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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------------

For the Quarterly Period Ended March 31, 2007.

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------

For the Transition Period from  to
.

Commission File No. 0-19651



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GENAERA CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 13-3445668                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)
|                                                               | 
|5110 Campus Drive Plymouth Meeting, Pennsylvania               |  | 19462                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

610-941-4020

(Registrants telephone number, including area code)



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

The number of outstanding shares of the registrants Common Stock, par value $.002 per share, on April 30, 2007 was 104,677,789.



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GENAERA CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED March 31, 2007

TABLE OF CONTENTS



|                                                                                              |  |     
|--------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  | Page
|PART I - FINANCIAL INFORMATION                                                                |  |     
|                                                                                              | 
|Item 1. Financial Statements (unaudited):                                                     |  |     
|                                                                                              | 
|Balance Sheets as of March 31, 2007 and December 31, 2006                                     |  | 2   
|                                                                                              | 
|Statements of Operations for the three-month periods ended March 31, 2007 and 2006            |  | 3   
|                                                                                              | 
|Statements of Cash Flows for the three-month periods ended March 31, 2007 and 2006            |  | 4   
|                                                                                              | 
|Notes to Financial Statements                                                                 |  | 5   
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 8   
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  | 12  
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | 12  
|                                                                                              | 
|PART II - OTHER INFORMATION                                                                   |  |     
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  | 12  
|                                                                                              | 
|Item 1A. Risk Factors                                                                         |  | 12  
|                                                                                              | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 14  
|                                                                                              | 
|Item 3. Defaults Upon Senior Securities                                                       |  | 14  
|                                                                                              | 
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 14  
|                                                                                              | 
|Item 5. Other Information                                                                     |  | 14  
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | 15  
|                                                                                              | 
|SIGNATURES                                                                                    |  | 16  



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PART IFINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

GENAERA CORPORATION

BALANCE SHEETS

(In thousands, except per share data)



|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                            |  | March 31, 2007 |          |   | December 31, 2006 |  
|                                                                                                                                                                            |  | (Unaudited)    |          |   |                   |  
|ASSETS                                                                                                                                                                      |  |                |          |   |                   |   |          |  
|Current assets:                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                   |  | $              | 11,719   |   |                   | $ | 11,965   |  
|Short-term investments                                                                                                                                                      |  |                | 17,937   |   |                   |   | 21,841   |  
|Prepaid expenses and other current assets                                                                                                                                   |  |                | 1,315    |   |                   |   | 629      |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total current assets                                                                                                                                                        |  |                | 30,971   |   |                   |   | 34,435   |  
|Fixed assets, net                                                                                                                                                           |  |                | 663      |   |                   |   | 759      |  
|Other assets                                                                                                                                                                |  |                | 56       |   |                   |   | 56       |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total assets                                                                                                                                                                |  | $              | 31,690   |   |                   | $ | 35,250   |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                        |  |                |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                        |  |                |          |   |                   |   |          |  
|Accounts payable and accrued expenses                                                                                                                                       |  | $              | 2,407    |   |                   | $ | 2,427    |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                   |  |                | 2,407    |   |                   |   | 2,427    |  
|Other liabilities                                                                                                                                                           |  |                | 1,920    |   |                   |   | 1,770    |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                           |  |                | 4,327    |   |                   |   | 4,197    |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Commitments and contingencies (Note 4)                                                                                                                                      |  |                |          |   |                   |   |          |  
|Stockholders equity (Note 2):                                                                                                                                              |  |                |          |   |                   |   |          |  
|Preferred stock$0.001 par value per share, 9,211 shares authorized, none issued and outstanding at March 31, 2007 and
December 31, 2006                                    |  |                |         |   |                   |   |         |  
|Common stock$0.002 par value per share; 150,000 shares authorized; 104,678 and 104,653 shares issued and outstanding at March 31,
2007 and December 31, 2006, respectively |  |                | 209      |   |                   |   | 209      |  
|Additional paid-in capital                                                                                                                                                  |  |                | 292,129  |   |                   |   | 291,669  |  
|Accumulated other comprehensive loss                                                                                                                                        |  |                | (28      | ) |                   |   | (59      | )
|Accumulated deficit                                                                                                                                                         |  |                | (264,947 | ) |                   |   | (260,766 | )
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                  |  |                | 27,363   |   |                   |   | 31,053   |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                  |  | $              | 31,690   |   |                   | $ | 35,250   |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  

See accompanying notes to financial statements.



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GENAERA CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)



|                                                        |  |                             |         |   |      |   |        |  
|------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                        |  | Three Months EndedMarch 31, |        
|                                                        |  | 2007                        |         |   | 2006 |  
|Collaborative research agreement and grant revenues     |  | $                           | 207     |   |      | $ | 160    |  
|                                                        |  |                             |         |   |      |   |        |  
|Costs and expenses:                                     |  |                             |         |   |      |   |        |  
|Research and development                                |  |                             | 3,470   |   |      |   | 6,160  |  
|General and administrative                              |  |                             | 1,432   |   |      |   | 1,607  |  
|                                                        |  |                             |         |   |      |   |        |  
|                                                        |  |                             | 4,902   |   |      |   | 7,767  |  
|                                                        |  |                             |         |   |      |   |        |  
|Loss from operations                                    |  |                             | (4,695  | ) |      |   | (7,607 | )
|Interest income                                         |  |                             | 367     |   |      |   | 240    |  
|                                                        |  |                             |         |   |      |   |        |  
|Loss Before Income taxes                                |  |                             | (4,328  | ) |      |   | (7,367 | )
|Income tax benefit                                      |  |                             | 147     |   |      |   |       |  
|                                                        |  |                             |         |   |      |   |        |  
|Net loss                                                |  | $                           | (4,181  | ) |      | $ | (7,367 | )
|                                                        |  |                             |         |   |      |   |        |  
|Net loss per share  basic and diluted                  |  | $                           | (0.04   | ) |      | $ | (0.11  | )
|                                                        |  |                             |         |   |      |   |        |  
|Weighted average shares outstanding  basic and diluted |  |                             | 104,655 |   |      |   | 68,800 |  
|                                                        |  |                             |         |   |      |   |        |  

See accompanying notes to financial statements.



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GENAERA CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                            |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months Ended March 31, |       
|                                                                            |  | 2007                         |        |   | 2006 |  
|Cash Flows From Operating Activities:                                       |  |                              |        |   |      |   |        |  
|Net loss                                                                    |  | $                            | (4,181 | ) |      | $ | (7,367 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                               |  |                              | 108    |   |      |   | 97     |  
|Amortization of investment discounts/premiums                               |  |                              | (65    | ) |      |   | (33    | )
|Compensation expense on option grants and equity awards                     |  |                              | 460    |   |      |   | 878    |  
|Changes in operating assets and liabilities:                                |  |                              |        |   |      |   |        |  
|Prepaid expenses and other assets                                           |  |                              | (686   | ) |      |   | (308   | )
|Accounts payable and accrued expenses                                       |  |                              | (20    | ) |      |   | (1,133 | )
|Other liabilities                                                           |  |                              | 150    |   |      |   | (7     | )
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash used in operating activities                                       |  |                              | (4,234 | ) |      |   | (7,873 | )
|                                                                            |  |                              |        |   |      |   |        |  
|Cash Flows From Investing Activities:                                       |  |                              |        |   |      |   |        |  
|Purchase of investments                                                     |  |                              |       |   |      |   | (2,000 | )
|Proceeds from maturities of investments                                     |  |                              | 4,000  |   |      |   | 6,000  |  
|Capital expenditures                                                        |  |                              | (12    | ) |      |   | (252   | )
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash provided by investing activities                                   |  |                              | 3,988  |   |      |   | 3,748  |  
|                                                                            |  |                              |        |   |      |   |        |  
|Cash Flows From Financing Activities:                                       |  |                              |        |   |      |   |        |  
|Proceeds from exercise of stock options and warrants                        |  |                              |       |   |      |   | 39     |  
|                                                                            |  |                              |        |   |      |   |        |  
|Net cash provided by financing activities                                   |  |                              |       |   |      |   | 39     |  
|                                                                            |  |                              |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                   |  |                              | (246   | ) |      |   | (4,086 | )
|Cash and cash equivalents at beginning of period                            |  |                              | 11,965 |   |      |   | 16,418 |  
|                                                                            |  |                              |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                  |  | $                            | 11,719 |   |      | $ | 12,332 |  
|                                                                            |  |                              |        |   |      |   |        |  

See accompanying notes to financial statements.



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NOTE 1. Basis of Presentation

The accompanying financial statements of Genaera Corporation (Genaera
or the Company) are unaudited and have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim financial statements. The December 31, 2006
balance sheet was derived from audited financial statements, however, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. 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 (consisting of a normal and recurring nature) necessary to present fairly the results of operations, financial
position 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, 2006.

The
preparation of financial statements in conformity with U.S. 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.

NOTE 2. Stockholders Equity

The changes in stockholders equity from December 31, 2006 to March 31, 2007 are summarized as follows (in thousands):



|                                                          |  |                 |  |                          |     |                                    |   |         |                    |   |     |                          |  |   |          |   |  |   |        |  
|--------------------------------------------------------- |  | --------------- |  | ------------------------ | --- | ---------------------------------- | - | ------- | ------------------ | - | --- | ------------------------ |  | - | -------- | - |  | - | ------ | -
|                                                          |  | Common Stock    |  | AdditionalPaid-inCapital |     | AccumulatedOtherComprehensive Loss |   |         | AccumulatedDeficit |   |     | TotalStockholdersEquity | 
|                                                          |  | Numberof Shares |  | Amount                   |     |                                    |   |        
|Balance at December 31, 2006                              |  | 104,653         |  | $                        | 209 |                                    | $ | 291,669 |                    | $ | (59 | )                        |  | $ | (260,766 | ) |  | $ | 31,053 |  
|Compensation expense under option grants and stock awards |  | 25              |  |                          |    |                                    |   | 460     |                    |   |    |                          |  |   |         |   |  |   | 460    |  
|Comprehensive loss:                                       |  |                 |  |                          |     |                                    |   |         |                    |   |     |                          |  |   |          |   |  |   |        |  
|Net loss                                                  |  |                |  |                          |    |                                    |   |        |                    |   |    |                          |  |   | (4,181   | ) |  |   | (4,181 | )
|Unrealized gain on investments                            |  |                |  |                          |    |                                    |   |        |                    |   | 31  |                          |  |   |         |   |  |   | 31     |  
|                                                          |  |                 |  |                          |     |                                    |   |         |                    |   |     |                          |  |   |          |   |  |   |        |  
|Total comprehensive loss                                  |  |                 |  |                          |     |                                    |   |         |                    |   |     |                          |  |   |          |   |  |   | (4,150 | )
|                                                          |  |                 |  |                          |     |                                    |   |         |                    |   |     |                          |  |   |          |   |  |   |        |  
|Balance at March 31, 2007                                 |  | 104,678         |  | $                        | 209 |                                    | $ | 292,129 |                    | $ | (28 | )                        |  | $ | (264,947 | ) |  | $ | 27,363 |  
|                                                          |  |                 |  |                          |     |                                    |   |         |                    |   |     |                          |  |   |          |   |  |   |        |  



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NOTE 3. Collaborative Arrangements

In February 1997, the Company entered into a development, supply and distribution agreement in North America with GlaxoSmithKline (GSK) for LOCILEX Cream (the GlaxoSmithKline Agreement). GSK
paid the Company $10,000,000 under this agreement. Because LOCILEX was not approved by the United States Food and Drug Administration (FDA), commercialization did not occur. The GlaxoSmithKline Agreement gave GSK rights to terminate the
arrangement and, under certain conditions, the right to negotiate for rights to another Genaera product development candidate. In October 2006, the Company received notification from Smithkline Beecham Corporation, d/b/a GSK, stating GSK was
terminating the GlaxoSmithKline Agreement between the Company and GSK for LOCILEX Cream and that GSK had no further rights to any of the Companys products under such agreement.

In April 2001, the Company entered into a research collaboration and licensing agreement with MedImmune, Inc. (MedImmune) to develop and
commercialize therapies related to the Companys Interleukon-9 (IL-9) program. MedImmune provided funding of $2,500,000 to the Company for research and development activities at the Company over a two-year period from April 2001 to
April 2003 (the R&D Funding). The R&D Funding was paid in eight quarterly installments and recognized by the Company as revenues on a straight-line basis over the two-year period. By the end of that two-year period, licensed
technology had been transferred to MedImmune and MedImmune assumed responsibility for development and commercialization efforts on the IL9 program. In addition to the R&D Funding, MedImmune agreed to reimburse the Company for certain external
costs incurred by the Company in connection with the IL9 research plan, which are recognized by the Company as revenues as the related expenses are incurred. In December 2006, the Company received a milestone payment as a result of the initiation of
Phase II clinical trials. For the three-month period ended March 31, 2007, the Company recognized $207,000 of revenue from external cost reimbursements of which $ 128,000 relate to prior periods. During the three-month period ended
March 31, 2007, the Company recognized related expenses of $ 200,000 related to prior periods. For the three-month period ended March 31, 2006, the Company recognized $45,000 of revenue from external cost reimbursements. The revenue
and expense amounts related to prior periods were determined to be immaterial to the current and prior periods. The Company could also receive up to $54,000,000 in additional payments based on successful completion of future milestones. The Company
is also entitled to royalties on sales of commercial products resulting from the collaboration. Receipt of future milestones and royalties is dependent upon favorable results in the future from clinical trials being conducted by MedImmune, MedImmune
continuing to conduct the research and development activities required to commercialize the product and the commercial success of the product if and when it is approved for marketing by the FDA.

In September 2001, the Company received a contingent award of up to $1,700,000 from Cystic Fibrosis Foundation Therapeutics (CFFT), an
affiliate of the Cystic Fibrosis Foundation, to support early clinical evaluation of LOMUCIN involving subjects with cystic fibrosis. In April 2005, the award was increased to $2,863,000, consisting of $513,000 previously received in connection with
the Companys initial Phase II trial of LOMUCIN and up to $2,350,000 in milestone-driven matching funds from CFFT to support a multi-center, randomized, double-blind, placebo-controlled Phase II clinical trial of LOMUCIN. After consultation
with CFFT, the protocol for this trial was amended in June 2006 to decrease the number of evaluable subjects to be enrolled in the trial from 200 to 80. Of the total grant of $2,863,000, $1,713,000 of grant support relating to the Phase II clinical
evaluation of LOMUCIN has been received by the Company and $144,500 of grant support was billed to CFFT in April of 2007 The total of $1,857,500 was recorded as a long-term liability as of March 31, 2007. The Company did not recognize any
portion of this total as revenue as it is refundable to CFFT upon marketing approval by the FDA or if the Company elects not to enter Phase III clinical trials or to commercialize the product within two years of the satisfaction of certain
development milestones, assuming the achievement of



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statistically significant results. On March 29, 2007, the Company executed an amendment to its award agreement with CFFT whereby the Company and CFFT
agreed to extend the project and budget period under the award to December 31, 2007 and amend certain milestones. As a result of the decrease in the number of evaluable subjects, the total contract funding for the Companys Phase II
clinical evaluation of LOMUCIN has been reduced from $2,863,000 to $2,521,478 or $2,452,000 depending upon the final milestone achieved. CFFT is also due a royalty of up to 1.6% on net sales of any resultant product, based upon the amount of funding
ultimately provided by CFFT.

In April 2004, the Company received a Phase I Small Business Innovative Research (SBIR) program
grant from the National Institute of Diabetes and Digestive and Kidney Diseases of the National Institutes of Health (NIH) in the amount of $100,000 to support its trodusquemine (formerly trodulamine) program. The grant extended over a
one-year period ending in March 2005. In March 2005, the Company notified the NIH of a no-cost extension to the original budget period by twelve months. As a result of the notification, the grant was extended to March 2006. The Company recognized no
revenue related to this grant in the three-month period ended March 31, 2007. The Company recognized $100,000 of revenue related to this grant during the three-month period ended March 31, 2006.

In September 2004, the Company received a Phase I SBIR program grant from the National Eye Institute of the NIH in the amount of $100,000 to support its
aminosterols for age-related macular degeneration program. The grant extended over a one-year period which ended in August 2005. In August 2005, the Company notified the NIH of a no-cost extension to the original budget period by twelve months. As a
result of the notification, the grant was extended to August 2006. The Company recognized no revenue related to this grant during the three-month periods ended March 31, 2007 and 2006.

In February 2006, the Company entered into an agreement to provide pexiganan cream to a research facility for its conduct of a research study. As a
result of this agreement, the Company recognized $15,000 as revenue in the three-month period ended March 31, 2006.

NOTE 4. Commitments,
Contingencies and Liquidity

Employment Agreements

The Company has employment agreements with all of its officers and employees. Employees covered under employment contracts who are terminated without cause are entitled to receive continuation of base pay
for periods ranging from two months to twelve months.

On January 3, 2007, the Company announced the termination of the EVIZON
clinical development program in wet age-related macular degeneration (AMD). As a result of this decision, the Company reduced its workforce by approximately 30 percent in January 2007. The Company incurred restructuring charges of
approximately $271,000 during the three months ended March 31, 2007. Approximately $239,000 of this amount was paid during the three months ended March 31, 2007.

Liquidity

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

The Company regularly explores
alternative means of financing its operations and seeks funding through various sources, including public and private securities offerings and collaborative arrangements with third parties. The Company currently does not have any commitments to
obtain additional funds and may be unable to obtain sufficient funding in the future on acceptable terms, if at all. If the Company cannot obtain funding, it will need to delay, scale back or eliminate research and development programs or enter into
collaborations with third parties to commercialize potential products or technologies that it might otherwise seek to develop or commercialize independently, or seek other arrangements. If the Company engages in collaborations, it will receive lower
consideration upon commercialization of such products than if it had not entered into such arrangements or if it entered into such arrangements at later stages in the product development process. The Company believes that its current cash and
investments as of March 31, 2007 are sufficient to meet its research and development goals for its programs and sustain operations at least through 2008.

NOTE 5. Income Tax

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprises financial statements and prescribes a threshold of more-likely-than-not
for recognition of tax benefits of uncertain tax positions taken or expected to be taken in a tax return. FIN 48 also provides related guidance on measurement, derecognition, classification, interest and penalties, and disclosures. The provisions of
FIN 48 were effective for the Company on January 1, 2007. The adoption of FIN 48 did not have a material impact on the Companys results of operations or financial condition.

During the three-month period ended March 31, 2007, the company sold a portion of its Pennsylvania research and development credit carryforwards to a
third party for a net proceeds of $147,000, resulting in the recognition of an income tax benefit in the statement of operations.

NOTE 6. Subsequent
Events

On April 10, 2007, the Company announced that its Board of Directors approved managements plan to focus corporate
resources on the development of trodusquemine for the treatment of obesity and diabetes. Over the next year, the companys business and



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research activities will be devoted to the development of trodusquemine and its collaboration with MedImmune, for development of the IL9 antibody as a
treatment for asthma. In addition, the Company will reduce its workforce by approximately 30 percent over the next three months and pursue the divestiture of certain non-core assets. The Company will incur restructuring charges of approximately
$500,000 in the second quarter of 2007 associated with this reduction in force.

On October 3, 2006, the stockholders of the Company voted
to grant authority to the Board of Directors of the Company the discretionary authority to effect a reverse stock split of the Companys common stock. On April 25, 2007, the Board of Directors of the Company authorized the implementation of a
reverse stock at a ratio of one-for-six effective May 11, 2007.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Forward-looking
Statements

Our disclosure and analysis in this Quarterly Report on Form 10-Q contains some forward-looking statements.
Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as
anticipate, estimate, expect, project, intend, plan, believe, hope and other words and terms of similar meaning. In particular, these include, among
others, statements relating to present or anticipated scientific progress, development of potential pharmaceutical products, future revenues, capital expenditures, research and development expenditures, future financing and collaborations,
personnel, manufacturing requirements and capabilities, the impact of new accounting pronouncements, and other statements regarding matters that are not historical facts or statements of current condition.

There are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements,
including those addressed below in Part II, Item 1A. under Risk Factors.

We undertake no obligation (and expressly
disclaim any such obligation) to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You are advised, however, to consult any further disclosures we make on
related subjects in our filings with the United States Securities and Exchange Commission (SEC), all of which are available in the SEC EDGAR database at www.sec.gov and from us.

Financial Condition, Liquidity and Capital Resources

Cash, cash equivalents and short-term investments were $29.7 million at March 31, 2007 as compared to $33.8 million at December 31, 2006. The primary use of cash during the three-month period ended March 31, 2007 was to
finance our research and development operations.

Current liabilities were $2.4 million at March 31, 2007 and December 31, 2006.
As of March 31, 2007, long-term liabilities include $1.9 million received as a contingent award from the CFFT.

Our capital expenditure
requirements will depend upon numerous factors, including the progress of our research and development programs, the time and cost required to obtain regulatory approvals, our ability to enter into additional collaborative arrangements, the demand
for products based on our technology, if and when such products are approved, and possible acquisitions of products, technologies and companies. We had no significant commitments for capital expenditures as of March 31, 2007.

We regularly explore alternative means of financing our operations and seek funding through various sources, including public and private securities
offerings, collaborative arrangements with third parties and other strategic alliances and business transactions. We currently do not have any commitments to obtain additional funds and may be unable to obtain sufficient funding in the future on
acceptable terms, if at all. If we cannot obtain funding, we will need to delay, scale back or eliminate research and development programs or enter into collaborations with third parties to commercialize potential products or technologies that we
might otherwise seek to develop or commercialize ourselves, or seek other arrangements. If we engage in collaborations, we will receive lower consideration upon commercialization of such products than if we had not entered into such arrangements, or
if we entered into such arrangements at later stages in the product development process. Additional factors that may impact our ability to raise capital are addressed in Part II, Item 1A. under Risk Factors.



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Contractual Cash Obligations

The table below sets forth our contractual cash obligations at March 31, 2007 (in thousands):



|                                                        |  |       |       |                             |   |           |  |           |     |               |   |   |  |   |  
|------------------------------------------------------- |  | ----- | ----- | --------------------------- | - | --------- |  | --------- | --- | ------------- | - | - |  | - | -
|                                                        |  |       |       | Cash Payments Due by Period
|Contractual Cash Obligations 1                          |  | Total |       | Less than 1 year            |   | 1-3 years |  | 4-5 years |     | After 5 years
|Operating lease on building2                            |  | $     | 1,219 |                             | $ | 433       |  | $         | 786 |               | $ |  |  | $ | 
|Operating leases and maintenance contracts on equipment |  |       | 124   |                             |   | 84        |  |           | 40  |               |   |  |  |   | 
|                                                        |  |       |       |                             |   |           |  |           |     |               |   |   |  |   |  
|Total contractual cash obligations                      |  | $     | 1,343 |                             | $ | 517       |  | $         | 826 |               | $ |  |  | $ | 
|                                                        |  |       |       |                             |   |           |  |           |     |               |   |   |  |   |  

---

|1 | This table does not include various agreements that we have entered into for services with third-party
vendors, including agreements to conduct clinical trials, to manufacture product candidates, and for consulting and other contracted services, due to the cancelable nature of the services. We accrue the costs of these agreements based on estimates
of work completed to date.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | The lease provides for an annual escalation of our monthly rent in the amount of $3,500 beginning on
December 1, 2007 and an additional rent escalation of 4% beginning on December 1, 2008.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies and
Estimates

A discussion of our critical accounting policies and estimates is included in Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2006. There have not been any changes or additions to our critical accounting policies during the three months
ended March 31, 2007.

Results of Operations

Revenues

We have received no revenues to date from product sales. Revenues recorded to date have consisted principally of
revenues recognized under collaborations with third parties. In April 2001, we entered into a research collaboration and licensing agreement with MedImmune to develop and commercialize therapies related to our IL9 program. MedImmune provided funding
of $2.5 million, payable in eight equal quarterly installments through April 2003 (the R&D Funding). In addition, MedImmune reimburses external costs for certain research and development activities and for patent prosecution
expenses. We could also receive up to $54.0 million of additional funding based on successful completion of future milestones. In December 2006, we received a milestone payment as a result of the initiation of Phase II clinical trials. For the
three-month period ended March 31, 2007, we recognized $0.2 million as revenue related to external cost reimbursements, of which $ 0.1 million related to reimbursements for expenses incurred in prior periods but recognized during the three
months ended March 31, 2007. For the three-month period ended March 31, 2006, we recognized $0.1 million as revenue related to external cost reimbursements.

In April 2004, we received a Phase I Small Business Innovative Research (SBIR) program grant from the National Institute of Diabetes and Digestive and Kidney Diseases of the National Institute of Health
(NIH) in the amount of $0.1 million to support our trodusquemine (formerly trodulamine) program. The grant extended over a one-year period which ended in March 2005. In March 2005, we notified the NIH of a no-cost extension to the
original budget period by twelve months. As a result of the notification, the grant was extended to March 2006. We recognized no revenue related to this grant in the three-month period ended March 31, 2007. We recognized $0.1 million of revenue
related to this grant in the three-month period ended March 31, 2006.



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In September 2004, we received a Phase I SBIR program grant from the National Eye Institute of the NIH in
the amount of $0.1 million to support our aminosterols for age-related macular degeneration (AMD) program. The grant extended over a one-year period which ended in August 2005. In August 2005, we notified the NIH of a no-cost extension
to the original budget period by twelve months. As a result of the notification, the grant was extended to August 2006. We recognized no revenue related to this grant during the three-month periods ended March 31, 2007 and 2006.

In February 2006, we entered into an agreement to provide pexiganan cream to a research facility for its conduct of a research study. As a result of this
agreement, we recognized $15,000 as revenue in the three-month period ended March 31, 2006.

Research and Development Expenses

Our current research and development programs include trodusquemine (MSI-1436) for the treatment of
obesity and metabolic disorders, squalamine lactate, LOMUCIN(talniflumate), IL9 and other programs consisting
of other aminosterols for the treatment of inflammatory disorders and LOCILEX (pexiganan) Cream for the treatment of infectious disease. The following table illustrates our research and development projects and the stage to which each has been
developed:



|                    |  |                      |  |            
|------------------- |  | -------------------- |  | -----------
|                    |  | Development Stage    |  | Status     
|Trodusquemine       |  | Research/Preclinical |  | Active     
|Squalamine:         |  |                      |  |            
|Squalamine          |  | Phase II             |  | Active     
|EVIZON(squalamine) |  | Phase II/III         |  | Inactive(1)
|LOMUCIN            |  | Phase II(2)          |  | Active     
|IL9                 |  | Phase II             |  | Active(3)  
|Other programs:     |  |                      |  |            
|Other aminosterols  |  | Research             |  | Active     
|LOCILEX Cream       |  | Phase III            |  | Inactive   

---

|(1) | In January 2007, we announced the termination of our EVIZONclinical development program for the treatment of wet AMD.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(2) | Due to slower than expected enrollment, reporting of the one year outcomes from the study will not occur
before 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(3) | In April 2001, we entered into a collaborative agreement with MedImmune to develop and commercialize
therapies related to our IL9 program.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

Research and development expenses for each of our projects consist of both direct
and indirect expenses. Direct expenses include salaries and other costs of personnel, raw materials and supplies for each project. We also may incur third-party costs related to these projects, such as contract research, clinical development and
manufacturing costs and consulting costs. Indirect expenses include depreciation expense and the costs of operating and maintaining our facilities, property and equipment, to the extent used for our research and development projects, as well as the
costs of general management of our research and development projects.

We recognized research and development expenses of $3.5 million and
$6.2 million in the three-month periods ended March 31, 2007 and 2006. The following table illustrates research and development expenses incurred during the three-month periods ended March 31, 2007 and 2006 for our significant groups of
research and development projects (in thousands).



|                               |  |                             |       |      |   |      
|------------------------------ |  | --------------------------- | ----- | ---- | - | -----
|                               |  | Three Months EndedMarch 31,
|                               |  | 2007                        |       | 2006
|Squalamine program expenses    |  | $                           | 334   |      | $ | 4,160
|LOMUCINprogram expenses       |  |                             | 260   |      |   | 400  
|IL9 program expenses           |  |                             | 282   |      |   | 24   
|Trodusquemine program expenses |  |                             | 1,402 |      |   | 233  
|Other program expenses         |  |                             | 18    |      |   | 12   
|Indirect expenses              |  |                             | 1,174 |      |   | 1,331
|                               |  |                             |       |      |   |      
|                               |  | $                           | 3,470 |      | $ | 6,160
|                               |  |                             |       |      |   |      

Research and development expenses decreased
in the three-month period ended March 31, 2007, as compared to the same period a year ago, due to decreases in clinical trial costs ($2.4 million), third-party contract research ($0.2 million), manufacturing ($0.4 million), consulting expenses
and research and development supplies ($0.2 million) and personnel costs ($0.6 million) related to our squalamine program for the treatment of wet AMD as a result of the discontinuation of the programming, decreases in clinical trial costs ($0.1
million) related to our LOMUCIN



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program and decreases in indirect expenses due to the decreased stock-based compensation expense for stock options ($0.2 million), temporary labor ($0.1
million) and recruiting fees ($0.1 million). These decreases were partially offset by increases in personnel costs ($0.4 million), manufacturing expenses ($0.5 million), clinical trial costs (0.2 million), and third-party contract research ($0.1
million) related to our trodusquemine program as a result of the preparation of our Investigational New Drug (IND) submission to the Food and Drug administration (FDA) and anticipation of the start of the phase I clinical
trials, as well as increases in third-party contract research ($0.2 million) related to our IL9 program. In addition, indirect expenses increased primarily due to realignment costs associated with the January 2007 reduction in force ($0.3 million).

The costs incurred to date on each of our development projects are not reasonably
estimable because work on one program often supports or enhances another program. For example, it is not possible to separate the time and resources spent in development of squalamine lactate as a product candidate to treat wet AMD and as a product
candidate to treat cancer because: (i) early research and development efforts devoted to cancer research led to development of squalamine lactate (trade name EVIZON) for AMD; (ii) clinical trial work pursuant to Genaeras IND application for cancer forms part of the safety data base for the IND we filed with
the FDA for wet AMD; (iii) our manufacturing development for squalamine lactate supports both the AMD and cancer programs; (iv) trodusquemine and squalamine are synthesized from the same starting material and a significant number of steps
in the synthesis are identical; and (v) nonclinical testing conducted supports all regulatory filings and proposed indications for squalamine.

The level of research and development expenses in future periods will depend principally upon the progress of our research and development programs and our capital resources. Due to the significant risks and uncertainties inherent in the
preclinical and clinical studies associated with each of our research and development programs, the cost to complete such programs, as well as the period in which net cash inflows from significant programs are expected to commence, are not
reasonably estimable. Preclinical and clinical studies may yield varying results that could delay, limit or prevent a programs advancement through the various stages of product development and significantly impact the costs to be incurred and
the time involved in bringing a program to completion. Such delays, limitations or prevention of a programs advancement could harm our financial condition and operating results and inhibit our ability to raise additional funds to support
ongoing operations.

The nature of costs incurred in the future will also vary depending upon the stage of the product candidates
development. Product candidates in the research stage often require significant laboratory work to develop and prepare the product candidate for preclinical testing and for testing in humans. Costs for such work typically include our staff, our
facilities, lab supplies and equipment and fees to contract research facilities supervised by our personnel. All products to be tested in humans require preclinical testing and often require additional nonclinical testing while clinical trials are
in process to fulfill regulatory requirements. Preclinical and nonclinical work requires expenditures for staffing and facilities. Costs will also be incurred for work done by contract research facilities under our supervision. Early stage products
require development of manufacturing methods, supporting analytical and research work and qualifying vendors, including contract manufacturers. Products in human testing, particularly later stage trials, require manufacturing more significant
quantities of product. The costs of conducting clinical trials include fees to contract research organizations to conduct the trials, payments to physicians and research centers, and payments for a wide range of services to prepare for clinical
trials, support the trials and manage data gathered in the trials. Internal costs for clinical trials include staffing and infrastructure to design, adapt and manage the trials, as well as managing vendors providing supporting services. Smaller but
continuing costs throughout the clinical trials process also include quality control and regulatory compliance activities conducted by Genaera staff and through contractors under our supervision.

General and Administrative Expenses

We recognized
general and administrative expenses of $1.4 million and $1.6 million in the three-month periods ended March 31, 2007 and 2006, respectively. General and administrative expenses consist principally of personnel costs, professional fees
and public company expenses. General and administrative costs decreased in the three-month period ended March 31, 2007, as compared to the same period a year ago, due principally to decreases in stock-based compensation expense for stock
options ($0.2 million).

Interest Income

We recognized interest income of $0.4 million and $0.2 million in the three-month periods ended March 31, 2007 and 2006, respectively. Interest income is primarily comprised of income generated from cash and investments.
Interest income increased during the three-month period ended March 31, 2007, as compared to the same period in 2006, due to higher average investment balances and higher interest rates.

Income Tax Benefit

We recognized an income tax
benefit of $0.1 million during the three-month period ended March 31, 2007, as a result of the sale of Pennsylvania research and development tax credit carryforwards to a third party pursuant to Pennsylvania Act 7 of 1997 and Pennsylvania
Act 46 of 2003.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We are exposed to risks associated
with interest rate changes. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We only invest in U.S. government, government agency, corporate and bank or institutional money market funds with
investment standards comparable to our investment policy. Our investment policy limits the amount of credit exposure we may have to any one issue, issuer or type of investment other than U.S. government debt.

As of March 31, 2007, our portfolio investments consisted of $11.7 million in cash and cash equivalents and $17.9 million in U.S. Treasury or U.S.
government agency debt instruments having a maturity of less than one year. Due to the nature of our investment portfolio, management believes that a sudden change in interest rates would not have a material effect on the value of the portfolio.
Management estimates that if the average annualized yield of our investments had decreased by 100 basis points, our interest income for the three-month period ended March 31, 2007 would have decreased by approximately $0.1 million.
Correspondingly, if the average annualized yield of our investments had increased by 100 basis points, our interest income for the three-month period ended March 31, 2007 would have increased by approximately $0.1 million. These estimates
assume that the change occurred on the first day of 2007 and changed the annualized yield of each investment instrument by 100 basis points. The impact on our future interest income will depend largely on the gross amount of our investment
portfolio.

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



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of disclosure controls and procedures: For the
quarterly period ended March 31, 2007, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Executive Vice President and Chief Financial
Officer (the principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended, as of the
end of the period covered by this report. Based upon this evaluation, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that, as of March 31, 2007, our disclosure controls and
procedures were effective.

Our management, including our President and Chief Executive Officer and our Executive Vice President and Chief
Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met and our disclosure controls and procedures are designed to provide this reasonable assurance. Based upon the evaluation discussed above, our President and Chief Executive Officer and our Executive Vice President and Chief
Financial Officer concluded that, as of March 31, 2007, our disclosure controls and procedures were effective at providing such reasonable assurance. Because of inherent limitations in all control systems, no evaluation of control can provide
absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.

Internal control over
financial reporting: There were no changes in our internal control over financial reporting during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

PART IIOTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

None.

ITEM 1A.
RISK FACTORS

There are many factors that affect our business and the results of our operations. In addition to
the following risk factor and the other information set forth in this quarterly report, you should carefully read and consider Item 1A. Risk Factors in Part I, and Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II, of our Annual Report on Form 10-K for the year ended December 31, 2006, which contain a description of significant factors that might cause the actual results of operations in future periods to
differ materially from those currently expected or desired.



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Risks Related to Our Business

Our efforts to increase the value of the Company for our stockholders may not be successful. There is no guarantee that our stockholders will realize greater value for, or preserve existing value of, their shares
of the Company.

On April 10, 2007, following the completion of the previously announced strategic review, our Board of Directors
approved managements plan to focus corporate resources on the development of trodusquemine (MSI-1436) for the treatment of obesity. Over the next year, our business and research activities will be devoted to our anti-obesity program and our
collaboration with MedImmune, Inc. for development of anti-interleukin-9 (IL9) antibody as a treatment for asthma. In connection with this realignment, we will reduce our workforce by approximately 30 percent during May through July of 2007 and seek
to divest certain non-core assets. There can be no assurance that our plan to focus resources on obesity and asthma programs will provide greater value to our stockholders than that reflected in the current stock price.



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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.
OTHER INFORMATION

None.



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##### Table of Contents

ITEM 6.
EXHIBITS



|     |  |                                                                                                                                                                                                                            
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                         
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                         



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SIGNATURES

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



|                     |  |  |  |                     |  |                                                                                                  
|-------------------- |  |  |  | ------------------- |  | -------------------------------------------------------------------------------------------------
|                     |  |  |  | GENAERA CORPORATION
|                     |  |  | 
|Date: April 30, 2007 |  |  |  | By:                 |  | /s/ John A. Skolas                                                                               
|                     |  |  |  |                     |  | John A. Skolas                                                                                   
|                     |  |  |  |                     |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                
|31.1        |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                         
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                         



17