.

Respiratory Program

   In 1996, we initiated a research program in the genomics of asthma and
allergy. These efforts led to the identification of interleukin-9 (IL9), a gene
that varies in DNA structure and function in asthmatic and allergic humans and
animals. We maintain a comprehensive research and development program to
identify additional genes which may be implicated in asthma and allergy. The
IL9 receptor has been discovered as a key second gene candidate, and we have
also identified other genes. We investigate the role of these genes in the
allergic inflammatory response, with the objective of utilizing the optimal
biologic gene targets in the development of novel therapeutics for asthma and
allergy.

   Asthma is a serious, chronic illness characterized by one or more symptoms,
including episodic shortness of breath, wheezing, coughing and chest tightness,
that appears to be increasing in prevalence and severity. The complex
pathophysiology of asthma is under intensive scrutiny; however, its precise
causes are not well understood. The recognition that specific genetic and
environmental factors are important in the etiology of asthma has prompted an
intensive search for genes that significantly influence susceptibility to this
common disorder. While genetic susceptibility to bronchial hyperresponsiveness
and asthma is likely due to multiple genes acting together, the identification
of specific susceptibility genes provides valuable insight into the molecular
pathways associated with this condition.

 Biologics Based Anti-IL9 Therapeutics

   In December 1998, we entered into a one-year collaborative research and
option agreement with Genentech, Inc. relating to development of a protein
therapeutic in asthma. Under this agreement, Genentech will be provided access
to a therapeutic target (IL9), which is in our proprietary Asthma Gene
Database, and the companies will conduct a collaborative program to evaluate
the utility of a blocking antibody to IL9 in suppressing the asthmatic
response.

 Asthma Gene Database (Screening Program)

   We also employ functional genomics to discover therapeutic targets for
asthma and allergy. Numerous targets have been identified, validated and added
to our Asthma Gene Database. These include genes and gene products that can be
antgonized by biological therapeutics, such as proteins, and traditional small
molecules. Chemical libraries can be screened for activity against these
targets using our comprehensive proprietary high throughput screening programs.

                                       2
Small Molecule Therapeutics

   We have identified aminosterols, including MSI-1432, that block T-cell
adhesion and proliferation in response to antigens. The effect of MSI-1432 in
reducing asthmatic response in animal models is comparable to systemic
corticosteroids with an improved side-effect profile and no measurable effect
on hematologic cells. Inhalation systems are being investigated and additional
preclinical studies are being conducted in preparation for possible clinical
testing.

Magainin Peptides

 LOCILEX(TM)

   LOCILEX(TM) CREAM has been our lead product development candidate.
LOCILEX(TM) is a topical cream antibiotic intended for the treatment of
infection in diabetic foot ulcers.

   On July 26, 1999, we announced that we received notification from the U.S.
Food and Drug Administration (FDA) that our New Drug Application (NDA) for
LOCILEX(TM) CREAM had been deemed not approvable. In order to again seek
approval of LOCILEX(TM) CREAM, the FDA has indicated that we must conduct
further development activities, including clinical and manufacturing
activities. We are currently considering the feasibility of continuing this
program.

 Other Peptides

   Our peptides have demonstrated in pre-clinical testing the potential for
broad application in a number of other indications:

  .  Cancer/Tumorcidal: MSI-1857 is a chemically modified magainin peptide
     formulated for systemic delivery. In preclinical animal models, MSI-1857
     enhances the cellular uptake and activity of standard chemotherapeutics
     against tumors. MSI-1596 is an antibiotic peptide with similar activity
     to MSI-1857. Preclinical testing of MSI-1596 in animal models is
     underway where demonstration of substantial anti-tumor activity may
     provide for a rapid clinical development program. These peptides appear
     to be useful against multi-drug resistant tumors.

  .  Systemic Infections: Magainin peptides are broad spectrum antibiotics
     that have shown no resistance or cross-resistance to other anti-
     infectives in testing to date. Preclinical data demonstrates activity
     against pathogens in various infectious disease models.

  .  Other Topical Infections: Various magainin peptides have shown promise
     in a broad variety of applications including eye infections, acne,
     sexually transmitted diseases and yeast infections. There may also be
     potential use against viruses, including rhinoviruses that cause the
     common cold.

  .  Agricultural Anti-fungal: Ornamental plants genetically altered to
     express certain magainins have shown resistance to fungal and other crop
     diseases. A variety of agricultural applications are being considered.

   An E.coli-based recombinant manufacturing process is under development at
Magainin. Recombinant methods would increase the availability, and decrease the
cost, of magainin peptides for various applications.

Defensins

   In the process of researching animal host-defenses across different species,
we have helped demonstrate that all species, including humans, utilize some
form of local antimicrobial defense beyond their systemic immune systems. In
humans, we have identified host-defense molecules (defensins) in the lungs, the
GI tract and skin. We have also identified several natural "inducers" of local
antimicrobial defenses. Some of these compounds are found in nature, are
generally regarded as safe (i.e., GRAS substances), and may possess novel
nutritional as well as pharmaceutical immunostimulant applications.

                                       3
The Offering

Shares offered....................  5,000,000 shares. See "Plan of
                                    Distribution."

Price per share...................  $    .

Common stock outstanding as of
June 30, 1999, as adjusted to
give effect to the offering.......
                                    27,911,616 shares (excludes 5,112,644
                                    shares issuable upon exercise of options
                                    and warrants outstanding at June 30, 1999).

Nasdaq National Market Symbol.....  MAGN (Common Stock)

Use of proceeds...................  We will use the net proceeds from the sale
                                    of the shares offered hereby to fund both
                                    ongoing and planned research and
                                    development activities, including clinical
                                    trials and manufacturing development
                                    efforts for squalamine, activities
                                    associated with our respiratory program and
                                    peptide program, and working capital to be
                                    used for general corporate purposes.

                                       4
Summary Financial Data
                    (In thousands, except per share amounts)

   The following summary financial data has been derived from our audited and
unaudited financial statements and are not necessarily indicative of results to
be expected for any future period. This data should be read in conjunction with
our financial statements and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus.
Six Months Ended
                                              Year Ended December 31,                        June 30,
                               --------------------------------------------------------  -----------------
                                   1998       1997         1996        1995      1994     1999      1998
                               ------------ --------  -------------- --------  --------  -------  --------
Statement of Operations Data:
Revenues:
 Contract and government
  grant......................    $    --    $ 10,088     $    150    $  2,056  $     85  $   --   $    --
 Related party contract......         --         --           --          280       326      --        --
                                 --------   --------     --------    --------  --------  -------  --------
                                      --      10,088          150       2,336       411      --        --
                                 --------   --------     --------    --------  --------  -------  --------
Costs and expenses:
 Research and development....      21,456     22,875       22,326      18,160    11,258    5,666    11,905
 General and administrative..       3,292      3,246        3,488       3,137     3,468    1,632     1,878
 Charge for stock issuance
  relating to royalty
  buyout.....................         --         --         7,080         --        --       --        --
                                 --------   --------     --------    --------  --------  -------  --------
                                   24,748     26,121       32,894      21,297    14,726    7,298    13,783
                                 --------   --------     --------    --------  --------  -------  --------
Loss from operations.........     (24,748)   (16,033)     (32,744)    (18,961)  (14,315)  (7,298)  (13,783)
Interest income..............       1,640      1,770        2,172       1,778     1,207      388       944
Interest expense.............        (196)      (118)         (48)        (32)      (48)    (103)      (84)
                                 --------   --------     --------    --------  --------  -------  --------
Net loss.....................    $(23,304)  $(14,381)    $(30,620)   $(17,215) $(13,156) $(7,013) $(12,923)
                                 ========   ========     ========    ========  ========  =======  ========
Net loss per share--basic and
 diluted.....................    $  (1.05)  $  (0.73)    $  (1.71)   $  (1.17) $  (0.99) $ (0.31) $  (0.58)
                                 ========   ========     ========    ========  ========  =======  ========
Weighted average shares
 outstanding.................      22,235     19,679       17,938      14,696    13,301   22,911    22,174
                                 ========   ========     ========    ========  ========  =======  ========
June 30, 1999
                               December 31, ------------------------
                                   1998      Actual   As Adjusted(1)
                               ------------ --------  --------------
Balance Sheet Data:
Cash and investments.........    $ 22,871   $ 15,693     $ 20,743
Working capital..............      11,897      5,367       10,417
Total assets.................      25,891     18,326       23,376
Total liabilities............      11,211     10,583       10,583
Accumulated deficit..........    (132,928)  (139,941)    (139,941)
Stockholders' equity.........      14,680      7,743       12,793
--------
(1) Reflects the sale of 5,000,000 shares of Common Stock offered hereby at an
    assumed offering price of $1.03 per share, less estimated expenses of the
    offering of approximately $0.02 per share.

                                       5
Important Note Regarding Forward-Looking Statements

   Our disclosure and analysis in this prospectus contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In
particular, these include statements relating to present or anticipated
scientific progress, development of potential pharmaceutical products, future
revenues, capital expenditures, research and development expenditures, future
financing and collaborations, personnel, manufacturing requirements and
capabilities, and other statements regarding matters that are not historical
facts or statements of current condition.

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

   We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, 8-K and 10-K reports to the SEC. Also note that we
provide the following cautionary discussion of risks and uncertainties relevant
to our business. These are factors that we think could cause our actual results
to differ materially from expected results. Other unanticipated occurrences
besides those listed here could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.

                                       6
RISK FACTORS

   You should carefully consider the following risk factors and the other
information presented in this prospectus before deciding to invest in the
shares of common stock.

The FDA Has Deemed Our NDA for LOCILEX(TM) Cream to Be Not Approvable, Which
Will Prevent Near Term Commercialization of the Product.

   On July 26, 1999, we announced that we received notification from the FDA
that our New Drug Application (NDA) for LOCILEX(TM) Cream has been deemed not
approvable.

   LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of infection
in diabetic foot ulcers, has been our lead product development candidate. We
had hoped to commercialize LOCILEX(TM) Cream in the near term. However, with
the FDA's decision, near term commercialization of LOCILEX(TM) Cream will not
occur, and we will generate no revenues from LOCILEX(TM) Cream in the near
future.

   In order to again seek approval of LOCILEX(TM) Cream, the FDA has indicated
that we must conduct further development activities, including clinical and
manufacturing activities. The specific nature of the clinical activities will
be determined after consultations with the FDA. As a result of its review of
manufacturing of the cream product, the FDA issued certain observations of
deficiencies in compliance with good manufacturing procedures. In any
additional clinical studies to be conducted, new batches of the cream product
will need to be manufactured from the bulk drug substance, in compliance with
good manufacturing procedures, and meeting strict product specifications.
Further clinical and manufacturing development efforts may again not be
successful. The time required to conduct such activities may be lengthy, and
the costs considerable.

   We are currently considering the feasibility of continuing the program.

If We Do Not Raise Additional Capital in the Near Term, We May Not Be Able to
Continue Any of Our Research and Development Programs, and We May Never
Commercialize Any Products.

   We will need to raise substantial additional funds in the near 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 maintained cash and investments of $15.7 million at June 30, 1999. At
June 30, 1999, we had current liabilities of $10.5 million. In the absence of
raising additional funds or significantly reducing expenses, we do not have
sufficient resources to sustain operations beyond the first half of 2000.

   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. If we cannot obtain funding, we will
need to delay, scale back or eliminate research and development programs or
enter into collaborations with third parties to commercialize potential
products or technologies that we might otherwise seek to develop or
commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.

   Particularly with the lack of approval of LOCILEX(TM) Cream, our prospects
of completing future equity financings are diminished. As a result, we expect
to evaluate all available strategic alternatives to finance our programs and
technology, including broad-based alliances or mergers with better-financed
entities.

                                       7
We Expect to Continue to Incur Substantial Losses and Continue to Have Negative
Results of Operations.

   To date, we have engaged solely in the research and development of drug
candidates. We have not generated any revenues from product sales and have
incurred losses in each year since our inception. As of June 30, 1999, we had
an accumulated deficit of approximately $139.9 million.

   Most of our proposed products are in a relatively early developmental stage
and will require significant research, development and testing. We must obtain
regulatory approvals for all of our proposed products prior to
commercialization. Our operations are also subject to various competitive and
regulatory risks. As a result, we are unable to predict when or if we will
achieve any product revenues. We expect to experience substantial losses in the
foreseeable future as we continue our significant research, development and
testing efforts, which will cause us to have continued negative results of
operations.

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

 1. Contract Manufacturing:

   We currently have neither the resources, facilities, nor the technical
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the
number of companies capable of producing our proposed products is limited. We
may be unable to maintain arrangements with qualified outside contractors to
manufacture materials at costs which are affordable to us, if at all.

   Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a
manufacturing process. In order to engage another manufacturer, we may need to
obtain a license or other technology transfer from the original contract
manufacturer. Even if a license is available from the original contract
manufacturer on acceptable terms, we may be unable to successfully effect the
transfer of the technology to the new contract manufacturer. Any such
technology transfer may also require the transfer of requisite data for
regulatory purposes, including information contained in a proprietary drug
master file held by a contract manufacturer. If we rely on a contract
manufacturer that owns the drug master file, our ability to change contract
manufacturers may be more limited.

 2. Abbott Laboratories:

   We had an arrangement with Abbott Laboratories providing for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream has not occurred, in September 1999 we
renegotiated this agreement with Abbott. As a result, we have agreed to pay
Abbott $4.2 million, of which $4.0 million has been paid to date, and we will
receive partial delivery of material. An additional $3.4 million is due to
Abbott and will be paid in the event that we successfully obtain additional
funds, and only then to the extent of 15% of amounts obtained in excess of $10
million in any year. We have no further purchase commitments to Abbott, and
Abbott has no further supply requirements to Magainin.

 3. Alternative Production Processes:

   The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of the traditional
antibiotics. We are pursuing alternative manufacturing sources, including
recombinant manufacturing, in order to improve the gross margins available to
us on any sales of these products. These programs, however, are at an early
stage and will require significant expenditures over an

                                       8
extended period of time. Ultimately, we may be unable to develop a more cost-
effective manufacturing process and, even if we develop a more cost-effective
process, the FDA may not approve such a process.

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

 4. Alternative Future Uses of LOCILEX(TM) Cream

   There are no currently identified alternative uses of bulk drug substance
for LOCILEX(TM) Cream.

If We Do Not Obtain Required Regulatory Approvals, We Will Not Be Able to
Commercialize Any of Our Product Candidates.

   Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.

   Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which has
occurred for LOCILEX(TM) Cream, will materially affect our business. Even if we
receive approval of a product candidate, it may be conditioned upon certain
limitations and restrictions as to the drugs used and may be subject to
continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including:

  .  warning letters;

  .  fines;

  .  withdrawal of regulatory approval;

  .  product recalls;

  .  operating restrictions;

  .  injunctions; and

  .  criminal prosecution.

 1. FDA Marketing Approval:

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

  .  grant marketing approval;

  .  require additional testing or information; or

  .  deny the application.

 2. FDA Manufacturing Approval:

   Detailed manufacturing information is also required to be included in the
NDA for review and approval by the FDA. All manufacturing facilities and
processes must comply with the good manufacturing practices, or GMP,
regulations prescribed by the FDA. All manufacturers must, among other things,
pass manufacturing

                                       9
plant inspections and provide records of detailed manufacturing processes.
Among other things, it must be demonstrated that:

  .  the drug product can be consistently manufactured at the same quality
     standard;

  .  the drug product is stable over time; and

  .  the level of chemical impurities in the drug product are under a
     designated level.

   As a result of its review of manufacturing of the cream product, the FDA
issued certain observations of deficiencies in compliance with good
manufacturing procedures. In any additional clinical studies to be conducted,
new batches of the cream product will need to be manufactured from the bulk
drug substance, in compliance with good manufacturing procedures, and meeting
strict product specifications.

 3. Ongoing FDA Oversight:

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

  .  require additional submissions if there are any modifications to the
     drug product including, for example, any changes in manufacturing
     process, labeling, or manufacturing facility;

  .  require post-marketing testing and surveillance to monitor the effects
     of approved drug products; and

  .  enforce conditional approvals that restrict the commercial applications
     of a drug product.

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

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

 4. Other Regulatory Bodies:

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

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

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

We Will Rely on Marketing and Development Partners and if They Do Not Perform
as Expected, We May Not Successfully Commercialize Our Products.

   We do not have our own sales and marketing staff. In order to successfully
develop and market our products, we must enter into marketing and distribution
arrangements with third parties. We also expect to delegate the responsibility
for all or a significant portion of the development and regulatory approval for
certain products to partners. If our partners do not develop an approvable or
marketable product or do not market a product successfully, we may not achieve
necessary product revenues. Additionally, we may be unable to enter into
successful arrangements like these, as is required in our business.

                                       10
We currently maintain a collaborative research and option agreement with
Genentech, Inc. in the asthma area, which expires in December 1999. Genentech
may choose not to exercise its option to negotiate a fuller asthma development
and commercialization agreement with us. We will need partners in this area to
assist us, and we may be unable to enter into a similar agreement or find as
effective a partner.

   We also have a development, supply distribution agreement with SmithKline
Beecham for LOCILEX(TM) Cream. Future milestone payments and sales proceeds
from SmithKline will occur only in the event that LOCILEX(TM) Cream is
eventually approved.

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

   We may also decide to establish our own sales force to market and sell
certain products. Although certain members of our management have limited
experience in the marketing of pharmaceutical products, we have no experience
with respect to marketing our products. If we choose to pursue this
alternative, we will need to spend significant additional funds and devote
significant management resources and time to establish a successful sales
force. Given our inexperience in establishing and managing a salesforce, this
effort may not be successful. Given our financial resources, efforts in this
area would likely be modest compared to our competitors.

If We Are Not Able to Innovate and Develop Products as Rapidly as Our
Competitors, Our Products May Not Achieve Market Acceptance.

   The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense
systems is being conducted by others. Many companies are also currently
involved in research and development activities focused on the pathogenesis of
disease, and the competition among companies attempting to find genes
responsible for disease is intense. Most of these entities have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources than we have. We will also face competition from companies using
different or advanced techniques that may render our products obsolete.

   We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that
have significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining
regulatory approvals of such products. Some of these companies may be in
advanced phases of clinical testing of various drugs that may be competitive
with our proposed products.

   Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that they
have developed, some of which may be directly competitive with our technology.
In addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting
highly qualified scientific personnel.

   Even if eventually approved, LOCILEX(TM) Cream may not be successfully
marketed against oral antibiotics for the treatment of infection in diabetic
foot ulcers. These infections have historically been treated with systemically
administered antibiotics, which may be perceived by some medical professionals
as having certain

                                       11
advantages over LOCILEX(TM) Cream. In addition, we may be unable to manufacture
LOCILEX(TM) Cream at a cost which will allow it to be sold at a competitive
price relative to oral antibiotics or other topical antibiotics that may be
used for this indication.

   Many companies are working to develop and market products intended for the
additional disease areas being targeted by us, including cancer and asthma. A
number of major pharmaceutical companies have significant franchises in these
disease areas, and can be expected to invest heavily to protect their
interests. In the cancer field, anti-angiogenic agents are under development at
a number of companies. In the asthma field, other biopharmaceutical companies
have also reported the discovery of genes relating to asthma.

We Depend on Our Intellectual Property, and If We Are Unable to Protect Our
Intellectual Property We May Not Realize Optimal Value from Our Technology.

 1. Patents:

   Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon commercialization could be
diminished.

   We cannot be certain that:

  .  patents will issue from any of our patent applications;

  .  our patent rights will be sufficient to protect our technology;

  .  our patents will not be successfully challenged or circumvented by our
     competitors; or

  .  our patent rights will provide us with any commercial advantages.

   The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy until a patent issues and publications
in the scientific or patent literature lag behind actual discoveries.

   Even after we are issued patent rights, we cannot be certain that:

  .  others will not develop similar technologies or duplicate the
     technology;

  .  others will not design around the patented aspects of the technology;

  .  we will not be obliged to defend ourselves in court against allegations
     of infringement of third-party patents;

  .  our issued patents will be held valid in court; or

  .  an adverse outcome in a suit would not subject us to significant
     liabilities to third parties, require rights to be licensed from third
     parties, or require us to cease using such technology.

   The cost of litigation can be substantial, regardless of the outcome.

 2. Potential Ownership Disputes:

   There may be disputes arising as to the ownership of our technology. Most of
our research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies,

                                       12
universities, or research institutions. These entities may raise questions as
to when technology was developed, and assert rights to the technology. These
kind of disputes have occurred in the past. We may not prevail in any such
disputes.

   Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be disputes as to the capacity in which consultants
are operating when they make certain discoveries. We may not prevail in any
such disputes.

 3. Other Intellectual Property:

   In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators, and other advisors.
We may find that these agreements will be breached, or that our trade secrets
have otherwise become known or independently developed or discovered by our
competitors.

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

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

   We depend to a considerable degree on a limited number of key personnel.
Many key responsibilities have been assigned to a relatively small number of
individuals. We do not maintain "key man" insurance on any of our employees.
The loss of certain management and technical personnel could adversely affect
our ability to develop and commercialize products.

We are Subject to Potential Product Liability Claims, Which Could Result in
Significant Expense if a Claim Arose.

   We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:

  .  our proposed products cause some undesirable side effects or injury
     during clinical trials;

  .  our proposed products cause undesirable side effects or injury; or

  .  third parties that we have agreed to indemnify incur liability.

   While we carry insurance, this coverage is expensive and we may be unable to
maintain adequate coverage on acceptable terms.

If We Do Not Receive Adequate Third-Party Reimbursement for Any of Our Drug
Candidates, Some Patients May Be Unable to Afford Our Products and Sales Could
Suffer.

   In both the United States and elsewhere, the availability of reimbursement
from third-party payers, such as government health administration authorities,
private health insurers and other organizations impacts prescription
pharmaceutical sales. These organizations are increasingly challenging the
prices charged for

                                       13
medical products and services, particularly where they believe that there is
only an incremental therapeutic benefit which does not justify the additional
cost. Coverage and reimbursement may not be available for our proposed products
or, if available, may not be adequate. Without insurance coverage, many
patients may be unable to afford our products, and we may not reach optimal
sales levels.

   There has also been a trend toward government reforms intended to contain or
reduce the cost of health care. In certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been a number of federal and state proposals
to implement similar government control.

   We expect this trend to continue, but we cannot predict the nature or extent
of any reform that results. It is possible that reform could impact
pharmaceutical marketing and pricing. Not only would this affect possible
future profit margins, it could adversely affect our ability to obtain
financing for the continued development of our proposed products. Furthermore,
reforms could have a broader impact by limiting overall growth of health care
spending, such as Medicare and Medicaid spending, which could also adversely
effect our business.

Our Stock Price Is Extremely Volatile Due to a Number of Factors.

   The market prices and trading volumes for securities of biopharmaceutical
and biotechnology companies, including ours, have historically been, and will
likely continue to be, highly volatile. Future events affecting our business or
that of our competitors may significantly impact our stock price, including:

     .  product testing results,

     .  technological innovations,

     .  new commercial products,

     .  government regulations,

     .  proprietary rights,

     .  regulatory actions, and

     .  litigation.

We May Be Unable to Maintain the Standards for Listing on the Nasdaq National
Market, Which Could Make it More Difficult for Investors to Dispose of Our
Common Stock and Could Subject Our Common Stock to the "Penny Stock" Rules.

   Our common stock is listed on the Nasdaq National Market. Nasdaq requires
listed companies to maintain standards for continued listing, including either
a minimum bid price for shares of a company's stock or a minimum tangible net
worth. If we are unable to maintain these standards, our common stock could be
delisted. Trading in our stock would then be conducted on the Nasdaq Small Cap
Market unless we are unable to meet the requirements for inclusion. If we were
unable to meet the requirements for inclusion in the Small Cap Market, our
common stock would be traded on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in quotations
published by the National Quotation Bureau, Inc. that are commonly referred to
as the "pink sheets." As a result, it could be more difficult to sell, or
obtain an accurate quotation as to the price of, our common stock.

   In addition, if our common stock were delisted, it would be subject to the
so-called penny stock rules. The SEC has adopted regulations that define a
"penny stock" to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules impose additional sales practice
requirements on broker-dealers subject to certain exceptions.

                                       14
For transactions covered by the penny stock rules, a broker-dealer must make
a special suitability determination for the purchaser and must have received
the purchaser's written consent to the transaction prior to the sale. The penny
stock rules also require broker-dealers to deliver monthly statements to penny
stock investors disclosing recent price information for the penny stock held in
the account and information on the limited market in penny stocks. Prior to the
transaction, a broker-dealer must provide a disclosure schedule relating to the
penny stock market. In addition, the broker-dealer must disclose the following:

  .  commissions payable to the broker-dealer and the registered
     representative; and

  .  current quotations for the security as mandated by the applicable
     regulations.

   If our common stock were delisted and determined to be a "penny stock," a
broker-dealer may find it to be more difficult to trade our common stock, and
an investor may find it more difficult to acquire or dispose of our common
stock in the secondary market.

The Exercise of Options and Warrants and Other Issuances of Shares Could Have
Dilutive Effect on Our Stock Price.

   As of June 30, 1999, there were outstanding options to purchase an aggregate
of 3,552,000 shares of our common stock at prices ranging from $0.40 per share
to $16.75 per share, of which approximately 2,270,000 were exercisable as of
such date. Also outstanding at June 30, 1999 were warrants to purchase 229,739
shares of our common stock exercisable at $8.00 per share, a warrant to
purchase 300,000 shares of our common stock, exercisable at $7.50 per share,
and warrants to purchase an aggregate of 1,030,905 shares of our common stock,
currently exercisable from $5.99-$8.31 per share, subject to adjustment
(including as a result of this offering). Exercise of options and warrants at
prices below the market price of our common stock could adversely affect the
price of our common stock. Additional dilution may result from the issuance of
shares in connection with collaborations or manufacturing arrangements, or in
connection with other financing efforts.

Our Certificate of Incorporation and Delaware Law Contain Provisions that could
Discourage a Takeover.

   Our certificate of incorporation provides our board of directors the power
to issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock, and the board of directors has the power to
determine these voting rights. In addition, Section 203 of the Delaware General
Corporation Law contains provisions which impose restrictions on stockholder
action to acquire control of Magainin. The effect of these provisions of our
certificate of incorporation and Delaware law provisions would likely
discourage third parties from seeking to obtain control.

We May be Subject to Year 2000 Compliance Risks, Which Could Disrupt Our
Operations and the Operations of Our Collaborators.

   We use computers in various aspects of our business, and are therefore
exposed to year 2000, or Y2K, problems. If unresolved, these computer system
problems could result in operational delays, financial miscues, manufacturing
errors, lost clinical data or other unforeseen consequences. In mid-1998, we
initiated a compliance program with the following objectives:

  .  identifying potentially non-compliant internal systems;

  .  updating and/or replacing aging hardware;

  .  upgrading or updating software/network systems;

  .  assuring company-wide Y2K compliance;

  .  assessing third-party risks; and

  .  establishing contingency plans for any third-party risks identified.

                                       15
We have identified, through internal testing and discussions with
significant vendors, that some administrative computers and software, as well
as some laboratory systems used for research, are not Y2K compliant. In order
to make these systems compliant, we have elected to replace hardware or upgrade
software systems. We expect to have critical internal systems and computers Y2K
compliant by November 1, 1999 at a cost of less than $100,000. We would likely
have considered replacing or upgrading certain computers and systems
independent of Y2K concerns.

   We are in the process of contacting significant vendors to determine the
extent of third-party Y2K risks. Most third-parties have advised us that they
will make every effort to be compliant prior to December 31, 1999; however,
these third-parties could not provide us with assurances that they will be
compliant on a timely basis. We have important third-party relationships with
sales and marketing partners, manufacturers and clinical study administrators.
None of our contracts with these vendors address Y2K problems or their
remediation or prevention, and no assurances of compliance can be given by
these parties. We will continue to monitor the progress of these third-party
vendors and will adjust our contingency plans if any significant risks are
identified. Necessary contingency plans or remedies could be expensive.

   In a worst case scenario, we could experience delays in receiving R&D
supplies and accessing data on patients enrolled in clinical studies. These
delays could slow commercialization efforts and research and development
programs, or impact our ability to effectively manage and monitor these
programs. Our Y2K compliance program is expected to reduce our level of
uncertainty about internal Y2K problems and Y2K problems of significant third
parties with whom we conduct business.

                                       16
USE OF PROCEEDS

   The net proceeds to us from the sale of the 5,000,000 shares of our common
stock in this offering are estimated to be approximately $5,050,000. This is
based on an assumed public offering price of $1.01 per share, which reflects
the deduction of estimated offering expenses payable by us. We will use the net
proceeds from the sale of the shares offered in this prospectus to fund both
ongoing and planned research and development activities, including clinical
trials and manufacturing development efforts for squalamine, activities
associated with our respiratory program and peptide program, and working
capital to be used for general corporate purposes.

   Although we anticipate the net proceeds of this offering, together with our
available cash, should be sufficient to finance our operations through the year
2000, we cannot be sure that these funds will be sufficient. Our projected
expenses and revenues may vary and are subject to change depending upon
numerous factors, including:

  .  the progress of our research and development programs,

  .  regulatory approvals,

  .  competitive and technological advances,

  .  the commercial viability of our products,

  .  the terms of collaborative arrangements, if any, that we may enter into,
     and

  .  other factors, many of which are beyond our control.

   Substantial additional funds will be needed to complete our current and
anticipated research and development programs and before we are able to bring
products to market.

   Pending the application of funds for the purposes described above, we intend
to invest the net proceeds of this offering in U.S. government and other
investment grade securities.

                                       17
PRICE RANGE OF COMMON STOCK

   Our common stock trades on the Nasdaq Stock Market under the symbol MAGN.
The following table sets forth the quarterly range of high and low closing
sales prices of our common stock, as reported on the Nasdaq National Market,
for the periods indicated below.
Year Ended December 31, 1997                                        High   Low
----------------------------                                       ------ -----
1st Quarter....................................................... $10.50 $7.88
2nd Quarter....................................................... $ 8.50 $6.63
3rd Quarter....................................................... $11.81 $7.25
4th Quarter....................................................... $12.13 $7.50
Year Ended December 31, 1998                                        High   Low
----------------------------                                       ------ -----
1st Quarter....................................................... $ 8.75 $5.38
2nd Quarter....................................................... $ 8.19 $4.38
3rd Quarter....................................................... $ 6.00 $2.31
4th Quarter....................................................... $ 3.88 $2.38
Year Ended December 31, 1999                                        High   Low
----------------------------                                       ------ -----
1st Quarter....................................................... $ 4.44 $1.44
2nd Quarter....................................................... $ 2.56 $1.50
3rd Quarter (through September 24, 1999).......................... $ 3.69 $1.00
DIVIDEND POLICY

   We have never paid, and do not intend to declare or pay in the foreseeable
future, any dividends on our common stock.

                                       18
CAPITALIZATION

   The following table sets forth our capitalization as of June 30, 1999, and
as adjusted to reflect the sale of the common stock offered hereby and the
receipt of the net proceeds from the sale.
June 30, 1999
                                                     --------------------------
                                                      Actual   As Adjusted(/1/)
                                                     --------  ----------------
                                                          (in thousands)
Short-term debt.................................. $  2,500      $  2,500
   Stockholders' equity:
     Preferred stock; $.001 par value; 9,211,000
      shares authorized; no shares issued or
      outstanding...................................      --            --
     Common Stock, $.002 par value; 45,000,000
      shares authorized, 22,912,000 shares
      outstanding, actual; and 27,912,000 shares
      outstanding, as adjusted (2)..................       46            56
     Additional paid-in capital.....................  147,646       152,686
     Accumulated deficit............................ (139,941)     (139,941)
     Accumulated other comprehensive income--
      unrealized (loss) on investments..............       (8)           (8)
                                                     --------      --------
       Total stockholders' equity...................    7,743        12,793
                                                     --------      --------
       Total capitalization......................... $ 10,243      $ 15,293
                                                     ========      ========
--------
(1) Reflects the sale of 5,000,000 shares of common stock offered hereby at an
    assumed offering price of $1.03 per share, less estimated expenses of the
    offering of approximately $0.02 per share.
(2) Does not include 5,112,644 shares issuable as of June 30, 1999 upon
    exercise of outstanding options and warrants.

                                    DILUTION

   Our net tangible book value as of June 30, 1999 (based on our unaudited
financial statements) was approximately $7,743,000 or $0.34 per share. "Net
tangible book value" per share of common stock represents our total tangible
assets reduced by our total liabilities and divided by the number of shares of
common stock outstanding. Assuming completion of this offering at net offering
price of $1.01 per share, our adjusted net tangible book value as of June 30,
1999 would have been approximately $12,793,000 or approximately $0.46 per
share. The increase in net tangible book value of $0.12 per share would be due
solely to the purchase of the shares in this offering. Purchasers in this
offering will immediately incur a dilution of $0.57 per share from the assumed
$1.03 offering price of the shares. "Dilution" is determined by subtracting net
tangible book value per share after the offering from the offering price.

   Public offering price per share..................               $   1.03
     Net tangible book value per share as of June
      30, 1999...................................... $    .34
     Increase per share attributable to new
      investors.....................................      .12
                                                     --------
   Net tangible book value per share after the
    offering........................................                    .46
                                                                   --------
   Dilution per share to new investors..............               $    .57
                                                                   ========
19
SELECTED FINANCIAL DATA

   The following selected financial data as of and for each of the five years
in the period ended December 31, 1998 are derived from our audited financial
statements. The statement of operations data for each of the six-month periods
ended June 30, 1999 and 1998, and the balance sheet data as of June 30, 1999
were derived from unaudited financial statements prepared by us. The unaudited
interim financial statements have been prepared on substantially the same basis
as the audited financial statements and, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results of operations for such periods. The
historical results are not necessarily indicative of results to be expected for
any future period. This data should be read in conjunction with our financial
statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus.
Six Months
                                       Year Ended December 31,                     Ended June 30,
                          -----------------------------------------------------  --------------------
                            1998       1997       1996       1995       1994       1999       1998
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                          (in thousands, except per share data)
Statement of Operations
 Data:
Revenues:
  Contract and
   government grant.....  $     --   $  10,088  $     150  $   2,056  $      85  $     --   $     --
  Related party
   contract.............        --         --         --         280        326        --         --
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                --      10,088        150      2,336        411        --         --
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
Costs and expenses:
  Research and
   development..........     21,456     22,875     22,326     18,160     11,258      5,666     11,905
  General and
   administrative.......      3,292      3,246      3,488      3,137      3,468      1,632      1,878
  Charge for stock
   issuance relating to
   royalty buyout.......        --         --       7,080        --         --         --         --
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
                             24,748     26,121     32,894     21,297     14,726      7,298     13,783
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
Loss from operations....    (24,748)   (16,033)   (32,744)   (18,961)   (14,315)    (7,298)   (13,783)
Interest income.........      1,640      1,770      2,172      1,778      1,207        388        944
Interest expense........       (196)      (118)       (48)       (32)       (48)      (103)       (84)
                          ---------  ---------  ---------  ---------  ---------  ---------  ---------
Net loss................  $ (23,304) $ (14,381) $ (30,620) $ (17,215) $ (13,156) $  (7,013) $ (12,923)
                          =========  =========  =========  =========  =========  =========  =========
Net loss per share-basic
 and diluted............  $   (1.05) $   (0.73) $   (1.71) $   (1.17) $   (0.99) $   (0.31) $   (0.58)
                          =========  =========  =========  =========  =========  =========  =========
Weighted average shares
 outstanding............     22,235     19,679     17,938     14,696     13,301     22,911     22,174
                          =========  =========  =========  =========  =========  =========  =========
December 31,
                          -----------------------------------------------------  June 30,
                            1998       1997       1996       1995       1994       1999
                          ---------  ---------  ---------  ---------  ---------  ---------
                                                 (in thousands)
Balance Sheet Data:
Cash and investments....  $  22,871  $  39,061  $  33,340  $  43,666  $  25,921  $  15,693
Working capital.........     11,897     33,073     28,276     30,429     21,750      5,367
Total assets............     25,891     42,444     36,376     45,727     28,050     18,326
Total liabilities.......     11,211      7,574      6,433      4,534      4,137     10,583
Accumulated deficit.....   (132,928)  (109,624)   (95,243)   (64,623)   (47,408)  (139,941)
Stockholders' equity....     14,680     34,870     29,943     41,193     23,913      7,743
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
                     OF OPERATIONS AND FINANCIAL CONDITION

General

   We are a biopharmaceutical company engaged in the development of medicines
for serious diseases. Our development efforts are focused on anti-infectives,
oncology, and pulmonary and allergic disorders.

   On July 26, 1999, we announced that we received notification from the FDA
that our NDA for LOCILEX(TM) Cream (formerly referred to as pexiganan acetate)
has been deemed not approvable.

   We are conducting research on an aminosterol class of compounds. One such
compound, squalamine, is currently being evaluated in Phase II clinical testing
in patients with non-small cell lung cancer. We are conducting additional
research efforts in the respiratory area.

   Since commencing operations in 1988, we have not generated any revenue from
product sales, and we have funded operations primarily from the proceeds of
public and private placements of securities. We have incurred a loss in each
year since our inception, and we expect to incur substantial additional losses
for at least the next several years. We expect that losses will fluctuate from
quarter to quarter, and that such fluctuations may be substantial. As such,
results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years. At June 30, 1999, our accumulated
deficit was approximately $139.9 million. We will need to raise additional
funds in the near future to continue our operations.

Results of Operations

 Revenues

   We have received no revenues from product sales. Revenues recorded to date
have consisted principally of revenues recognized under collaborations with
corporate partners. We recorded revenue of $10,000,000 in 1997 reflecting the
receipt of payments under the SmithKline Agreement entered into in February
1997 for LOCILEX(TM) Cream. We do not expect to realize additional milestone
revenues from our arrangement with SmithKline. We have no other currently
existing collaborations that will result in the realization of research and
development revenues.

 Research and Development Expenses

   Research and development expenses decreased in the year ended December 31,
1998 as compared to the same period a year ago due principally to a reduction
in clinical and preclinical costs associated with LOCILEX(TM) Cream and
squalamine, as well as a reduction in manufacturing development costs. These
decreases have been partially offset by an increase in personnel expenses.

   We have incurred significant expenses associated with the development and
scale-up of the manufacturing process for our products, as well as in the
production of materials for development and possible commercialization. We
contract with third parties for these activities, and such expenses amounted to
$7,652,000, $10,174,000 and $9,557,000 for 1998, 1997 and 1996, respectively.

   Research and development expenses decreased in the six months ended June 30,
1999 as compared to the same period a year ago, due principally to reductions
in manufacturing development, clinical and regulatory costs, and personnel
expenses. The level of research and development expenses in future periods will
depend principally upon the progress of our research programs.

 General and Administrative Expenses

   General and administrative expenses consist principally of personnel costs
and professional fees and have remained generally steady from 1996 through
1998.

   General and administrative expenses have decreased for the six months ended
June 30, 1999 as compared to the same period a year ago due principally to
reductions in personnel expenses.

                                       21
Other Income and Expense

   We recorded a non-cash charge to earnings of $7,080,000 in 1996 representing
the fair value of 550,000 shares of Common Stock issued by us in a buyout of
royalties which we would otherwise have owed on any sales of LOCILEX(TM) Cream.

   Interest income decreased during the year ended December 31, 1998 as
compared to the prior year, due to lower investment balances during this
period. The decrease in interest income in the year ended December 31, 1997 as
compared to December 31, 1996 is principally due to decreased investment
balances. The increase in interest expense for the years ended December 31,
1998 and 1997, as compared to the prior years, is due to higher debt balances.

   Interest income decreased in the six months ended June 30, 1999 as compared
to the same period of the prior year due to lower investment balances during
this period. The increase in interest expense for the six-month period ended
June 30, 1999 is due principally to higher debt balances in the first quarter
of 1999 compared to the same period a year ago.

 Loss

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

Financial Condition, Liquidity, and Capital Resources

   Cash and investments were $15,693,000 at June 30, 1999 as compared to
$22,871,000 at December 31, 1998. The primary use of cash was to finance our
operations.

   Since inception, we have funded our operations primarily from the proceeds
of public and private placements of securities, including:

  .  $17,080,000 raised from our initial public offering in December 1991;

  .  $21,469,000 raised from a public offering completed in February 1993;

  .  $18,023,000 raised from a private placement completed in October 1993;

  .  $32,627,000 raised from a public offering completed in August 1995;

  .  $11,932,000 raised from a private placement completed in August 1996;

  .  $19,172,000 raised from a public offering completed in December 1997;
     and

  .  $2,000,000 raised from a private placement completed in December 1998.

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

   Accounts payable and accrued expenses decreased $629,000 from December 31,
1998 to $8,024,000 at June 30, 1999, due principally to payments made under
certain manufacturing development agreements related to LOCILEX(TM) Cream.
Accounts payable and accrued expenses are expected to decrease in future
periods as we make payments for the purchase of bulk drug substance for
LOCILEX(TM) Cream.

   We refinanced our $2,500,000 note payable in the second quarter of 1999.
Under the terms of this arrangement, we make monthly interest-only payments at
a rate of 7.375%, with principal due in June 2000. We maintain investments of
$2,750,000 as collateral for the note payable.

                                       22
In February 1997, we entered into a development, supply and distribution
agreement in North America with SmithKline for LOCILEX(TM) Cream. SmithKline
has paid us $10,000,000 under this agreement, which we received in 1997.
SmithKline may make additional payments upon the occurrence of approval and
certain product milestones. We had hoped to commercialize LOCILEX(TM) Cream in
the near term. However, with the FDA's decision, near term commercialization of
LOCILEX(TM) Cream will not occur, and we will generate no revenues from
LOCILIX(TM) Cream in the near future. The SmithKline Agreement also gives
SmithKline rights to terminate the arrangement, and, under certain conditions,
the right to negotiate for rights to another Magainin product development
candidate.

   In December 1998, we entered into a collaborative research and option
agreement with Genentech, Inc. relating to a protein therapeutic in asthma.
Under this agreement, we will provide Genentech with access to a therapeutic
target (IL9), that is in our proprietary asthma gene database, and we will
jointly conduct a one-year collaborative program to evaluate the utility of a
blocking antibody to IL9 in suppressing the asthmatic response. Under this
collaborative agreement, Genentech made an initial equity investment of
$2,000,000 in our company, and has an option to enter into a future development
and commercialization agreement with our company. Any such future development
and commercialization agreement could provide for payments to us of up to
$35,000,000, upon terms to be negotiated, and royalty payments on sales of
products developed by Genentech in the field.

   We will need to raise substantial additional funds in the near 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 maintained cash and investments of $15.7 million at June 30, 1999. At
June 30, 1999, we had current liabilities of $10.5 million. In the absence of
raising additional funds or significantly reducing expenses, we do not have
sufficient resources to sustain operations beyond the first half of 2000.

   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 we cannot
obtain funding, we will need to delay, scale back or eliminate research and
development programs or enter into collaborations with third parties to
commercialize potential products or technologies that we might otherwise seek
to develop or commercialize ourselves, or seek other arrangements. If we engage
in collaborations, we will receive lower consideration upon commercialization
of such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.

   Particularly with the lack of approval of LOCILEX(TM) Cream, our prospects
of completing future equity financings are diminished. As a result, we expect
to evaluate all available strategic alternatives to finance our programs and
technology, including broad-based alliances or mergers with better-financed
entities.

   We currently have neither the resources, facilities nor capabilities to
manufacture any of our proposed products in the quantities and quality required
for commercial sale. We have no current plans to establish a manufacturing
facility. We depend upon contract manufacturers for commercial scale
manufacturing of our proposed products in accordance with regulatory standards.
This dependence may restrict our ability to develop and deliver products on a
timely, profitable and competitive basis. Additionally, the number of companies
capable of producing our products is limited. We may be unable to maintain
arrangements with qualified outside contractors to manufacture materials at
costs which are affordable to us, if at all.

   The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of the traditional
antibiotics. We are pursuing alternative manufacturing sources, including
recombinant manufacturing, in order to improve the gross margins available to
us on sales of these products. These programs, however, are at an early stage
and will require significant expenditures over an extended period of time.
Ultimately, we may be unable to develop a more cost-effective manufacturing
process and, even if we develop a more cost-effective process, the FDA may not
approve such a process.

                                       23
We had an arrangement with Abbott Laboratories providing for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream has not occurred, in September 1999 we
renegotiated this agreement with Abbott. As a result, we have agreed to pay
Abbott $4.2 million, of which $4.0 million has been paid to date, and we will
receive partial delivery of material. An additional $3.4 million is due to
Abbott and will be paid in the event that we successfully obtain additional
funds, and only then to the extent of 15% of amounts obtained in excess of $10
million in any year. We have no further purchase commitments to Abbott, and
Abbott has no further supply requirements to Magainin.

   Our capital expenditure requirements will depend upon numerous factors,
including the progress of our other research and development programs, the time
and cost required to obtain regulatory approvals, our ability to enter into
additional collaborative arrangements, the demand for products based on our
technology, if and when such products are approved, and possible acquisitions
of products, technologies and companies. We had no significant capital
commitments as of June 30, 1999.

   Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
available funds for investment. We do not believe that we currently have any
significant direct foreign currency exchange rate risk.

Year 2000

   We use computers in various aspects of our business, and are therefore
exposed to year 2000, or Y2K, problems. If unresolved, these computer system
problems could result in operational delays, financial miscues, manufacturing
errors, lost clinical data or other unforeseen consequences. In mid-1998, we
initiated a compliance program with the following objectives:

  .  identifying potentially non-compliant internal systems;

  .  updating and/or replacing aging hardware;

  .  upgrading or updating software/network systems;

  .  assuring company-wide Y2K compliance;

  .  assessing third-party risks; and

  .  establishing contingency plans for any third-party risks identified.

   We have identified, through internal testing and discussions with
significant vendors, that some administrative computers and software, as well
as some laboratory systems used for research, are not Y2K compliant. In order
to make these systems compliant, we have elected to replace hardware or upgrade
software systems. We expect to have critical internal systems and computers Y2K
compliant by November 1, 1999 at a cost of less than $100,000. We would likely
have considered replacing or upgrading certain computers and systems
independent of Y2K concerns.

   We are in the process of contacting significant vendors to determine the
extent of third-party Y2K risks. Most third-parties have advised us that they
will make every effort to be compliant prior to December 31, 1999; however,
these third-parties could not provide us with assurances that they will be
compliant on a timely basis. We have important third-party relationships with
sales and marketing partners, manufacturers and clinical study administrators.
None of our contracts with these vendors address Y2K problems or their
remediation or prevention, and no assurances of compliance can be given by
these parties. We will continue to monitor the progress of these third-party
vendors and will adjust our contingency plans if any significant risks are
identified. Necessary contingency plans or remedies could be expensive.

   In a worst case scenario, we could experience delays in receiving R & D
supplies and accessing data on patients enrolled in clinical studies. These
delays could slow commercialization efforts and research and development
programs, or impact our ability to effectively manage and monitor these
programs. Our Y2K compliance program is expected to reduce our level of
uncertainty about internal Y2K problems and Y2K problems of significant third
parties with whom we conduct business.

                                       24
BUSINESS

Background

   Our biopharmaceutical research and development efforts are focused on two
technology platforms: host-defense drug discovery, and a gene-based target and
drug discovery program in respiratory disease. In our host-defense programs, we
seek to isolate and develop therapeutically active compounds from the host-
defense systems of animals for the treatment of human diseases. In our gene-
based target and drug discovery program, we employ a range of genomics
techniques to identify genes associated with the pathogenesis of asthma and
allergy, with the objective of utilizing the optimal biologic gene targets in
the development of novel therapeutics.

 Host-Defense System

   We were formed to engage in the research, development and commercialization
of compounds derived from the host-defense systems of animals. The host-defense
system is the complex of natural processes and mechanisms used by the body to
protect itself against disease. This system comprises physical barriers to
infection, such as skin and mucosal membranes and fluids, as well as more
complex chemical and biological components, such as the immune system. We
believe that certain classes of naturally occurring peptides, such as
magainins, and certain small molecules, such as aminosterols, both described
below, are used by the host-defense system to provide a first line of defense
against disease.

   Our approach to identifying pharmaceutically active compounds in the host-
defense systems of animals involves the extraction of compounds from animal
tissues. The extracts are assayed for activity against selected pathogens, such
as bacteria, fungi, viruses and certain cancers. We then purify the active
compounds and determine the precise chemical structure of the purified
molecule. Once naturally occurring molecules have been isolated, we analyze the
relationship between the molecular structure of the compound and its biological
activity. In general, this requires that we identify the structures in the
compound that are believed to have therapeutic effects and analyze how the
compounds could be modified to improve the desired therapeutic effects. We then
utilize our combinatorial chemistry capabilities to modify the molecules to
alter biological activity or increase stability.

   Magainins While conducting genetic and molecular biological research at the
National Institutes of Health in 1987, Dr. Michael A. Zasloff, presently our
Vice Chairman and Executive Vice President, isolated the first magainins from
the African frog Xenopus laevis. In connection with his research, Dr. Zasloff
was performing surgery on African clawed frogs in his laboratory. After
suturing the frogs and returning them to their aquarium tank, he noticed that
the incisions healed without infection, inflammation or notable scarring,
despite being exposed to the bacteria-filled aquarium water. Dr. Zasloff
deduced that the frogs produced a substance that protected them against
infection. Eventually, he isolated, from the frog's skin, two related peptides,
which he called magainins, and which were later shown to kill a variety of
pathogens, including bacteria, amoebae, fungi and parasites.

   Magainins are peptides. A peptide is a chain of molecules, known as amino
acids, that are considered to be one of the basic building blocks of the human
body. Chains of 2 to 50 amino acids are generally referred to as peptides,
while longer chains are referred to as proteins. We have modified natural
peptides by rearranging the order and combination of amino acids and by
substituting and deleting additional amino acids to produce magainins having a
broader spectrum of therapeutic activity and improved potency.

   In the presence of a cell membrane rich in acidic phospholipids and poor in
cholesterol, such as bacterial membranes, magainins twist into two-sided,
spiral shaped molecules (helices), with one side soluble in the fat-like
substance that comprise cell membranes and the other side soluble in water.
Individual magainin peptides

                                       25
then aggregate and form a channel in the membrane of a pathogen. Once formed,
this aggregation of magainin peptides punctures the cell membrane, breaks down
the integrity of the cell and kills the pathogen. By rupturing bacteria and
targeting a fundamental difference in cell membrane composition, magainins
target and kill bacteria differently than traditional antibiotics. In certain
cases, cancer cells also exhibit sufficient acidic phospolipids on their
external membranes to be lysed by magainin peptides.

   Aminosterols and Angiogenesis  Squalamine was discovered in the body tissues
of the dogfish shark. The shark was initially examined because of its known
resistance to infection and cancer. The chemical structure of squalamine
uniquely combines a steroid and a polyamine, two classes of systemic agents
that are generally well-tolerated in humans. Beyond squalamine, we have
discovered several other aminosterol compounds in the shark. In preclinical
testing, some of these compounds have demonstrated an ability to control cell
growth, along with other pharmacologic properties. These properties may have
application in the treatment of a number of disease indications characterized
by cell proliferation, including cancer.

   Within the human body, a network of arteries, capillaries and veins, known
as the vasculature, functions to transport blood throughout the body. The basic
network of the vasculature is developed through angiogenesis, a fundamental
process by which new blood vessels are formed. This growth process primarily
occurs during the first three months of embryonic development. Once the general
network of the blood vessels is complete, certain inhibitory factors balance
and stabilize the stimulators of new blood vessel formation. Although
angiogenesis occurs in human embryonic development, wound healing and in
certain reproductive processes in women, angiogenesis is also associated with
several diseases, including diabetic retinopathy and macular degeneration, both
of which are major causes of blindness, and cancer.

   Cancer includes many different types of uncontrolled cellular growth.
Clusters of cancer cells, referred to as tumors, may invade and destroy
surrounding organs, impair physiological function and lead to death. In order
to survive, cancer cells require oxygen and nutrients, which are received from
the body's blood supply. In order to access this blood supply, cancer cells
initiate a biochemical mechanism that stimulates angiogenesis, which provides
the blood supply that nourishes the tumor. As cancer cells grow and metastasize
(spread from primary sites to secondary sites) they require continuous
angiogenesis. Anti-angiogenic substances are intended to inhibit the growth of
new blood vessels and may therefore be effective in treating certain cancers,
with potentially less serious and fewer adverse side effects than traditional
therapies.

 Genomics and Drug Discovery

   Advances in genetics and molecular biology have significantly enhanced the
ability of scientists to clone and sequence genes and identify the causes of
disease at the molecular level. Genomics, or the study of the genome, can be
applied to the examination of the genetic influences on human disease.
Functional genomics refers to the determination of the manner in which disease
genes specifically impact the disease process. In contrast to traditional drug
discovery and development, a genetic approach commences by identifying those
genes that are responsible for the initiation or progression of disease.
Analysis of DNA (deoxyribonucleic acid) helps characterize the specific role of
genes in the disease process. The information stored in the DNA of a gene acts
as a set of instructions to living cells of the organism. These instructions
direct the cells to synthesize specific proteins, such as hormones or enzymes
that perform the basic biochemical and physiological functions of the cells.
Disease may occur when a defect (mutation) occurs in a gene or genes, resulting
in incorrect instructions being sent to cells, and disrupting the normal
balance or function of these essential proteins. The ability to detect such a
mutation and to understand how the disruption of normal protein function
contributes to the initiation and progression of the resultant disease are
potentially valuable aids to pharmaceutical discovery and development. To
identify an appropriate molecular target for therapeutic intervention, it may
also be necessary to characterize fully the biochemical pathway in which the
disease gene functions.

   We employ a functional genomics approach to understand the genetic basis of
disease and to develop potential drug leads. Through these efforts we seek to
identify appropriate targets for pharmaceutical

                                       26
intervention that aim to control the root cause of human disease. We believe
that pharmaceuticals developed for use against these specific targets have the
potential for greater effectiveness and fewer side effects than pharmaceuticals
developed through more traditional processes.

Product Development and Research Programs

 Squalamine--Solid Tumors

   Squalamine is the lead product development candidate in our aminosterol
program. Our initial disease focus for squalamine is solid tumors. We are
currently conducting Phase II clinical testing of squalamine in patients with
non-small cell lung cancer.

   The Phase II studies will test the safety and efficacy of squalamine in
combination with paclitaxel and carboplatin, the leading cytotoxic
chemotherapeutic regimen for the treatment of advanced non-small cell lung
cancer. Squalamine will be administered intravenously with each cycle of
chemotherapy. Efficacy will be assessed by the number of patients whose tumors
stop growing, along with the number of individuals who experience tumor
shrinkage.

   Additional clinical studies for squalamine are being planned in ovarian
cancer, pediatric neuroblastoma, and other solid tumors.

   Cancer is the second most common cause of death in the Western world,
exceeded only by coronary heart disease. Cancer patients are usually treated
with a combination of surgery, radiation therapy and chemotherapy. Surgery and
radiation therapy can be particularly effective in patients in which the
disease has not yet spread to other tissue or organs. Chemotherapy is the
principal treatment for tumors that have metastasized. Chemotherapy involves
the administration of so-called cytotoxic drugs designed to kill cancer cells,
or the administration of hormone analogues to either reduce the production of,
or block the action of, certain hormones, such as estrogens and androgens,
which affect the growth of tumors. Because chemotherapeutic agents generally
attack rapidly dividing cells indiscriminately, damaging both normal and
cancerous cells, chemotherapy patients often suffer serious side effects.
Additionally, resistance to chemotherapy inevitably occurs over time.

   With advances in the understanding of the genesis and development of cancer,
there are several new approaches to cancer treatment. One such approach is the
control of angiogenesis, or new blood vessel growth. Angiogenesis is a key
stage in the development of tumor malignancy, and its inhibition may contribute
to the tumor becoming or remaining dormant.

   Squalamine may be of benefit in the treatment of solid tumors by inhibiting
new blood vessel growth required for tumor nourishment. Squalamine has
exhibited anti-angiogenic properties in a number of in vitro and in vivo
assays, and in animal models. Squalamine is believed to inhibit the growth of
primitive or embryonic capillaries associated with tumor growth. Squalamine has
the potential to be used in combination with a number of cytotoxic drugs in the
treatment of solid tumors, and we have observed synergies with certain such
cytotoxic therapies in animal testing.

   We are also pursuing other research programs related to squalamine. Due to
its unique mechanism of action, squalamine may also have application in a
number of disease conditions characterized by abnormal blood vessel growths,
including diabetic retinopathy, age-related macular degeneration, rheumatoid
arthritis and psoriasis

 Respiratory Target Discovery and Product Development Program

   Asthma is characterized clinically by wheezing and shortness of breath due
to reversible bronchospasm. It is a chronic, disabling disorder that appears to
be increasing in prevalence and severity. The complex pathophysiology of asthma
is under intensive scrutiny by scientists and researchers; however, its precise
causes

                                       27
are not well understood. A number of studies suggest asthma may have a genetic
basis, but family studies have been difficult to interpret due to other
influences, including allergens and pollutants. Allergic diseases, including
allergic rhinitis, are often present in individuals with asthma, but are also
individually important diseases. We believe the genetic susceptibility factors
for asthma and allergy will be, at least in part, related to one another.
Current treatment for asthma and allergies principally focuses on controlling
inflammation or treating airway constriction through use of bronchodilators and
steroids.

   In 1996, we initiated a research program in the genomics of asthma and
allergy. Our research program is primarily focussed on IL9, a gene which varies
in DNA structure and function in asthmatic and allergic humans and animals. We
maintain a comprehensive research and development program to identify
additional genes which may be implicated in asthma and allergy. The IL9
receptor has been discovered in humans as a key second gene candidate, and we
have also identified other genes. We continue to investigate the role of these
genes in the allergic inflammatory response, with the objective of utilizing
the optimal biologic gene targets in the development of novel therapeutics for
asthma and allergy.

   Biologics Based Anti-IL9 Therapeutics. In December 1998, we entered into a
collaborative research and option agreement with Genentech, Inc. relating to
development of a protein therapeutic in asthma. Under this agreement, Genentech
will be provided access to a therapeutic target (IL9), which is in our
proprietary Asthma Gene Database, and the companies will conduct a
collaborative one-year program to evaluate the utility of a blocking antibody
to IL9 in suppressing the asthmatic response.

   Asthma Gene Database (Screening Program). We also employ functional genomics
to discover small molecule targets for asthma and allergy. Numerous targets
have been identified, validated and added to our Asthma Gene Database.
Libraries can be screened for activity against these targets using our
comprehensive proprietary high throughput screening programs. We are engaged in
discussions regarding potential collaborations in this area.

   Small Molecule Therapeutics. We have identified aminosterols, including MSI-
1432, that block T-cell adhesion and proliferation in response to antigens. The
effect of MSI-1432 in reducing asthmatic response in animal models is
comparable to systemic corticosteroids with an improved side-effect profile and
no measurable effect on hematologic cells. Inhalation systems are being
investigated and additional preclinical studies are being conducted in
preparation for clinical development.

 LOCILEX(TM)

   LOCILEX(TM) Cream has been our lead product development candidate.
LOCILEX(TM) is a topical cream antibiotic intended for the treatment of
infection in diabetic foot ulcers.

   On July 26, 1999, we announced that we received notification from the FDA
that our NDA for LOCILEX(TM) Cream had been deemed not approvable. In order to
again seek approval of LOCILEX(TM) Cream, the FDA has indicated that we must
conduct further development activities, including clinical and manufacturing
activities. We are currently considering the feasibility of continuing the
program.

 Other Pre-Clinical Research Programs

   Other Peptides. Our peptides have demonstrated in pre-clinical testing the
potential for broad application in a number of other indications:

  .  Cancer / Tumorcidal: MSI-1857 is a chemically modified magainin peptide
     formulated for systemic delivery. In preclinical animal models, MSI-1857
     enhances the cellular uptake and activity of standard chemotherapeutics
     against tumors. MSI-1596 is an antibiotic peptide with similar activity
     to MSI-1857. Preclinical testing of MSI-1596 in animal models is
     underway where demonstration of substantial anti-tumor activity may
     provide for a rapid clinical development program. These peptides appear
     to be useful against multi-drug resistant tumors.

                                       28
.  Systemic Infections: Magainin peptides are broad spectrum antibiotics
     that have shown no resistance or cross-resistance to other anti-
     infectives in testing to date. Preclinical data demonstrates activity
     against pathogens in various infectious disease models.

  .  Other Topical Infections: Various magainin peptides have shown promise
     in a broad variety of applications including eye infections, acne,
     sexually transmitted diseases and yeast infections. There may also be
     potential use against viruses, including rhinoviruses that cause the
     common cold.

  .  Agricultural Anti-fungal: Ornamental plants genetically altered to
     express certain magainins have shown resistance to fungal and other crop
     diseases. A variety of agricultural applications are being considered.

   An E.coli-based recombinant manufacturing process is under development at
Magainin. Recombinant methods would increase the availability, and decrease the
cost, of magainin peptides for various applications.

   Other Aminosterols. We have discovered a number of other aminosterol
compounds in the shark, each differing from squalamine in chemical structure
and interacting with a specific receptor. These compounds affect the
intracellular metabolism in a manner that disturbs the target cell responses to
certain growth factors, hormones and other signals. Therapeutic opportunities
for these compounds may include obesity, various malignancies, inflammatory
diseases, and viral infections.

   Defensins. In the process of researching animal host-defenses across
different species, we have helped demonstrate that all species, including
humans, utilize some form of local antimicrobial defense beyond their systemic
immune systems. In humans, we have identified host-defense molecules
(defensins) in the lungs, the GI tract and skin. We have also identified
several natural "inducers" of local antimicrobial defenses. Some of these
compounds are found in nature, are generally regarded as safe (i.e., GRAS
substances), and may possess novel nutritional as well as pharmaceutical
immunostimulant applications.

Collaborative Arrangements

 Development and Marketing Collaborations

   Collaborations may allow us to leverage our scientific and financial
resources and gain access to markets and technologies that would not otherwise
be available to us. In the long term, development and marketing arrangements
with established companies in the markets in which potential products will
compete may allow our potential products more efficient access to intended
markets and may accordingly conserve our resources. We expect that we will
enter into development and marketing arrangements for most of the products we
may develop. From time to time, we hold discussions with various potential
partners.

   In February 1997, we entered into a development, supply and distribution
agreement in North America with SmithKline for LOCILEX(TM) Cream. SmithKline
has paid us $10,000,000 under this agreement, which we received in 1997.
SmithKline may make additional payments to us upon the occurrence of approval
and certain product milestones. We had hoped to commercialize LOCILEX(TM) Cream
in the near term. However, with the FDA's decision, near term commercialization
of LOCILEX(TM) Cream will not occur, and we will generate no revenues from
LOCILEX(TM) Cream in the near future. The SmithKline Agreement also gives
SmithKline rights to terminate the arrangement, and, under certain conditions,
the right to negotiate for rights to another Magainin product development
candidate.

   In December 1998, we entered into a collaborative research and option
agreement with Genentech, Inc. relating to a protein therapeutic in asthma.
Under this agreement, we will provide Genentech with access to a therapeutic
target (IL9), that is in our proprietary asthma gene database, and we will
jointly conduct a one-year collaborative program to evaluate the utility of a
blocking antibody to IL9 in suppressing the asthmatic response. Under this
collaborative agreement, Genentech made an initial equity investment of
$2,000,000 in our

                                       29
company, and has an option to enter into a future development and
commercialization agreement with our company. Any such future development and
commercialization agreement could provide for payments to us of up to
$35,000,000, upon terms to be negotiated, and royalty payments on sales of
products developed by Genentech in the field.

 Research and License Agreements

   We have rights under license agreements to several patents and patent
applications under which we expect to owe royalties on sales of any products
that are covered by issued patent claims. Additionally, certain of these
agreements also provide that if we elect not to pursue the commercial
development of any licensed technology, or do not adhere to an acceptable
schedule of commercialization, then our exclusive rights to such technology
would terminate. We also fund research at certain institutions, and these
relationships may provide us with an option to license any results of the
research.

Manufacturing

   We currently have neither the resources, the facilities, nor the technical
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no current plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the
number of companies that are capable of producing our proposed products is
limited. We may be unable to maintain arrangements with qualified outside
contractors to manufacture materials at costs which are affordable to us, if at
all.

   Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a
manufacturing process. In order to engage another manufacturer, we may need to
obtain a license or other technology transfer from the original contract
manufacturer. Even if a license is available from the original contract
manufacturer on acceptable terms, we may be unable to successfully effect the
transfer of the technology to the new contract manufacturer. Any such
technology transfer may also require the transfer of requisite data for
regulatory purposes, including information contained in a proprietary drug
master file held by a contract manufacturer. If we rely on a contract
manufacturer that owns the drug master file, our ability to change contract
manufacturers may be limited.

   The production of peptides, such as LOCILEX(TM) Cream and other magainin
peptides, is expensive relative to the production of traditional antibiotics.
We are pursuing alternative manufacturing sources, including recombinant
manufacturing, in order to improve the gross margins available to us on any
sales of these products. These programs, however, are at an early stage and
will require significant expenditures over an extended period of time.
Ultimately, we may be unable to develop a more cost-effective manufacturing
process, and even if we develop a more cost-effective process, the FDA may not
approve such a process.

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

Government Regulation

   Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.

   Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A

                                       30
delay or denial of regulatory approval for any of our drug candidates, such as
that which has occurred for LOCILEX(TM) Cream, will materially affect our
business. Even if we receive approval of a product candidate, it may be
conditioned upon certain limitations and restrictions as to how the drug is
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.

 FDA Marketing Approval

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

  .  grant marketing approval;

  .  require additional testing or information; or

  .  deny the application.

 FDA Manufacturing Approval

   Detailed manufacturing information is also required to be included in the
NDA for review and approval by the FDA. All manufacturing facilities and
processes must comply with the good manufacturing practice regulations
prescribed by the FDA. All manufacturers must, among other things, pass an
inspection of their plants and detailed manufacturing records and processes.
Among other things, it must be demonstrated that:

  .  the drug product can be consistently manufactured at the same quality
     standard;

  .  the drug product is stable over time; and

  .  the level of chemical impurities in the drug product are under a
     designated level.

   As a result of its review of manufacturing of LOCILEX(TM) Cream, the FDA
issued certain observations of deficiencies in compliance with good
manufacturing procedures. In any additional clinical studies to be conducted,
new batches of the cream product will need to be manufactured from the bulk
drug substance, in compliance with good manufacturing procedures, and meeting
strict product specifications.

 Ongoing FDA Oversight

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

  .  require additional submissions if there are any modifications to the
     drug product, including, for example, any changes in manufacturing
     process, labeling, or manufacturing facility;

  .  require post-marketing testing and surveillance to monitor the effects
     of approved drug products; and

  .  enforce conditional approvals that restrict the commercial applications
     of a drug product.

                                       31
Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting that may adversely affect our
business.

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

 Other Regulatory Bodies

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

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

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

Patent and Proprietary Rights; Licensed Technology

 Patents

   Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon commercialization could be
diminished.

   We cannot be certain that:

  .  patents will issue from any of our patent applications;

  .  our patent rights will be sufficient to protect our technology;

  .  our patents will not be successfully challenged or circumvented by our
     competitors; or

  .  our patent rights will provide us with any commercial advantages.

   The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because United States
patent applications are maintained in secrecy until a patent issues, and
publications in the scientific or patent literature lag behind actual
discoveries.

   Even after we are issued patent rights, we cannot be certain that:

  .  others will not develop similar technologies;

  .  others will not design around the patented aspects of the technology;

  .  we will not be obliged to defend ourselves in court against allegations
     of infringement of third-party patents;

  .  our issued patents will be held valid in court; and

                                       32
.  an adverse outcome in a suit would not subject us to significant
     liabilities to third parties, require rights to be licensed from third
     parties, or require us to cease using such technology.

   The cost of litigation can be substantial, regardless of the outcome.

 Potential Ownership Disputes

   There may be disputes arising as to the ownership of our technology. Most of
our research and development team previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when the technology was developed, and
assert rights to the technology. These kind of disputes have occurred in the
past. We may not prevail in any such disputes.

   Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be a dispute as to the capacity in which consultants
are operating when they make certain discoveries. We may not prevail in any
such disputes.

 Other Intellectual Property

   In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators and sponsored
researchers and other advisors. We may find that these agreements will be
breached, or that our trade secrets have otherwise become known or
independently developed or discovered by our competitors.

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

Competition

   The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense
systems is being conducted by others. Many companies are also currently
involved in research and development activities focused on the pathogenesis of
disease, and the competition among companies attempting to find genes
responsible for disease is intense. Most of these entities have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources than we have. We will also face competition from companies using
different or advanced techniques that may render our products obsolete.

   We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that
have significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining
regulatory approvals of such products. Some of these companies may be in
advanced phases of clinical testing of various drugs that may be competitive
with our proposed products.

   Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that they
have developed, some of which may be directly competitive with our technology.
In addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting
highly qualified scientific personnel.

                                       33
Even if eventually approved, LOCILEX(TM) Cream may not be successfully
marketed against oral antibiotics for the treatment of infection in diabetic
foot ulcers. These infections have historically been treated with systemically
administered antibiotics, which may be perceived by some medical professionals
as having certain advantages over LOCILEX(TM) Cream. In addition, we may be
unable to manufacture LOCILEX(TM) Cream at a cost which will allow it to be
sold at a competitive price relative to oral antibiotics or other topical
antibiotics that may be used for this indication.

   Many companies are working to develop and market products intended for the
additional disease areas we are targeting, including cancer and asthma. A
number of major pharmaceutical companies have significant franchises in these
disease areas, and can be expected to invest heavily to protect their
interests. In the cancer field, anti-angiogenic agents are under development at
a number of companies. In the asthma field, other biopharmaceutical companies
have also reported the discovery of genes relating to asthma.

Legal Proceedings

   We are not a party to any material legal proceedings.

Employees

   As of September 24, 1999, we had 49 full-time employees. No employees are
covered by collective bargaining agreements, and we consider relations with our
employees to be good.

Properties

   We lease an aggregate of approximately 26,000 square feet of space in
Plymouth Meeting, Pennsylvania for office and laboratory space. Our leases
expire in 2001 and 2002, and provide for minimum annual payments of
approximately $411,000 in 1999 and annual increases thereafter.

                                       34
MANAGEMENT

Directors, Executive Officers and Key Employees

   The following table sets forth certain information with respect to our
directors, executive officers and key employees:
Name                Age Position
               ----                --- --------
Michael R. Dougherty.............  41 President, Chief Executive Officer,
                                       Chief Financial Officer and Director
 Roy C. Levitt, M.D...............  46 Executive Vice President, Chief
                                       Operating Officer and Director
 Michael A. Zasloff, M.D., Ph.D...  53 Vice Chairman, Executive Vice President
                                       and Director
 Kenneth J. Holroyd, M.D..........  41 Senior Vice President
 Zola P. Horovitz, Ph.D...........  64 Chairman of the Board
 Bernard Canavan, M.D.............  63 Director
 Charles A. Sanders, M.D..........  67 Director
 Robert F. Shapiro................  64 Director
 James B. Wyngaarden, M.D.........  74 Director
Mr. Dougherty has served as our President and Chief Executive Officer since
August 1998. Mr. Dougherty served as Executive Vice President from March 1995
through August 1998, and as a Director since August 1997. From August 1993,
when he joined us, until March 1995, Mr. Dougherty served as Senior Vice
President. Mr. Dougherty has also served as our Chief Financial Officer since
August 1993. Prior to joining us, Mr. Dougherty served in the following
capacities at Centocor, Inc. (a biopharmaceutical company): Senior Vice
President, Chief Financial Officer and Treasurer, from February 1992 to August
1993, Vice President Corporate Finance from May 1990 to February 1992 and
Treasurer from June 1986 to May 1990.

   Dr. Levitt has served as our Executive Vice President and Chief Operating
Officer since August 1998. Dr. Levitt was appointed our head of Research and
Development, and a Director in August 1997. Dr. Levitt has served as Executive
Vice President since joining us on a full-time basis in January 1996. Prior to
joining, Dr. Levitt served as a consultant to Magainin beginning in 1995. Dr.
Levitt served as a faculty member at Johns Hopkins University in the Department
of Anesthesiology and Critical Care Medicine, from 1986 to 1995, in
Neurological Surgery from 1995 to 1996 and in the Department of Environmental
Health Sciences in the Johns Hopkins School of Public Health and Hygiene from
1988 to 1996.

   Dr. Zasloff has served as our Executive Vice President since July 1992. In
July 1996, Dr. Zasloff was appointed Vice Chairman of the Board. From 1988
until Dr. Zasloff joined us on a full-time basis in July 1992, Dr. Zasloff was
our Chief Scientific Advisor and served as the Charles E.H. Upham Professor,
Department of Pediatrics and Genetics, University of Pennsylvania School of
Medicine, and Chief, Division of Human Genetics and Molecular Biology, The
Children's Hospital of Philadelphia. From 1982 until 1988, Dr. Zasloff was
Chief, Human Genetics Branch, National Institutes of Child Health and Human
Development, National Institutes of Health. Dr. Zasloff currently also serves
as Adjunct Professor, Department of Human Genetics and Orthopedics, University
of Pennsylvania School of Medicine.

   Dr. Holroyd has served as Senior Vice President, Clinical Research and
Regulatory Affairs since June 1998. Dr. Holroyd has held various positions,
including Vice President of Respiratory Discovery Research, Product Development
and Business Development, since joining us in February 1997. Prior to joining
us, Dr. Holroyd was a faculty member and head of respiratory care services at
Johns Hopkins University School of Medicine and Hospital in the Department of
Anesthesiology and Critical Care Medicine. Dr. Holroyd earned his M.D. from
Johns Hopkins in 1984 and completed his residency training at Johns Hopkins
serving as chief resident of the Osler Medical Service and at the National
Heart, Lung and Blood Institute.

   Dr. Horovitz has served as Chairman of the Board of Directors since August
1998, and a director of Magainin since 1995. Dr. Horovitz was employed by
Bristol-Myers Squibb Company and its predecessor,

                                       35
Squibb Corporation, for over thirty years. At the time of his retirement in
1994, Dr. Horovitz was Vice President of Business Development at Bristol-Myers.
Dr. Horovitz is currently a consultant to the pharmaceutical and biotechnology
industries, and is a director of Avigen, Inc., Clinicor, Inc., Procept, Inc.,
Synaptic Pharmaceutical Corporation, Diacrin, Inc., BioCryst Pharmaceuticals,
Inc. and Roberts Pharmaceutical Corporation.

   Dr. Canavan has served as a director of Magainin since 1994. Dr. Canavan was
employed by American Home Products Corporation for over twenty-five years until
his retirement in February 1994. From June 1990 until January 1994, he was
President of American Home Products Corporation and was responsible for all
operations, including its pharmaceutical businesses worldwide. Previously, Dr.
Canavan was Chairman and Chief Executive Officer of American Home Products
Corporation's pharmaceutical company, Wyeth-Ayerst Laboratories. Dr. Canavan is
also a director of Alpha-Beta Technology, Inc. and BioChem Pharma Inc.

   Dr. Sanders has served as a director of Magainin since September 1996. Dr.
Sanders is the retired Chairman and Chief Executive Officer of Glaxo Inc.,
where he was employed from 1989 to 1995. Previously, Dr. Sanders was Vice
Chairman of Squibb Corporation and also served as General Director of
Massachusetts General Hospital. Dr. Sanders is a director of Scios Inc., Vertex
Pharmaceuticals Incorporated, StaffMark, Inc., Kendle International Inc.,
Pharmacopeia, Inc. and Trimeris, Inc.

   Mr. Shapiro has served as a director of Magainin since September 1996. In
1997, Mr. Shapiro joined Klingenstein, Fields and Co., LLC, an investment
management firm, as Vice Chairman and Partner. Since 1988, Mr. Shapiro has also
served as President of RFS & Associates, Inc., a private investment and
consulting firm. Previously, Mr. Shapiro served as President and Co-Chairman of
Wertheim Schroder & Co., Inc. and Chairman of New Street Capital Corporation,
investment banking firms. Mr. Shapiro is a director of American Buildings
Company, The Burnham Fund, Inc., Equitable Capital Partners, L.P. and The TJX
Companies, Inc.

   Dr. Wyngaarden has served as a director of Magainin since September 1996.
Since 1998, Dr. Wyngaarden has served as a Professor of Medicine at Duke
University Medical School. Since 1996, Dr. Wyngaarden has been a partner in the
Washington Advisory Group, a consulting firm. From 1995 to 1997, Dr. Wyngaarden
was a Senior Associate Dean, International Affairs, University of Pennsylvania
Medical School. From 1990 to 1994, Dr. Wyngaarden was Foreign Secretary of the
U.S. National Academy of Sciences and Institute of Medicine. From 1990 to 1994,
Dr. Wyngaarden also served as Associate Dean at Duke University Medical School.
Dr. Wyngaarden previously served in several capacities, including as the
Director of the National Institutes of Health. Dr. Wyngaarden is a director of
Hybridon, Inc. and Human Genome Sciences, Inc.

   Officers are elected or appointed by the Board of Directors to serve until
the appointment or election and qualification of their successors or their
earlier termination or resignation.

   Our board of directors consists of such number of directors as is fixed from
time to time by resolution adopted by the board of directors. All directors
hold office until the next annual meeting of stockholders or until the election
and qualification of their successor.

   The board of directors annually elects from its members an Executive
Committee, Audit Committee, Compensation Committee and Nominating Committee.

   The Executive Committee may exercise, with certain exceptions, all of the
authority of the board in the management of our business and affairs. The
Executive Committee is intended to serve in the event that action must be taken
by the board of directors at a time when convening a meeting of the entire
board is not feasible. The current members of the Executive Committee are Mr.
Dougherty and Dr. Horovitz.

   The Audit Committee is responsible for providing general oversight with
respect to the accounting principles employed in our financial reporting. The
Audit Committee meets at least annually with our principal financial and
accounting officers and independent public accountants to review the scope of
auditing procedures, our policies relating to internal auditing and accounting
procedures and controls, and to discuss results of the annual audit of our
financial statements. The current members of the Audit Committee are
Dr. Horovitz and Mr. Shapiro, both non-employee members of the board of
directors.

                                       36
The Compensation Committee has general supervisory power over, and the power
to grant awards under, our equity compensation plans. In addition, the
Compensation Committee recommends to the board the compensation of our
President and Chief Executive Officer, reviews and takes action on the
recommendations of the President and Chief Executive Officer as to the
compensation of our other officers and key personnel, approves the grants of
any bonuses to officers, and reviews other compensation matters generally. The
current members of the Compensation Committee are Dr. Canavan and Dr. Sanders.

   The Nominating Committee is authorized to consider candidates for directors
of Magainin. It is the policy of the Nominating Committee to consider director
nominees recommended by stockholders. The current members of the Nominating
Committee are Mr. Dougherty and Dr. Wyngaarden.

   All non-employee directors receive an annual fee of $15,000 for their
services to Magainin as directors, and are reimbursed for expenses incurred in
connection with attending meetings of the board of directors. As Chairman of
the Board, Dr. Horovitz receives an additional annual fee of $45,000.

Compensation of Executive Officers and Directors

   The following table sets forth for the years ended December 31, 1998, 1997
and 1996 information regarding compensation paid by us to our Chief Executive
Officer, our four other most highly paid executive officers as of December 31,
1998 and our former Chief Executive Officer.

                           Summary Compensation Table
Long-Term Compensation
                                                        -----------------------
                                 Annual Compensation    Restricted  Securities
                                 ----------------------   Stock     Underlying   All Other
   Name and Principal
        Position            Year  Salary        Bonus     Awards   Options/SARs Compensation
   ------------------       ---- ----------   --------- ---------- ------------ ------------
Michael R. Dougherty....    1998 $ 246,132    $  40,000    $ 0       170,000      $     0
   President, Chief
   Executive Officer        1997   215,507       66,000      0        50,000            0
   and Chief Financial
   Officer                  1996   197,380       77,000      0        90,000            0

Roy C. Levitt, M.D......    1998 $ 246,164    $  30,000    $ 0       150,000      $37,188(1)
   Executive Vice
   President and........    1997   230,098       66,000      0        60,000            0
   Chief Operating
   Officer..............    1996   194,063       77,000      0        95,000       27,800

Michael A. Zasloff,
 M.D., Ph.D.............    1998 $ 250,350    $  20,000    $ 0        60,000      $     0
   Vice Chairman and
   Executive............    1997   237,356       67,000      0        40,000            0
   Vice President.......    1996   225,072       90,000      0        95,000            0

Thomas J. Bigger........    1998 $ 223,860    $   5,000    $ 0        20,000      $     0
   Senior Vice President
   (2)..................    1997   214,200       40,000      0        27,000            0
                            1996   105,000       30,000      0       125,000       29,500

Kenneth J. Holroyd,
 M.D....................    1998 $ 196,646    $  20,000    $ 0       120,000      $     0
   Senior Vice President
   (3)

Jay Moorin..............    1998 $ 171,124(4) $       0    $ 0             0      $     0
   Former Chairman,
   President and........    1997   294,053      100,000      0        70,000            0
   Chief Executive
   Officer..............    1996   266,500      125,000      0       105,000            0
--------
(1) Dr. Levitt was issued 8,500 shares of common stock in July, 1998 pursuant
    to his employment agreement.
(2)  Mr. Bigger joined Magainin in July 1996 and resigned in 1999.
(3)  Dr. Holroyd became an executive officer in 1998.
(4)  Mr. Moorin ceased to be an executive officer and director upon his
     resignation from Magainin on August 3, 1998. Mr. Moorin was retained as a
     consultant to Magainin through July 1999. See "Other Compensation."

                                       37
Stock Option Information

   The following table sets forth certain information regarding stock options
granted during 1998 to the persons named in the Summary Compensation Table.

                             Option Grants in 1998
Individual Grants(1)
                         ----------------------------------------- Potential Realizable
                                    Percent of                       Value At Assumed
                         Number of    Total                        Annual Rates of Stock
                         Securities  Options                        Price Appreciation
                         Underlying Granted to                      for Option Term(2)
                          Options   Employees  Exercise Expiration ---------------------
          Name            Granted    in 1998    Price      Date              5%             10%
          ----           ---------- ---------- -------- ---------- --------------------- --------
Michael R. Dougherty....   70,000       8%      $4.63    7/13/2008       $203,605        $515,974
                          100,000      11%      $3.25   12/14/2008       $204,391        $517,996
Roy C. Levitt, M.D......   60,000       7%      $4.63    7/13/2008       $174,518        $442,264
                           90,000      10%      $3.25   12/14/2008       $183,952        $466,170
Michael A. Zasloff,
 M.D., Ph.D.............   40,000       4%      $5.75    7/24/2008       $144,646        $366,561
                           20,000       2%      $3.25   12/14/2008       $ 40,878        $103,593
Thomas J. Bigger........   20,000       2%      $5.75    7/24/2008       $ 72,323        $183,280
Kenneth J. Holroyd,
 M.D....................   50,000       5%      $5.56    6/16/2008       $165,085        $418,357
                           30,000       3%      $5.75    7/24/2008       $108,484        $274,921
                           40,000       4%      $3.25   12/14/2008       $ 81,756        $207,187
Jay Moorin (3)..........        0       0%      $0.00          --        $      0        $      0
--------
(1) Options are non-qualified stock options to acquire shares of common stock
    with a stated term of ten years, vesting in four annual installments
    beginning one year after the date of grant. If a "change in control" (as
    defined in the 1992 Stock Option Plan and 1998 Equity Compensation Plan)
    were to occur, these options would become immediately exercisable in full.
(2) Potential Realizable Values are based on an assumption that the stock price
    of the common stock starts equal to the exercise price shown for each
    particular option grant and appreciates at the annual rate shown
    (compounded annually) from the date of grant until the end of the term of
    the option. These amounts are reported net of the option exercise price,
    but before any taxes associated with exercise or subsequent sale of the
    underlying stock. The actual value, if any, an option holder may realize
    will be a function of the extent to which the stock price exceeds the
    exercise price on the date the option is exercised and also will depend on
    the option holder's continued employment through the vesting period. The
    actual value to be realized by the option holder may be greater or less
    than the values estimated in this table.
(3) Mr. Moorin ceased to be an executive officer and director upon his
    resignation from Magainin on August 3, 1998.

                                       38
The following table sets forth certain information regarding stock option
exercises during 1998 and the value of vested and unvested options for the
persons named in the Summary Compensation Table as of December 31, 1998. Year-
end values are based upon a price of $3.188 per share, which was the closing
market price of a share of our common stock on December 31, 1998.

         Aggregated Option Exercises in 1998 and Year-End Option Values
Value of Unexercised
                                                Number of Unexercised         In-the-Money
                                                     Options at                Options at
                           Shares                 December 31, 1998         December 31, 1998
                         Acquired on  Value   ------------------------- -------------------------
Name                      Exercise   Realized Exercisable Unexercisable Exercisable Unexercisable
----                     ----------- -------- ----------- ------------- ----------- -------------
Michael R. Dougherty....         0   $      0   207,000      265,000     $      0       $   0
Roy C. Levitt, M.D......         0   $      0   172,500      282,500     $      0       $   0
Michael A. Zasloff,
 M.D., PhD..............   137,758   $843,768   211,250      151,750     $      0       $   0
Thomas J. Bigger........         0   $      0    69,375      103,125     $      0       $   0
Kenneth J. Holroyd,
 M.D....................         0   $      0    28,275      156,625     $      0       $   0
Jay Moorin(1)...........         0   $      0   816,862      121,750     $707,587       $   0
--------
(1) Mr. Moorin ceased to be an executive officer and director upon his
    resignation from Magainin on August 3, 1998.

Other Compensation

   We have entered into an employment agreement with Dr. Zasloff pursuant to
which, among other things, Dr. Zasloff will receive a $50,000 bonus upon
approval by the FDA of the first product developed by us under his direction.

   In January 1996, we entered into an employment agreement with Dr. Levitt
pursuant to which, among other things, Dr. Levitt will receive up to an
additional 75,000 options in the event certain milestones are achieved in a
certain area of research.

   In August 1998, we entered into a consulting agreement with Mr. Moorin in
connection with his resignation from Magainin. The agreement covered the period
August 1998 to August 1999 and provided for cash compensation to Mr. Moorin of
$343,355, a continuation of Mr. Moorin's stock options, other than the option
described below, through the term of the consulting agreement, and payments
equal to the cost of health insurance for a twelve month period. Under a
previous agreement Mr. Moorin was granted an option, which is currently
exercisable in full, to acquire 595,612 shares of common stock at an exercise
price of $2.00 per share. This option will remain exercisable through 2001,
notwithstanding the termination of Mr. Moorin's employment relationship.

   The 1998 Equity Compensation Plan provides for the issuance of up to 375,000
shares of common stock. In 1998, we reserved a total of 146,000 shares for
issuance under the plan, as follows: 50,000 shares to Mr. Dougherty, 36,000
shares to Dr. Levitt, 20,000 shares to Dr. Zasloff, 20,000 shares to Mr. Bigger
and 20,000 shares to Dr. Holroyd subject to certain conditions. Shares will be
issued to each executive officer at a rate of 25% each year beginning in July
1999, provided that the officer is still employed by Magainin.

   We do not currently grant any long-term incentives, other than stock options
and awards, to its executives or other employees. Similarly, we do not sponsor
any defined benefit or actuarial plans at this time.

   Our executive officers are entitled to receive six to twelve months' base
salary in the event we terminate their employment without "cause." In addition,
in the event that Dr. Levitt is terminated prior to January 1, 2001 for reasons
other than "cause", we will be obligated to pay royalties to Dr. Levitt with
respect to certain intellectual property transferred by Dr. Levitt to Magainin.

                                       39
PRINCIPAL STOCKHOLDERS

   The following table sets forth certain information as of September 23, 1999,
except as otherwise noted, regarding the ownership of our common stock by:

  .  each person known by us to be the beneficial owner of more than five
     percent of the outstanding common stock;

  .  each of our directors;

  .  each of our executive officers named in the Summary Compensation Table
     included elsewhere in this prospectus; and

  .  all of our current executive officers and directors as a group.
Percentage
                                                      Beneficially Owned(2)
                                                      ------------------------
                                  Number of Shares     Prior to       After
Beneficial Owner                Beneficially Owned(1)  Offering      Offering
----------------                --------------------- ----------    ----------
Wellington Management Company,
 LLP("Wellington")(3)(4)......        3,119,900               12.6%         10.4%
  75 State Street
  Boston, MA 02109
Vanguard Specialized Funds-
 Vanguard Health Care
 Fund("Vanguard")(3)(4).......        1,278,100                5.1%          4.3%
  P.O. Box 2600
  Valley Forge, PA 19482
Healthcare Ventures V,
 L.P.("Healthcare
 Ventures")(3)(5).............        2,073,500                8.3%          6.9%
Healthcare Partners V,
 L.P.("Healthcare
 Partners")(3)(5).............        2,073,500                8.3%          6.9%
James H. Cavanaugh,
 Ph.D.(3)(5)(6)...............        2,217,037                8.9%          7.4%
Harold R. Werner (3)(5)(6)....        2,219,575                8.9%          7.4%
John W. Littlechild
 (3)(5)(6)....................        2,214,716                8.9%          7.4%
William Crouse (3)(5)(6)......        2,214,716                8.9%          7.4%
Mark Leschly (3)(5)...........        2,073,500                8.3%          6.9%
Larry N. Feinberg (3).........        1,790,300                7.2%          6.0%
  c/o Oracle Investment
   Management Inc.
  712 Fifth Avenue, 45th Floor
  New York, NY 10019
Jay Moorin (7)................          869,612                3.5%          2.9%
Michael A. Zasloff, M.D.,
 Ph.D.(8).....................          606,070                2.4%          2.0%
Roy C. Levitt, M.D.(9)........          294,625                1.2%          1.0%
Michael R. Dougherty (10).....          282,000                1.1%            *
Robert F. Shapiro (11)........          109,250                  *             *
Kenneth J. Holroyd, M.D.(12)..           66,750                  *             *
Zola P. Horovitz, Ph.D.(13)...           38,750                  *             *
Bernard Canavan, M.D.(14).....           29,750                  *             *
Charles A. Sanders, M.D.(15)..           21,250                  *             *
James B. Wyngaarden,
 M.D.(15).....................           16,750                  *             *
Thomas J. Bigger(16)..........                0                  *             *
All current executive officers
 and directors as a group (9
 persons)(17).................        1,465,195                5.9%          4.9%
--------
  * Less than one percent.
 (1) Nature of ownership consists of sole voting and investment power unless
     otherwise indicated. The number of shares indicated includes shares
     issuable upon the exercise of outstanding stock options and warrants held
     by each individual or group to the extent such options and warrants are
     exercisable within sixty days of September 23, 1999.

                                       40
(2) The percentage for each individual or group is based on the aggregate of
     the shares outstanding as of September 23, 1999 (22,911,616 shares) and
     all shares issuable upon the exercise of outstanding stock options and
     warrants held by such individual or group to the extent such options and
     warrants are exercisable within sixty days of September 23, 1999.
 (3) This information is presented in reliance on information disclosed in a
     Schedule 13G filed with the Commission and reporting as of December 31,
     1998.
 (4) Of the shares reported, Wellington shares dispositive power with respect
     to all 3,119,900 shares and shares voting power with respect to 1,644,100
     shares. The Wellington shares include 1,278,100 shares reported separately
     by Vanguard for which shared dispositive power was claimed by Vanguard.
 (5) Healthcare Ventures is a Delaware limited partnership of which Healthcare
     Partners is the general partner. Dr. Cavanaugh and Messrs. Werner,
     Littlechild, Crouse and Leschly were the general partners of Healthcare
     Partners as of the date of its Schedule 13G. The business address for
     Healthcare Ventures, Healthcare Partners, Dr. Cavanuagh, and Messrs.
     Werner and Crouse is 44 Nassau Street, Princeton, NJ 08542. The business
     address for Messrs. Littlechild and Leschly is One Kendall Square,
     Building 300, Cambridge, MA 02139. Beneficial ownership reported includes
     2,073,500 shares held by Healthcare Ventures. Voting and dispositive power
     are shared among Healthcare Ventures, Healthcare Partners, Dr. Cavanuagh
     and Messrs. Werner, Littlechild, Crouse and Leschly.
 (6) Beneficial ownership includes warrants to purchase 141,216 shares, for
     which voting and dispositive power are shared among Dr. Cavanaugh and
     Messrs. Werner, Littlechild and Crouse.
 (7) To the best of our knowledge, this includes 869,112 shares of Common Stock
     issuable upon exercise of options, and 500 shares of Common Stock owned by
     Mr. Moorin's wife as to which shares Mr. Moorin disclaimed beneficial
     ownership.
 (8) Includes 261,000 shares of Common Stock issuable upon exercise of options,
     172,312 shares of Common Stock held by Mr. Zasloff's wife and 30,000
     shares of Common Stock in trusts for the benefit of certain members of Dr.
     Zasloff's family.
 (9) Includes 262,500 shares of Common Stock issuable upon exercise of options
     and 2,120 shares of Common Stock held in accounts of family members.
(10) Includes 264,500 shares of Common Stock issuable upon exercise of options.
(11) Includes 16,250 shares of Common Stock issuable upon exercise of options,
     5,000 shares of Common Stock held in an account for a foundation for which
     Mr. Shapiro is a trustee, and 10,000 shares owned by Mr. Shapiro's wife,
     as to which shares Mr. Shapiro disclaims beneficial ownership.
(12) Includes 52,750 shares of Common Stock issuable upon exercise of options
     and 9,000 shares of Common Stock held in a joint account where voting and
     investment power are shared.
(13) Includes 35,000 shares of Common Stock issuable upon exercise of options.
(14) Includes 28,750 shares of Common Stock issuable upon exercise of options.
(15) Includes 16,250 shares of Common Stock issuable upon exercise of options.
(16) Mr. Bigger resigned from Magainin in May 1999.
(17) See (8) through (15) above.

                                       41
DESCRIPTION OF CAPITAL STOCK

Our Authorized Capital Stock

  .  45,000,000 shares of common stock, par value $0.002 per share, of which
     22,911,616 were outstanding as of June 30, 1999.

  .  9,211,031 shares of preferred stock, par value $0.001 per share, none of
     which were outstanding as of June 30, 1999.

  .  immediately after the sale of the shares of common stock in this
     offering, we will have 27,911,616 shares of common stock outstanding and
     no shares of preferred stock outstanding.

  .  as of June 30, 1999, we had outstanding options to purchase an aggregate
     of 3,552,000 shares of our common stock and warrants to purchase an
     aggregate of 1,560,644 shares of our common stock.

Common Stock

 Voting:

  .  one vote for each share held of record on all matters submitted to a
     vote of stockholders;

  .  no cumulative voting rights;

  .  election of directors by plurality of votes cast; and

  .  all other matters by majority of the votes cast.

 Dividends:

  .  subject to preferential dividend rights of outstanding shares of
     preferred stock, common stockholders are entitled to receive ratably
     declared dividends; and

  .  the board of directors may only declare dividends out of legally
     available funds.

 Additional Rights:

  .  subject to the preferential liquidation rights of outstanding shares of
     preferred stock, common stockholders are entitled to receive ratably net
     assets, available after the payment of all debts and liabilities, upon
     our liquidation, dissolution or winding up;

  .  no preemptive rights;

  .  no subscription rights;

  .  no redemption rights;

  .  no sinking fund rights; and

  .  no conversion rights.

   The rights and preferences of common stockholders are subject to the right
of any series of preferred stock we may issue in the future.

Preferred Stock

   We may, by resolution of our board of directors, and without any further
vote or action by our stockholders, authorize and issue, subject to certain
limitations prescribed by law, up to an aggregate of 9,211,031 shares of
preferred stock. The preferred stock may be issued in one or more classes or
series of shares of any class or series. With respect to any classes or series,
the board of directors may determine the designation and the number of shares,
preferences, limitations and special rights, including dividend rights,
conversion rights, voting rights, redemption rights and liquidation
preferences. Because of the rights that may be granted, the issuance of
preferred stock may delay, defer or prevent a change of control. There are no
shares of preferred stock outstanding as of the date of this prospectus.

                                       42
Limitation on Liability

   As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors shall not be personally liable to us
or our stockholders for monetary damages for a breach of fiduciary duty as a
director, except for liability:

  .  for any breach of such person's duty of loyalty;

  .  for acts or omissions not in good faith or involving intentional
     misconduct or a knowing violation of law;

  .  for the payment of unlawful dividends and certain other actions
     prohibited by Delaware corporate law; and

  .  for any transaction resulting in receipt by such person of an improper
     personal benefit.

   Our certificate of incorporation also contains provisions indemnifying our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law.

   We currently carry directors' and officers' liability insurance to provide
our directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, errors and other wrongful acts.

Certain Anti-Takeover Provisions

   Our certificate of incorporation provides that our board of directors may
establish the rights of, and cause us to issue, substantial amounts of
preferred stock without the need for stockholder approval. The issuance of
preferred stock may have the effect of discouraging, delaying or preventing a
change in control of Magainin. We have no present plans to issue any shares of
preferred stock.

   Section 203 of the Delaware General Corporation Law applies to Magainin.
Section 203 of the Delaware General Corporation Law generally prohibits
certain "business combinations" between a Delaware corporation and an
"interested stockholder." An "interested stockholder" is generally defined as
a person who, together with any affiliates or associates of such person,
beneficially owns, or within the preceeding three years did own, directly or
indirectly, 15% or more of the outstanding voting shares of a Delaware
corporation. The statute broadly defines business combinations to include:

  .  mergers;

  .  consolidations;

  .  sales or other dispositions of assets having an aggregate value in
     excess of 10% of the consolidated assets of the corporation or 10% of
     the aggregate market value of all outstanding stock of the corporation;
     and

  .  specified transactions that would increase the "interested
     stockholder's" proportionate share ownership in the corporation.

   The statute prohibits any such business combination for a period of three
years commencing on the date the "interested stockholder" becomes an
"interested stockholder," unless:

  .  the business combination is approved by the corporation's board of
     directors prior to the date the "interested stockholder" becomes an
     "interested stockholder";

  .  the "interested stockholder" acquired at least 85% of the voting stock
     of the corporation (other than stock held by directors who are also
     officers or by certain employee stock plans) in the transaction in which
     it becomes an "interested stockholder"; or

  .  the business combination is approved by a majority of the board of
     directors and by the affirmative vote of at least two-thirds of the
     outstanding voting stock that is not owned by the "interested
     stockholder."

Transfer Agent and Registrar

   The transfer agent and registrar for our common stock is Continental Stock
Transfer and Trust Company.

                                      43
PLAN OF DISTRIBUTION

   We are offering the shares, on an all or none basis, to selected
institutional investors, including current institutional holders of our common
stock. We may sell the common stock offered in this prospectus directly to
investors on our own behalf in jurisdictions where we are authorized to do so,
acting through our officers and directors. Our officers and directors will not
be separately compensated for their services in connection with this offering.
Alternatively, we may offer the shares through agents who may receive
compensation from us in the form of commissions, which may be in excess of
ordinary brokerage commissions, and who may be reimbursed for certain expenses.
We have no agreements with or commitments from any such agents as of the date
of this prospectus. Any agents that participate in the distribution of the
shares may be deemed to be "underwriters" as defined in the Securities Act, and
any profit on the sale of shares by them and any selling commissions received
by any such agents may be deemed to be underwriting discounts and selling
commissions under the Securities Act.

   We will obtain indications of interest from potential investors for the
amount of the offering. We will distribute confirmations and definitive
prospectuses to all investors at the time of pricing, informing investors of
the closing date, which will be scheduled for three business days after
pricing. We will not accept any investor funds prior to effectiveness of the
registration statement. The offering will not continue after the closing date,
and we will deregister any shares not sold.

   We will pay all of the expenses incurred in this offering. In order to
comply with certain states' securities laws, if applicable, the shares will be
sold in such jurisdictions only through registered or licensed brokers or
dealers. In certain states the shares may not be sold unless previously
registered under the "blue sky" laws of the state.

                      WHERE YOU CAN FIND MORE INFORMATION

   We have filed a registration statement on Form S-1, of which this prospectus
forms a part, to register the securities with the Securities and Exchange
Commission. As allowed by SEC rules, this prospectus does not contain all the
information you can find in the registration statement or the exhibits to the
registration statement. We file annual, quarterly and current reports, proxy
statements and other information with the SEC. Copies of the registration
statement are on file at the offices of the SEC and may be inspected without
charge at the Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of the registration statement may be obtained from the Public
Reference Section of the SEC upon payment of the fee prescribed by the SEC.
Information on Magainin can be obtained from the Public Reference Room by
calling 1-800-SEC-0330. The Commission maintains a Web site that contains all
information filed electronically by us, including reports, proxy and
information statements. The address of the SEC's Web site is
(http://www.sec.gov).

                                       44
LEGAL MATTERS

   Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, will pass on the
validity of the shares.

                                    EXPERTS

   Our financial statements as of December 31, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1998 are included in this
prospectus and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, also included in this
prospectus and in the registration statement, and upon the authority of KPMG
LLP as experts in accounting and auditing.

                               CHANGE OF AUDITORS

   Richard A. Eisner & Company, LLP served as our independent accountants from
our inception in June 1987 through 1998. On January 4, 1999, we dismissed
Richard A. Eisner & Company, LLP as our independent public accountants and
auditors and engaged KPMG LLP to serve as our independent public accountants
and auditors. The dismissal of Richard A. Eisner & Company, LLP and the
engagement of KPMG LLP was approved by our Audit Committee of the Board of
Directors. The reports of Richard A. Eisner & Company, LLP on our financial
statements for the years ended December 31, 1997 and 1996 did not contain an
adverse opinion and were not qualified or modified as to uncertainty, audit
scope or accounting principles. During the years ended December 31, 1996 and
1997 and for the period from January 1, 1998 to January 4, 1999, there were no
(i) disagreements between us and Richard A. Eisner & Company, LLP on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Richard A. Eisner & Company, LLP, would have caused Richard A.
Eisner & Company, LLP to make reference to the subject matter of such
disagreement in connection with its report or (ii) "reportable events" as that
term is described in Item 304(a)(1)(v) of Regulation S-K.

                                       45
MAGAININ PHARMACEUTICALS INC.

                         INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements:
  Independent Auditors' Report............................................  F-2
  Balance Sheets as of December 31, 1998 and 1997.........................  F-3
  Statements of Operations for the years ended December 31, 1998, 1997 and
   1996...................................................................  F-4
  Statements of Changes in Stockholders' Equity and Comprehensive Loss
   for the years ended December 31, 1998, 1997 and 1996...................  F-5
  Statements of Cash Flows for the years ended December 31, 1998, 1997 and
   1996...................................................................  F-6
  Notes to Financial Statements...........................................  F-7
Unaudited Financial Statements:
  Balance Sheet as of June 30, 1999....................................... F-16
  Statements of Operations for the six months ended June 30, 1999 and June
   30, 1998............................................................... F-17
  Statements of Cash Flows for the six months ended June 30, 1999 and June
   30, 1998............................................................... F-18
  Notes to Financial Statements........................................... F-19
F-1
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Magainin Pharmaceuticals Inc.:

   We have audited the accompanying balance sheets of Magainin Pharmaceuticals
Inc. as of December 31, 1998 and 1997, and the related statements of
operations, changes in stockholders' equity and comprehensive loss and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Magainin Pharmaceuticals
Inc. as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting principles.

                                          /s/ KPMG LLP

Princeton, New Jersey
February 12, 1999

                                      F-2
MAGAININ PHARMACEUTICALS INC.

                                 BALANCE SHEETS
                    (In thousands, except per share amounts)
December 31,
                                                            ------------------
                                                              1998      1997
                                                            --------  --------
ASSETS
Current assets:
  Cash and cash equivalents................................ $  4,495  $    487
  Short-term investments...................................   18,376    38,574
  Prepaid expenses and other...............................      179       490
                                                            --------  --------
    Total current assets...................................   23,050    39,551
Fixed assets, net..........................................    2,765     2,824
Other assets...............................................       76        69
                                                            --------  --------
      Total assets......................................... $ 25,891  $ 42,444
                                                            ========  ========
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.................... $  8,653  $  5,944
  Current portion of note payable..........................    2,500       500
  Current potion of capital lease obligations..............      --         34
                                                            --------  --------
    Total current liabilities..............................   11,153     6,478
Note payable-long-term.....................................      --      1,000
Deferred rent..............................................       58        96
                                                            --------  --------
      Total liabilities....................................   11,211     7,574
                                                            --------  --------
Commitments, contingencies and other matters
Stockholders' equity:
  Preferred stock--$.001 par value; shares authorized--
   9,211; none issued
  Common stock--$.002 par value; shares authorized--45,000;
   shares issued and outstanding--22,910 and 21,980,
   respectively............................................       46        44
  Additional paid-in capital...............................  147,553   144,444
  Accumulated other comprehensive income--unrealized gains
   on investments..........................................        9         6
  Accumulated deficit...................................... (132,928) (109,624)
                                                            --------  --------
    Total stockholders' equity.............................   14,680    34,870
                                                            --------  --------
      Total liabilities and stockholders' equity........... $ 25,891  $ 42,444
                                                            ========  ========
See accompanying notes to financial statements.

                                      F-3
MAGAININ PHARMACEUTICALS INC.

                            STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
Year Ended December 31,
                                                  ----------------------------
                                                    1998      1997      1996
                                                  --------  --------  --------
Contract Revenues................................ $    --   $ 10,088  $    150
Costs and Expenses:
  Research and development.......................   21,456    22,875    22,326
  General and administrative.....................    3,292     3,246     3,488
  Charge for stock issuance relating to royalty
   buyout........................................      --        --      7,080
                                                  --------  --------  --------
                                                    24,748    26,121    32,894
                                                  ========  ========  ========
Loss from operations.............................  (24,748)  (16,033)  (32,744)
Interest income..................................    1,640     1,770     2,172
Interest expense.................................     (196)     (118)      (48)
                                                  --------  --------  --------
Net loss......................................... $(23,304) $(14,381) $(30,620)
                                                  ========  ========  ========
Net loss per share--basic and diluted............ $  (1.05) $  (0.73) $  (1.71)
                                                  ========  ========  ========
Weighted average shares outstanding..............   22,235    19,679    17,938
                                                  ========  ========  ========
See accompanying notes to financial statements.

                                      F-4
MAGAININ PHARMACEUTICALS INC.

      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                                 (In thousands)
Accumulated
                           Common Stock                 Other                 Total
                         ---------------- Additional   Compre-               Stock-
                          Number           Paid-in     hensive   Accumulated holders
                         of Shares Amount  Capital     Income      Deficit   Equity
                         --------- ------ ---------- ----------- ----------- -------
Balance at January 1,
 1996..................   17,052    $34    $105,662     $120      $ (64,623) $41,193
  Common stock issued
   pursuant to private
   placement...........    1,557      3      11,929      --             --    11,932
  Fair value of shares
   issued pursuant to
   royalty buyout......      550      1       7,059      --             --     7,060
  Common stock issued,
   exercise of options
   and warrants........      205      1         484      --             --       485
  Comprehensive loss
    Net loss...........      --     --          --       --         (30,620) (30,620)
    Carrying value
     adjustment........      --     --          --      (107)           --      (107)
                          ------    ---    --------     ----      ---------  -------
      Total
       comprehensive
       loss............      --     --          --       --             --   (30,727)
                          ------    ---    --------     ----      ---------  -------
Balance at December 31,
 1996..................   19,364     39     125,134       13        (95,243)  29,943
  Common stock issued
   pursuant to public
   offering............    2,587      5      19,167      --             --    19,172
  Common stock issued,
   exercise of options
   and warrants........       29    --          143      --             --       143
  Comprehensive loss
    Net loss...........      --     --          --       --         (14,381) (14,381)
    Carrying value
     adjustment........      --     --          --        (7)           --        (7)
                          ------    ---    --------     ----      ---------  -------
      Total
       comprehensive
       loss............      --     --          --       --             --   (14,388)
                          ------    ---    --------     ----      ---------  -------
Balance at December 31,
 1997..................   21,980     44     144,444        6       (109,624)  34,870
  Common stock issued
   pursuant to research
   and option
   agreement...........      620      1       1,999      --             --     2,000
  Fair value of shares
   issued to contract
   manufacturer........      125    --          859      --             --       859
  Common stock issued
   by/upon exercise of
   options, warrants
   and stock awards....      185      1         251      --             --       252
  Comprehensive loss
    Net loss...........      --     --          --       --         (23,304) (23,304)
    Carrying value
     adjustment........      --     --          --         3            --         3
                          ------    ---    --------     ----      ---------  -------
      Total
       comprehensive
       loss............      --     --          --       --             --   (23,301)
                          ------    ---    --------     ----      ---------  -------
Balance at December 31,
 1998..................   22,910    $46    $147,553     $  9      $(132,928) $14,680
                          ======    ===    ========     ====      =========  =======
See accompanying notes to financial statements.

                                      F-5
MAGAININ PHARMACEUTICALS INC.

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)
Year Ended December 31,
                                                 ----------------------------
                                                   1998      1997      1996
                                                 --------  --------  --------
Cash Flows From Operating Activities:
Net loss........................................ $(23,304) $(14,381) $(30,620)
Adjustments to reconcile loss to net cash used
 in operating activities:
  Fair value of stock, options and warrants
   issued.......................................      859       --      7,060
  Depreciation and amortization.................    1,140       976       625
  Amortization of investment
   discounts/premiums...........................     (782)     (752)     (718)
  Compensation expense under stock awards.......      114       --        --
Changes in operating assets and liabilities:
  Prepaid expenses and other....................      298       (29)       55
  Accounts payable and accrued expenses.........    2,709       799     1,065
  Deferred rent.................................      (38)      (31)      (16)
                                                 --------  --------  --------
    Net cash used in operating activities.......  (19,004)  (13,418)  (22,549)
                                                 --------  --------  --------
Cash Flows From Investing Activities:
Purchase of investments.........................  (45,317)  (72,313)  (27,301)
Proceeds from maturities and sales of
 investments....................................   66,300    65,752    38,430
Capital expenditures............................   (1,081)   (1,294)   (1,655)
                                                 --------  --------  --------
    Net cash provided by (used in) investing
     activities.................................   19,902    (7,855)    9,474
                                                 --------  --------  --------
Cash Flows From Financing Activities:
Proceeds from notes payable.....................    1,000       500     1,000
Payments on capitalized equipment leases........      (28)     (127)     (150)
Proceeds from sale of stock and exercise of
 options and warrants...........................    2,138    19,315    12,417
                                                 --------  --------  --------
    Net cash provided by financing activities...    3,110    19,688    13,267
                                                 --------  --------  --------
Net increase (decrease) in cash and cash
 equivalents....................................    4,008    (1,585)      192
Cash and cash equivalents at beginning of
 period.........................................      487     2,072     1,880
                                                 --------  --------  --------
Cash and cash equivalents at end of period...... $  4,495  $    487  $  2,072
                                                 ========  ========  ========
Supplemental Cash Flow Information:
Cash paid during the period for interest........ $    185  $    106  $     48
                                                 ========  ========  ========
See accompanying notes to financial statements.

                                      F-6
MAGAININ PHARMACEUTICALS INC.

                         NOTES TO FINANCIAL STATEMENTS

1. The Company

   Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company's development efforts are focused
on anti-infectives, oncology, and pulmonary and allergic disorders.

   The Company has submitted a New Drug Application ("NDA") with the United
States Food and Drug Administration ("FDA") for its lead product development
candidate, pexiganan acetate (formerly called "Cytolex"), a topical cream
antibiotic intended for the treatment of infection in diabetic foot ulcers. The
Company is also conducting research on an aminosterol class of compounds. One
such compound, squalamine, is currently being evaluated in Phase I clinical
testing in cancer. The Company conducts additional research efforts in the
genomics of asthma.

   The Company has not generated any revenues from product sales, and has
funded operations primarily from the proceeds of public and private placements
of securities. Substantial additional financing will be required by the Company
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.

2. Summary of Significant Accounting Policies

   Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and related notes. Actual results could differ from those estimates.

   Cash and Cash Equivalents. The Company considers all highly liquid
investment instruments purchased with a maturity of three months or less to be
cash equivalents.

   Investments. Investments purchased with a maturity of more than three
months, and which mature less than twelve months from the balance sheet date,
are classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity, however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company classifies
its investments as available-for-sale as defined by Statement of Financial
Accounting Standards ("SFAS"), No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Available-for-sale securities are carried at
market value with unrealized gains and losses reported as a separate component
of stockholders' equity. Gross realized gains and losses on the sales of
investment securities are determined on the specific identification method and
are included in interest income.

   Fixed Assets and Depreciation. Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets including: three (3) years for computers/software, five (5) years
for laboratory and office equipment and seven (7) years for furniture and
fixtures. Equipment under capital leases and leasehold improvements are
amortized using the straight-line method over the term of the respective lease,
or their estimated useful lives, whichever is shorter. Expenditures for
maintenance and repairs are charged to expense as incurred.

   Revenue Recognition. Any revenues from research and development arrangements
are recognized pursuant to the terms of the related agreements, either as work
is performed, or as milestones are achieved.

   Research and Development. Research and development costs are expensed as
incurred.

                                      F-7
MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   Patent Costs. Patent-related costs are expensed as incurred.

   Lease Expense. Expense related to the facility lease is recorded on a
straight-line basis over the lease term. The difference between rent expense
incurred and the amount paid is recorded as deferred rent and is amortized over
the lease term.

   Stock Based Compensation. The Company accounts for stock-based employee
compensation under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Effective January 1, 1996, the Company adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation".

   Income Taxes. The Company accounts for income taxes using the asset and
liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes".
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period in which tax rate changes
are enacted.

   Loss Per Share. The Company calculates loss per share under the provisions
of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires a dual
presentation of "basic" and "diluted" loss per share on the face of the income
statement. Basic loss per share is computed by dividing income (loss) by the
weighted average number of shares of common stock outstanding during each
period. Diluted loss per share includes the dilutive effect, if any, from the
potential exercise or conversion of securities, such as stock options and
warrants, which would result in the issuance of shares of common stock. Basic
and diluted loss per share amounts are the same because the Company reported a
loss for all periods presented.

   Reclassification. Certain reclassifications have been made to prior years'
financial statements to conform to the current year presentation.

   Comprehensive Income. Effective January 1, 1998 the Company adopted SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
the reporting of comprehensive income and its components. Comprehensive income
consists of reported net income or loss and "other comprehensive income" (i.e.
other gains and losses affecting stockholders' equity that, under generally
accepted accounting principals, are excluded from net income or loss as
reported on the statement of operations). With regard to the Company, other
comprehensive income consists of unrealized gains and losses on marketable
securities. The adoption of SFAS No. 130 affects only the presentation of the
Company's balance sheet, and does not affect the Company's reported results of
operations or cash flows.

3. Investments

   The Company invests in securities of the U.S. Treasury and U.S. Government
agencies. Excess cash is invested on a short-term basis in U.S. government
based money market funds. Unrealized gains at December 31, 1998 and 1997 total
$9,000 and $6,000, respectively. The Company has not realized any losses on its
investments.

                                      F-8
MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

4. Fixed Assets

   Fixed assets are stated at cost and are summarized as follows (in
thousands):
December 31, December 31,
                                                          1998         1997
                                                      ------------ ------------
Laboratory and office equipment...................   $ 3,354       $3,147
   Leasehold improvements............................     2,886        2,625
                                                        -------       ------
     Total...........................................     6,240        5,772
   Less accumulated depreciation and amortization....    (3,475)      (2,948)
                                                        -------       ------
                                                        $ 2,765       $2,824
                                                        =======       ======
5. Accounts Payable and Accrued Expenses

   Accounts payable and accrued expenses consist of the following (in
thousands):
December 31, December 31,
                                                           1998         1997
                                                       ------------ ------------
Accounts payable...................................   $   179       $  215
   Clinical and regulatory costs......................       448        1,197
   Manufacturing development costs....................     7,171        3,507
   Preclinical costs..................................       117          338
   Professional fees..................................       253          258
   Other..............................................       485          429
                                                         -------       ------
                                                         $ 8,653       $5,944
                                                         =======       ======
Accrued manufacturing development costs consist primarily of amounts related
to various third-party manufacturing agreements.

6. Note Payable

   The Company has entered into a credit arrangement with a commercial bank.
Borrowings under this credit arrangement bear interest at rates ranging from
8.0% to 8.5%. As of December 31, 1998, the Company had borrowed $2,500,000
under this credit arrangement, including $1,000,000 borrowed in 1998. Any
amounts outstanding under this credit arrangement shall become immediately due
and payable under certain circumstances, including the failure by the Company
to maintain certain minimum cash and investment balances, as well as certain
financial ratios. Under the terms of the credit arrangement, the Company makes
monthly interest-only payments with all principal due in May 1999. The
Company's current intention is to refinance this loan prior to its maturity.

7. Stockholders' Equity

   In May 1996, the Company increased the number of its authorized common
shares to 45,000,000.

   In August 1996, the Company completed a private placement of 1,556,763
shares of common stock, together with warrants as described below, with
proceeds to the Company (after offering expenses) of approximately $11,932,000.

   In September 1996, pursuant to a buyout of a royalty arrangement, the
Company issued 550,000 shares of common stock with a fair value of $12.87 per
share. In connection, therewith, the Company recorded a non-cash charge to
earnings of $7,060,000.

                                      F-9
MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   In December 1997, the Company consummated a public offering of 2,587,500
shares of common stock with proceeds to the Company (after underwriting
discounts and offering expenses) of approximately $19,172,000.

   In January 1998, pursuant to an arrangement with a contract manufacturer,
the Company issued to such manufacturer 125,000 shares of common stock with a
fair value of $6.125 per share. In connection therewith, the Company recorded a
non-cash charge to earnings of $859,000.

   In December 1998, pursuant to a collaboration, the Company sold 620,540
shares of common stock to Genentech, Inc. ("Genentech"), with proceeds to the
Company of approximately $2,000,000.

   Warrants. Under a 1991 credit agreement with certain stockholders, the
Company granted warrants to the lenders to purchase an aggregate of 250,000
shares of common stock at $8 per share. These warrants expire in 2001. At
December 31, 1998, 229,739 of these warrants are outstanding.

   In October 1994, pursuant to an arrangement with a contract manufacturer,
the Company granted to such manufacturer a warrant to purchase 300,000 shares
of common stock at $7.50 per share. The warrant expires in 1999.

   In connection with its August 1996 private placement, the Company issued
common stock, together with warrants to purchase 1,011,896 shares of the
Company's common stock. The warrants contain provisions to decrease the
exercise price, and increase shares, under certain circumstances. Such
circumstances include the issuance of shares of common stock by the Company for
a consideration per share less than the exercise price of the warrants, and the
issuance by the Company of securities convertible into shares of common stock
for which the exercise or conversion price is less than the exercise price of
the warrants. The warrant holders also have a one-time right, in the event the
average price of the Company's common stock in any month prior to August 1999
falls below a certain level, to reduce the exercise price of the warrant to
110% of such average price. Warrants to purchase 1,030,905 shares of common
stock at prices ranging from $5.99 to $8.31 per share are currently
exercisable.

   Stock option plans. In May 1991, the stockholders approved the 1990 Stock
Option Plan (the "1990 Plan") which provides for the granting of options for
the purchase of up to 160,000 shares of common stock. In May 1996, the
stockholders approved the amended 1992 Stock Option Plan (the "1992 Plan")
which provides for the granting of options for the purchase of up to 2,500,000
shares of common stock. In May 1998, the stockholders approved the 1998 Equity
Compensation Plan (the "1998 Plan") which provides for the granting of options,
and stock awards, of up to 1,500,000 shares of common stock.

   The plans provide for the granting of incentive stock options and
nonqualified stock options and are administered by a committee of the Board of
Directors. The committee has the authority to determine the term during which
an option may be exercised (provided that no option may have a term of more
than 10 years), the exercise price of an option and the rate at which options
may be exercised. Incentive stock options may be granted only to employees of
the Company. Nonqualified stock options may be granted to employees, directors
or consultants of the Company. For nonqualified stock options under the 1992
and 1998 Plans and incentive stock options, the exercise price can not be less
than the fair market value of the underlying common stock on the date of the
grant.

   In addition to the shares of common stock issuable upon exercise of options
granted under the Company's stock option plans, 596,625 shares of common stock
are issuable upon exercise of outstanding options granted pursuant to written
agreements. The exercise price for these options was set by the Board of
Directors, or a committee designated by the Board, based upon an evaluation of
the fair market value of the Company's common stock on the date of grant.

                                      F-10
MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   A summary of the status of the Company's stock options as of December 31,
1998, 1997 and 1996, and changes during the years ended on those dates, is
presented below (in thousands, except per share data):
1998                     1997                    1996
                          ------------------------ ----------------------- ------------------------
                                  Weighted Average        Weighted Average         Weighted Average
Options                   Shares   Exercise Price  Share   Exercise Price  Shares   Exercise Price
-------                   ------  ---------------- -----  ---------------- ------  ----------------
Outstanding at beginning
 of year................  2,974        $6.33       2,466       $6.07       2,048        $ 3.97
Granted.................    976        $4.29         576       $7.51         782        $10.56
Exercised...............   (176)       $0.78         (29)      $4.91        (196)       $ 2.56
Forfeited...............   (186)       $8.40         (39)      $8.46        (168)       $ 5.01
                          -----                    -----                   -----
Outstanding at end of
 year...................  3,588        $5.94       2,974       $6.33       2,466        $ 6.07
Exercisable at end of
 year...................  2,022        $5.76       1,586       $4.29       1,203        $ 3.00
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1998 (in thousands, except per share data):
Options Outstanding                    Options Exercisable
               --------------------------------------------- --------------------------------
Range of                   Weighted Average                    Shares
Exercise       Outstanding    Remaining     Weighted Average Exercisable Weighted Average
Prices         At 12/31/98 Contractual Life  Exercise Price  At 12/31/98  Exercise Price
--------       ----------- ---------------- ---------------- ----------- ----------------
$.002--$.40           8        2 Years           $ 0.35             8         $ 0.35
$2.00--$3.75      1,523        6 Years           $ 2.88           983         $ 2.68
$4.63--$8.25      1,212        8 Years           $ 6.65           499         $ 6.88
$9.13--$11.63       830        7 Years           $10.37           517         $10.30
$16.75               15        5 Years           $16.75            15         $16.75
                  -----                                         -----
$.002--$16.75     3,588        7 Years           $ 5.94         2,022         $ 5.76
The Company applies APB Opinion 25 and related Interpretations in accounting
for options. Accordingly, no compensation cost has been recognized for employee
stock option grants. Had compensation cost for employee stock option grants
been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS No. 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below
(in thousands, except per share data):
1998      1997      1996
                                                 --------  --------  --------
Net loss......................... As reported $(23,304) $(14,381) $(30,620)
                                     Pro forma   $(26,208) $(16,649) $(31,816)
   Net loss per share--basic and
    diluted......................... As reported $  (1.05) $  (0.73) $  (1.71)
                                     Pro forma   $  (1.18) $  (0.85) $  (1.77)
F-11
MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   The resulting effect on pro forma loss and pro forma loss per share
disclosed above is not likely to be representative of the effects on a pro
forma basis in future years, because 1998, 1997 and 1996 pro forma results
include the impact of only four, three and two years, respectively, of grants
and related vesting, while subsequent years will include additional years of
grants and vesting. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1998       1997       1996
                                              ---------- ---------- ----------
Range of risk free interest rates......... 4.4%--5.7% 5.8%--6.6% 6.1%--6.8%
   Dividend yield............................     0%         0%         0%
   Volatility factor.........................    78%        75%        79%
   Expected life of options (in years).......     6          6          6
   Weighted-average fair value of options
    granted during the year..................   $3.04      $5.31      $7.54
The 1998 Plan also provides for the issuance of common stock awards, up to a
maximum of 375,000 shares. Such awards shall be made subject to such
performance requirements, vesting provisions, transfer restrictions or other
restrictions and conditions as the Compensation Committee may determine. A
total of 146,000 shares have been awarded under the 1998 Plan, vesting over a
four year period beginning in 1999. The cost of these awards will be recognized
as expense over the vesting period. As of December 31, 1998, no shares have
been issued under this program.

8. Income Taxes

   As of December 31, 1998 the Company had approximately $116.4 million of net
operating loss ("NOL") carry-forwards for federal income tax purposes (expiring
in years 2003 through 2018). In addition, the Company had NOL carryforwards for
state income tax purposes of approximately $58.1 million (expiring in years
1999 through 2001). Pennsylvania has a $1.0 million annual limitation on the
utilization of NOL carryforwards, thus the Company is not likely to utilize
most of its state NOL carryforwards. The Company also had approximately $7.4
million of research and development tax credits carryforwards available to
offset future federal income tax liability (expiring in years 2005 through
2018). The NOL carryforward differs from the accumulated deficit principally
due to differences in the recognition of certain expenses between financial and
federal tax reporting.

   Under the Tax Reform Act of 1986, the utilization of a corporation's NOL
carryforward and research and development tax credits are limited following a
change in ownership of greater than 50% within a three year period. Due to the
Company's prior equity transactions, the Company's net operating loss and tax
credit carryforwards may be subject to an annual limitation generally
determined by multiplying the market value of the Company on the date of the
ownership change by the federal long-term tax exempt rate. Any amount exceeding
the annual limitation may be carried forward to future years for the balance of
the NOL and tax credit carryforward period.

   Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
reliability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the Company's ability to realize the benefit of the
deferred tax asset, the deferred tax assets are fully offset by a valuation
allowance at December 31, 1998 and 1997. The net change in the valuation
allowance for deferred tax assets at December 31, 1998 and 1997 was an increase
of $12.0 million and an increase of $11.8 million, respectively.

                                      F-12
MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   Significant components of the net deferred tax assets as of December 31,
1998 and 1997 consists of the following (in thousands):
1998      1997
                                                            --------  --------
Deferred tax assets:
     Net operating losses.................................. $ 46,534  $ 37,091
     Research credits......................................    7,395     5,675
     Capitalized research and development..................    2,748     2,936
     Accrued expenses and other............................    3,247     2,190
     Depreciation..........................................      372       414
                                                            --------  --------
                                                              60,296    48,306
     Valuation allowance................................... $(60,296) $(48,306)
                                                            --------  --------
       Deferred tax assets, net............................ $      0  $      0
                                                            ========  ========
9. Collaborative Agreements

   In February 1997, the Company entered into a development, supply and
distribution agreement (the "SmithKline Agreement") in North America with
SmithKline Beecham ("SmithKline") for pexiganan acetate. SmithKline has paid
the Company $10.0 million under this agreement, and may make additional
payments to Magainin of up to $22.5 million, upon the occurrence of certain
product milestones. SmithKline will also fund a percentage of any development
expenses for any additional indications for pexiganan acetate. Upon the
commencement of commercial sales by SmithKline, Magainin will be responsible
for the supply of pexiganan acetate and SmithKline will be responsible for the
marketing and sale of pexiganan acetate. Magainin will receive certain
percentages of SmithKline sales revenues under agreed upon terms. The
SmithKline Agreement gives SmithKline the right to negotiate for rights to
another Magainin product development candidate, under certain terms and
conditions. The SmithKline Agreement also gives SmithKline the right to
terminate the arrangement on a country-by-country basis if SmithKline
determines it is not economical to distribute pexiganan acetate in those areas.

   In December 1998, the Company entered into a collaborative research and
option agreement with Genentech Inc. relating to a protein therapeutic in
asthma. Under this agreement, Genentech will be provided access to a
therapeutic target (IL9), which is in Magainin's proprietary asthma gene
database, and the companies will conduct a collaborative program to evaluate
the utility of a blocking antibody to IL9 in suppressing the asthmatic
response. Under this collaboration, Genentech made an initial equity investment
in Magainin of $2.0 million, and has an option to enter into a development and
commercialization agreement with the Company. Any such development and
commercialization agreement could provide for payments to the Company of up to
$35.0 million, upon terms to be negotiated, and royalty payments on sales of
products developed by Genentech in the field.

   In August 1994, the Company entered into a collaboration in the nutritional
field with Abbott Laboratories ("Abbott"). The Company recorded revenue of $0,
$88,000, $150,000 in the years ended December 31, 1998, 1997 and 1996,
respectively, under this arrangement. This agreement has expired.

   The Company has rights under license agreements to certain patents and
patent applications under which the Company expects to owe royalties on sales
of any products which are covered by issued patent claims. Additionally,
certain of these agreements also provide that if the Company elects not to
pursue the commercial development of any licensed technology, or does not
adhere to an acceptable schedule of commercialization, then the Company's
exclusive rights to such technology would terminate. We also fund research at
certain institutions, and these relationships may provide us with an option to
license any results of the research.

                                      F-13
MAGAININ PHARMACEUTICALS INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

10. 401(K) Plan

   The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. No such contributions have been made through December 31, 1998.

11. Fair Value of Financial Instruments

   The following disclosures of estimated fair value were determined by
management, using available market information and valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair market value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize on
disposition of the financial instruments. The use of different market
assumptions or estimation methodologies may have an effect on the estimated
fair value amounts.

   Cash equivalents, accounts payable, accrued expenses and investments are
carried at amounts which reasonably approximate their fair values due to the
short term nature of these instruments. The estimated fair value of the
Company's note payable is estimated to be approximately equal to its carrying
value of $2.5 million at December 31, 1998.

   Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1998. Although
management is not aware of any factors that would significantly affect the
reasonable fair value amounts, such amounts have not been comprehensively
revalued for the purposes of these financial statements since December 31,
1998, and current estimates of fair value may differ from the amounts
presented herein.

12. Commitments, Contingencies and Other Matters

 Rent

   The Company has entered into two operating leases for its laboratory and
corporate office facilities. These leases provide for minimum annual rent
payments through 2002 as follows (in thousands):
Year
             Ending
            December
               31,
            --------
1999.................................. $  411
             2000..................................    427
             2001..................................    327
             2002..................................    299
                                                    ------
                                                    $1,464
                                                    ======
The leases provide for escalations relating to increases in real estate
taxes and certain operating expenses.

   Rent expense was approximately $394,000, $295,000 and $310,000, for the
years ended December 31, 1998, 1997 and 1996, respectively.

                                     F-14
MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 Manufacturing

   The Company has an arrangement with Abbott initially providing for the
purchase of approximately $10.0 million of bulk drug substance for pexiganan
acetate. As FDA approval of pexiganan acetate has not occurred, the Company has
recorded charges to research and development expense related to this contract.
No amounts have been paid under this arrangement to date, and payments are
expected to be made in 1999 and 2000. The Company's prior development
arrangement with Abbott provided for the issuance to Abbott of up to 500,000
shares of Magainin Common Stock and the obligation to pay a royalty on any
future sales of pexiganan acetate. Stock issuances by the Company to Abbott
result in a charge to earnings, representing the fair value of the shares when
issued. As of December 31, 1998, the Company has issued 250,000 shares of
common stock to Abbott, including 125,000 shares issued during the year ended
December 31, 1998. The issuance of such shares resulted in the recording of an
earnings charge of $859,000 in 1998. Future stock issuances are related to the
achievement by Abbott of contractual performance milestones.

                                      F-15
MAGAININ PHARMACEUTICALS INC.

                                 BALANCE SHEETS
                                  (Unaudited)
                    (In thousands, except per share amounts)
June 30,
                                                                       1999
                                                                     ---------
ASSETS
Current assets:
  Cash and cash equivalents......................................... $     743
  Short-term investments (Note 3)...................................    14,950
  Prepaid expenses and other........................................       198
                                                                     ---------
    Total current assets............................................    15,891
  Fixed assets, net.................................................     2,266
  Other assets......................................................       169
                                                                     ---------
      Total assets.................................................. $  18,326
                                                                     =========
                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses (Note 7).................... $   8,024
  Note payable (Note 3).............................................     2,500
                                                                     ---------
    Total current liabilities.......................................    10,524
Deferred rent.......................................................        59
                                                                     ---------
      Total liabilities.............................................    10,583
                                                                     ---------
Commitments, contingencies and other matters
Stockholders' equity (Note 4):
  Preferred stock--$.001 par value; shares authorized--9,211; none
   issued...........................................................       --
  Common stock--$.002 par value; shares authorized--45,000; shares
   issued and
   outstanding--22,912 at June 30, 1999.............................        46
  Additional paid-in capital........................................   147,646
  Accumulated other comprehensive income--unrealized (loss) gain on
   investments......................................................        (8)
  Accumulated deficit...............................................  (139,941)
                                                                     ---------
    Total stockholders' equity......................................     7,743
                                                                     ---------
      Total liabilities and stockholders' equity.................... $  18,326
                                                                     =========
See accompanying notes to financial statements.

                                      F-16
MAGAININ PHARMACEUTICALS INC.

                            STATEMENTS OF OPERATIONS
                                  (unaudited)
                    (In thousands, except per share amounts)
Six Months Ended
                                                                June 30,
                                                           -------------------
                                                             1999      1998
                                                           --------  ---------
Revenues.................................................. $    --   $     --
Costs and expenses:
  Research and development................................    5,666     11,905
  General and administrative..............................    1,632      1,878
                                                           --------  ---------
                                                              7,298     13,783
                                                           --------  ---------
Loss from operations......................................   (7,298)   (13,783)
Interest income...........................................      388        944
Interest expense..........................................     (103)       (84)
                                                           --------  ---------
Net loss.................................................. $ (7,013) $ (12,923)
                                                           ========  =========
Net loss per share--basic and diluted..................... $  (0.31) $   (0.58)
                                                           ========  =========
Weighted average shares outstanding.......................   22,911     22,174
                                                           ========  =========
See accompanying notes to financial statements.

                                      F-17
MAGAININ PHARMACEUTICALS INC.

                            STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                 (In thousands)
Six Months Ended
                                                                June 30,
                                                            -----------------
                                                             1999      1998
                                                            -------  --------
Cash Flows From Operating Activities:
Net loss................................................... $(7,013) $(12,923)
Adjustments to reconcile net loss to net cash used in
 operating activities:
  Fair value of stock, options and warrants issued.........     --        859
  Depreciation and amortization............................     535       598
  Amortization of investment discounts/premiums............    (291)     (360)
  Compensation expense under stock and option awards.......      93       --
Changes in operating assets and liabilities:
  (Increase) decrease in prepaid expenses and other
   assets..................................................    (112)       36
  Increase (decrease) in accounts payable and accrued
   expenses................................................    (629)    1,022
  Increase (decrease) in deferred rent.....................       1       (19)
                                                            -------  --------
    Net cash used in operating activities..................  (7,416)  (10,787)
                                                            -------  --------
Cash Flows From Investing Activities:
Purchase of investments.................................... (17,300)  (22,644)
Proceeds from maturities and sales of investments..........  21,000    33,900
Capital expenditures.......................................     (36)     (913)
                                                            -------  --------
    Net cash provided by investing activities..............   3,664    10,343
                                                            -------  --------
Cash Flows From Financing Activities:
Payment of notes payable...................................  (2,500)      --
Proceeds from notes payable................................   2,500     1,000
Payments on capitalized equipment leases...................     --        (28)
Proceeds from sale of stock and exercise of options and
 warrants..................................................     --        127
                                                            -------  --------
    Net cash provided by financing activities..............     --      1,099
                                                            -------  --------
Net increase (decrease) in cash and cash equivalents.......  (3,752)      655
Cash and cash equivalents at beginning of period...........   4,495       487
                                                            -------  --------
Cash and cash equivalents at end of period................. $   743  $  1,142
                                                            =======  ========
Supplemental Cash Flow Information:
Cash paid during the period for interest................... $    99  $     80
                                                            =======  ========
See accompanying notes to financial statements.

                                      F-18
MAGAININ PHARMACEUTICALS INC.

                         NOTES TO FINANCIAL STATEMENTS

                                  (unaudited)

1. The Company

   Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company's development efforts are focused
on oncology, anti-infectives, and pulmonary and allergic disorders.

   On July 26, 1999, the Company announced that it had received notification
from the U.S. Food and Drug Administration (FDA) that its New Drug Application
(NDA) for its lead product candidate, LOCILEX(TM) Cream (formerly referred to
as pexiganan acetate), had been deemed not approvable. In order to again seek
approval of LOCILEX(TM) Cream, the FDA has indicated that the Company must
conduct further development activities, including clinical and manufacturing
activities. We are currently considering the feasibility of continuing this
program.

   The Company is conducting research on an aminosterol class of compounds. One
such compound, squalamine, is currently being evaluated in Phase II clinical
studies for the treatment of non-small cell lung cancer. The Company conducts
additional research efforts in the genomics of asthma.

   The Company has not generated any revenues from product sales, and has
funded operations primarily from the proceeds of public and private placements
of securities. Substantial additional financing will be required by the Company
in the near term to continue to fund its research and development programs and
to commercialize any of our proposed products. 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 does not have
sufficient resources to sustain operations beyond the first half of 2000.

2. Basis of Presentation

   The accompanying financial statements are unaudited and have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations. The Company believes that the financial
statements include all adjustments of a normal and recurring nature necessary
to present fairly the results of operations, financial position, changes in
stockholders' equity and cash flows for the periods presented. Results of
operations for interim periods are not necessarily indicative of those to be
achieved for full fiscal years. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
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, 1998.

3. Note Payable

   The Company refinanced its $2,500,000 note payable in the second quarter of
1999. Under the terms of this arrangement, the Company makes monthly interest-
only payments at a rate of 7.375%, with principal due in June 2000. The Company
maintains investments of $2,750,000 at the bank as collateral for the note
payable.

                                      F-19
MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                                  (unaudited)

4. Stockholders' Equity

   The changes in stockholders' equity from December 31, 1998 to June 30, 1999
are summarized as follows (in thousands):
Common Stock               Accumulated                Total
                         ---------------- Additional     Other                   Stock-
                          Number           Paid-in   Comprehensive Accumulated  holders'
                         of Shares Amount  Capital      Income       Deficit     Equity
                         --------- ------ ---------- ------------- -----------  --------
Balance at December 31,
 1998...................  22,910    $46    $147,553      $  9      $ (132,928)  $14,680
  Exercise of stock
   options, and
   compensation expense
   under stock and
   options awards.......       2    --           93       --              --         93
  Comprehensive loss
    Net loss............     --     --          --        --           (7,013)   (7,013)
    Carrying value ad-
     justment...........     --     --          --        (17)            --        (17)
                                                                                -------
  Total comprehensive
   loss.................     --     --          --        --              --     (7,030)
                          ------    ---    --------      ----      ----------   -------
Balance at June 30,
 1999...................  22,912    $46    $147,646      $ (8)     $ (139,941)  $ 7,743
                          ======    ===    ========      ====      ==========   =======
5. Manufacturing Agreement

   The Company had an arrangement with Abbott providing for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. Through
June 30, 1999, the Company paid Abbott $656,000 under this arrangement. The
Company's prior development arrangement with Abbott provides for the issuance
to Abbott of up to 500,000 shares of Magainin Common Stock and the obligation
to pay a royalty on any future sales of LOCILEX(TM) Cream. When the Company
issued stock to Abbott it was required to record a charge to earnings
representing the fair value of the shares when issued. As of June 30, 1999, the
Company has issued 250,000 shares of common stock to Abbott, including 125,000
shares issued during the six months ended June 30, 1998. The issuance of such
shares resulted in the recording of an earnings charge of $859,000 in the six
months ended June 30, 1998. See footnote 8 for subsequent event.

6. Collaborative Agreements

   In February 1997, the Company entered into a development, supply and
distribution agreement (the "SmithKline Agreement") in North America with
SmithKline Beecham ("SmithKline") for LOCILEX(TM) Cream. SmithKline has paid
the Company $10.0 million under this agreement, and may make additional
payments upon the occurrence of approval and certain product milestones. The
Company had hoped to commercialize LOCILEX(TM) Cream in the near term. However,
with the FDA's decision, near term commercialization of LOCILEX(TM) Cream will
not occur, and the Company will generate no revenues from LOCILEX(TM) Cream in
the near future. The SmithKline Agreement also gives SmithKline rights to
terminate the arrangement, and, under certain conditions, the right to
negotiate for rights to another Magainin product development candidate. (see
"Note 1" regarding LOCILEX(TM) Cream FDA notification on July 26, 1999)

                                      F-20
MAGAININ PHARMACEUTICALS INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                                  (unaudited)

   In December 1998, the Company entered into a collaborative research and
option agreement with Genentech Inc. ("Genentech") relating to a protein
therapeutic in asthma. Under this agreement, the Company will provide Genentech
with access to a therapeutic target (IL9), which is in Magainin's proprietary
asthma gene database, and the companies will jointly conduct a one-year
collaborative program to evaluate the utility of a blocking antibody to IL9 in
suppressing the asthmatic response. Genentech made an initial equity investment
in the Company of $2.0 million, and has an option, exercisable prior to April
2000, to enter into a development and commercialization agreement with the
Company. Any such development and commercialization agreement could provide for
payments to the Company of up to $35.0 million, upon terms to be negotiated,
and royalty payments on sales of products developed by Genentech in the field.

   The Company has rights under license agreements to certain patents and
patent applications under which the Company expects to owe royalties on sales
of any products which are covered by issued patent claims. Additionally,
certain of these agreements also provide that if the Company elects not to
pursue the commercial development of any licensed technology, or does not
adhere to an acceptable schedule of commercialization, then the Company's
exclusive rights to such technology would terminate. The Company also funds
research at certain institutions, and these relationships may provide us with
an option to license any results of the research.

7. Accounts Payable and Accrued Expenses

   Accounts payable and accrued expenses consist of the following (in
thousands):
June 30,
                                                                          1999
                                                                        --------
Accounts payable.................................................... $   131
   Clinical and regulatory costs.......................................     323
   Manufacturing development costs.....................................   6,709
   Preclinical costs...................................................     146
   Professional fees...................................................     190
   Other...............................................................     525
                                                                        -------
                                                                        $ 8,024
                                                                        =======
Manufacturing development costs principally include amounts accrued under
the Company's agreement with Abbott, providing for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream.

8. Subsequent Event

   The Company's contract with Abbott Laboratories provided for the purchase of
approximately $10 million of bulk drug substance for LOCILEX(TM) Cream. As FDA
approval of LOCILEX(TM) Cream has not occurred, in September 1999, the Company
renegotiated this agreement with Abbott. As a result, the Company has agreed to
pay Abbott $4.2 million, of which $4.0 million has been paid to date, and will
receive partial delivery of material. An additional $3.4 million is due to
Abbott and will be paid in the event that the Company successfully obtains
additional funds, and then only to the extent of 15% of amounts obtained in
excess of $10 million in any year, The Company has no further purchase
commitments to Abbott, and Abbott has no further supply requirements to the
Company. In addition, Abbott will retain ownership of the manufacturing process
developed by it.

                                      F-21
5,000,000 Shares

                         MAGAININ PHARMACEUTICALS INC.

                                  Common Stock

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

                                   PROSPECTUS
                               September  , 1999

                               ----------------
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table shows the estimated expenses of the issuance and
distribution of the securities offered hereby.
Commission fee...................  $  1,417.80
            Nasdaq listing fee...............  $ 17,500.00
            Legal fees, accounting fees and
             expenses........................  $ 81,082.20
                                               -----------
              Total..........................  $100,000.00
                                               ===========
All of the amounts shown are estimates except for the fees payable to the
Securities and Exchange Commission and the National Association of Securities
Dealers.

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations.
Section 145 empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director, officer
or agent of the corporation or another enterprise if serving at the request of
the corporation. Depending on the character of the proceeding, a corporation
may indemnify against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if the person indemnified acted in good
faith and in respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. In the case of an action by or in
the right of the corporation, no indemnification may be made with respect to
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director, officer, employee
or agent of a corporation has been successful in the defense of any action,
suit or proceeding referred to above or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.

   Article 9 of the Company's By-Laws provides for the indemnification of
directors, officers, employees and agents of the Company to the maximum extent
permitted by the Delaware General Corporation Law. The Company's By-laws permit
it to purchase insurance on behalf of such person against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status a such, whether or not the Company would have the power to
indemnify him against such liability under the foregoing provision of the By-
laws.

Item 15. Recent Sales of Unregistered Securities

   The Registrant has sold and issued the following securities during the past
three years:

   In September 1996, pursuant to a buyout of a royalty arrangement, the
Registrant issued 550,000 shares of common stock with a fair value of $12.87
per share.

                                      II-1
In January, 1998, pursuant to an arrangement with Abbott Laboratories, the
Registrant issued 125,000 shares of common stock with a fair value of $6.125
per share.

   In December, 1998, pursuant to a collaborative research and option
agreement, the Registrant sold 620,540 shares of common stock to Genentech,
Inc. with proceeds to the Registrant of approximately $2,000,000.

   The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under Section 4(2) of the Securities Act as
transactions not involving any public offering because such issuances were made
to a limited group of persons, each of whom was believed to have been a
sophisticated investor or had a pre-existing business or personal relationship
with the Registrant or its management and because each such person was
purchasing for investment without a view to further distribution. Restrictive
legends were placed on stock certificates and are contained in agreements
evidencing the securities described above. No underwriters were involved in
connection with the sales of securities referred to in this Item 15.

Item 16. List of Exhibits

   The exhibits filed as part of this registration statement are as follows:
Exhibit
 Number  Description
 ------- -----------
3.1    Restated Certificate of Incorporation of the Registrant (Exhibit 3.1)(1)
  3.2    Certificate of Amendment of Restated Certificate of Incorporation of
         the Registrant (Exhibit 3.2)(13)
  3.3    By-laws of the Registrant (Exhibit 3.2)(2)
  4.1    Specimen copy of stock certificate for shares of Common Stock of the
         Registrant (Exhibit 4.1)(3)
  5.1  * Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
         securities being issued
 10.1  # 1990 Stock Option Plan of the Registrant (Exhibit 10.1)(2)
 10.2  # 1992 Stock Option Plan of the Registrant, as amended (4)
 10.3  # Stock Option Agreement with Jay Moorin (Exhibit 10.24)(3)
 10.4  # Stock Option Agreement with Jay Moorin (Exhibit 10.24)(1)
 10.5  # Form of Stock Option Agreement under Stock Option Plans (Exhibit
         4.6)(2)
 10.6  # Employment Agreement with Jay Moorin (Exhibit 10.2)(2)
 10.7  # Employment Agreement with Michael A. Zasloff, M.D., Ph.D. (Exhibit
         10.23)(3)
 10.8  # Employment Agreement with Michael A. Zasloff, M.D., Ph.D. (Exhibit
         10.9)(3)
 10.9  # Employment Agreement with Michael R. Dougherty (Exhibit 10.26)(7)
 10.10 # Employment Agreement with Roy C. Levitt, M.D. (Exhibit 10.24)(5)(9)
 10.11 # Employment Agreement with Thomas J. Bigger (Exhibit 10.12)(13)
 10.12 # Employment Agreement with Kenneth J. Holroyd, M.D. (Exhibit 10.12)(16)
 10.13 # Consulting Agreement with Jay Moorin, Dated August 3, 1998 (Exhibit
         10.2)(16)
 10.14   Lease with respect to Plymouth Meeting, Pennsylvania offices and
         laboratories (Exhibit 10.16)(2)
 10.15   Lease with respect to Plymouth Meeting, Pennsylvania office (Exhibit
         10.13)(14)
 10.16   Amendment to lease with respect to Plymouth Meeting, Pennsylvania
         offices and laboratories (Exhibit 10.16)(16)
 10.17   Patent License Agreement and Sponsored Research Agreement with The
         Children's Hospital of Philadelphia (Exhibit 10.15)(2)
 10.18   License Agreement with Multiple Peptide Systems, Inc. (Exhibit
         10.12)(3)
 10.19   Second Amendment to License Agreement with Multiple Peptide Systems,
         Inc. (Exhibit 10.30)(12)
 10.20   Stock Issuance Agreement between Magainin Pharmaceuticals, Inc. and
         The Scripps Research Institute (Exhibit 10.2)(11)
 10.21   Stock Issuance Agreement between Magainin Pharmaceuticals, Inc. and
         Houghten Pharmaceuticals, Inc. (Exhibit 10.1)(11)
 10.22   Form of Credit Agreement, including form of Promissory Note and
         Warrant (Exhibit 10.22)(2)
 10.23   Form of Amendment to Credit Agreement Warrant (Exhibit 10.18)(6)
II-2
10.24   Research and Development Agreement with Abbott Laboratories (Exhibit
         10.23)(7)
 10.25   Warrant Agreement with Abbott Laboratories (Exhibit 10.25)(7)
 10.26   Manufacturing Agreement with Abbott Laboratories, dated October 4,
         1995 (Exhibit 10.27)(5)(8)
 10.27   Stock Issuance Agreement with Abbott Laboratories, dated October 4,
         1995 (Exhibit 10.28)(5)(8)
 10.28   Assignment Agreement between Magainin Pharmaceuticals Inc., Roy C.
         Levitt, M.D. and GeneQuest, Inc. (Exhibit 10.25)(5)(9)
 10.29   Form of Purchase Agreement relating to the issuance by Magainin
         Pharmaceuticals, Inc. of units consisting of shares of Magainin
         Pharmaceuticals, Inc. Common Stock and warrants to purchase shares of
         Common Stock (Exhibit 10.1)(10)
 10.30   Form of Warrant to purchase shares of Magainin Pharmaceuticals, Inc.
         Common Stock (Exhibit 10.2)(10)
 10.31   Development, Supply and Distribution Agreement, effective as of
         February 12, 1997 with SmithKline Beecham Corporation (Exhibit
         10.29)(5)(13)
 10.32   Collaborative Research and Option Agreement with Genentech, Inc.,
         effective as of December 30, 1998
 10.33   Stock Purchase Agreement between Magainin Pharmaceuticals, Inc. and
         Genentech Inc., dated December 30, 1998 (Exhibit 10.33)(16)
 10.34   Supply Agreement between Abbott Laboratories Inc. and Magainin
         Pharmaceuticals, Inc., effective January 1, 1999 (Exhibit 10.34)(16)
 10.35 # 1998 Equity Compensation Plan(15)
 10.36 # Summary of Oral Agreements with Executive Officers
 10.37   Settlement and Termination Agreement with Abbott Laboratories, dated
         September 8, 1999 (Exhibit 99.1)(17)
 23.1  * Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
         as Exhibit 5.1 hereto)
 23.2  * Consent of KPMG LLP
 24    * Power of Attorney (included on signature page)
--------

Explanation of Footnotes to Listing of Exhibits

*  Filed herewith.
#  Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
    June 30, 1992 filed with the Securities and Exchange Commission on
    September 24, 1992.
(2) Filed as an Exhibit to Registration Statement (No. 33-43579) on Form S-1
    filed with the Securities and Exchange Commission on October 24, 1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
    Statement (No. 33-43579) on Form S-1 filed with the Securities and Exchange
    Commission on November 27, 1991.
(4) Filed as Exhibit A to the Proxy Statement for the 1996 Annual Meeting of
    Stockholders.
(5) Portions of this Exhibit were omitted and filed separately with the
    Securities and Exchange Commission pursuant to an order granting
    confidential treatment.
(6) Filed as an Exhibit to the Transition Report on Form 10-K for the year
    ended December 31, 1993 filed with the Securities and Exchange Commission
    on March 9, 1994.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
    December 31, 1994 filed with the Securities and Exchange Commission on
    March 31, 1995.
(8) Filed as an Exhibit to the Form 10-Q for the quarter ended September 30,
    1995 filed with the Securities and Exchange Commission on November 9, 1995.
(9) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
    December 31, 1995 filed with the Securities and Exchange Commission on
    March 29, 1996.
(10) Filed as an Exhibit to Registration Statement (No. 333-09927) on Form S-3
     filed with the Securities and Exchange Commission on August 9, 1996.
(11) Filed as an Exhibit to Registration Statement (No. 333-14555) on Form S-3
     filed with the Securities and Exchange Commission on October 21, 1996.

                                      II-3
(12) Filed as an Exhibit to the Form 10-Q for the quarter ended September 30,
     1996 filed with the Securities and Exchange Commission on November 14,
     1996.
(13) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
     December 31, 1996 filed with the Securities and Exchange Commission on
     March 31, 1997.
(14) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
     December 31, 1997, filed with the Securities and Exchange Commission on
     March 13, 1998.
(15) Filed as Exhibit A to the Proxy Statement for the 1998 Annual Meeting of
     Stockholders.
(16) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
     December 31, 1998, filed with the Securities and Exchange Commission on
     March 3, 1999.
(17) Filed as an Exhibit to the Current Report on Form 8-K filed with the
     Securities and Exchange Commission on September 28, 1999.

Item 17. Undertakings

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against a public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.

   The undersigned Registrant hereby undertakes that:

   (1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

   (2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

                                      II-4
SIGNATURES AND POWER OF ATTORNEY

   Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Plymouth Meeting, Pennsylvania, on
this 27th day of September, 1999.

                                          MAGAININ PHARMACEUTICALS INC.

                                                 /s/ Michael R. Dougherty
                                          By: _________________________________
                                                   Michael R. Dougherty
                                                President, Chief Executive
                                               Officer, and Chief Financial
                                                   Officer and Director

   KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Zola P. Horovitz, Chairman, and Michael R.
Dougherty, President, Chief Executive Officer, Chief Financial Officer and
Director, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement, and to file the same, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Signature                            Title                       Date
             ---------                            -----                       ----
/s/ Zola P. Horowitz        Chairman of the Board               September 27, 1999
 _________________________________
      Zola P. Horovitz, Ph.D.
        /s/ Bernard Canavan        Director                            September 27, 1999
 _________________________________
       Bernard Canavan, M.D.
     /s/ Michael R. Dougherty      President, Chief Executive          September 27, 1999
 _________________________________  Officer,
       Michael R. Dougherty         Chief Financial Officer and
                                    Director
                                    (Principal Executive, Financial
                                    and Accounting Officer)
         /s/ Roy C. Levitt         Chief Operating Officer and         September 27, 1999
 _________________________________ Director
        Roy C. Levitt, M.D.
      /s/ Charles A. Sanders       Director                            September 27, 1999
 _________________________________
     Charles A. Sanders, M.D.
       /s/ Robert F. Shapiro       Director                            September 27, 1 999
 _________________________________
         Robert F. Shapiro
     /s/ James B. Wyngaarden       Director                            September 27, 1999
 _________________________________
     James B. Wyngaarden M.D.
      /s/ Michael A. Zasloff       Vice Chairman, Executive Vice       September 27, 1999
 _________________________________  President
  Michael A. Zasloff, M.D., Ph.D.   and Director
II-5
Exhibit
 Number  Document
 ------- --------
5.1*   Opinion of Morgan, Lewis & Bockius LLP regarding legality of
         Securities being registered.
 23.1*   Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
         as Exhibit 5.1 hereto).
 23.2*   Consent of KPMG LLP
 24.1*   Powers of Attorney (included on the signature page).
--------
*  Filed herewith.

                                      II-6