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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 September 30, 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 ofincorporation or organization) |  | (IRS EmployerIdentification Number)



|                                                |  |           
|----------------------------------------------- |  | ----------
|5110 Campus DrivePlymouth Meeting, Pennsylvania |  | 19462     
|(Address of principal executive offices)        |  | (Zip Code)

610-941-4020

(Registrants telephone number, including area code)



---

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

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 November 9, 2007 was 17,461,505.



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GENAERA CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS



|                               |  |                                                                                                  |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------------------ |  | ----
|                               |  |                                                                                                  |  | Page
|PART I - FINANCIAL INFORMATION |  |                                                                                                 
|                               |  |                                                                                                 
|Item 1.                        |  | Financial Statements (unaudited):                                                                |  |     
|                               |  |                                                                                                 
|                               |  | Balance Sheets as of September 30, 2007 and December 31, 2006                                    |  | 3   
|                               |  |                                                                                                 
|                               |  | Statements of Operations for the three- and nine-month periods ended September 30, 2007 and 2006 |  | 4   
|                               |  |                                                                                                 
|                               |  | Statements of Cash Flows for the nine-month periods ended September 30, 2007 and 2006            |  | 5   
|                               |  |                                                                                                 
|                               |  | Notes to Financial Statements                                                                    |  | 6   
|                               |  |                                                                                                 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 10  
|                               |  |                                                                                                 
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                       |  | 14  
|                               |  |                                                                                                 
|Item 4.                        |  | Controls and Procedures                                                                          |  | 15  
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                                 
|                               |  |                                                                                                 
|Item 1.                        |  | Legal Proceedings                                                                                |  | 16  
|                               |  |                                                                                                 
|Item 1A.                       |  | Risk Factors                                                                                     |  | 16  
|                               |  |                                                                                                 
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                      |  | 16  
|                               |  |                                                                                                 
|Item 3.                        |  | Defaults Upon Senior Securities                                                                  |  | 16  
|                               |  |                                                                                                 
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                              |  | 16  
|                               |  |                                                                                                 
|Item 5.                        |  | Other Information                                                                                |  | 16  
|                               |  |                                                                                                 
|Item 6.                        |  | Exhibits                                                                                         |  | 16  
|                               | 
|SIGNATURES                     |  | 17                                                                                              



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##### Table of Contents

PART I - FINANCIAL INFORMATION



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

GENAERA CORPORATION

BALANCE SHEETS

(In thousands, except per share data)



|                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                              |  | September 30, 2007 |          |   | December 31, 2006 |  
|                                                                                                                                                                              |  | (Unaudited)        |          |   |                   |  
|ASSETS                                                                                                                                                                        |  |                    |          |   |                   |   |          |  
|Current assets:                                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                     |  | $                  | 9,323    |   |                   | $ | 11,965   |  
|Short-term investments                                                                                                                                                        |  |                    | 13,882   |   |                   |   | 21,841   |  
|Prepaid expenses and other current assets                                                                                                                                     |  |                    | 659      |   |                   |   | 629      |  
|                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Total current assets                                                                                                                                                          |  |                    | 23,864   |   |                   |   | 34,435   |  
|Fixed assets, net                                                                                                                                                             |  |                    | 458      |   |                   |   | 759      |  
|Other assets                                                                                                                                                                  |  |                    | 56       |   |                   |   | 56       |  
|                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Total assets                                                                                                                                                                  |  | $                  | 24,378   |   |                   | $ | 35,250   |  
|                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|                                                                                                                                                                              |  |                   
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                          |  |                    |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                          |  |                    |          |   |                   |   |          |  
|Accounts payable and accrued expenses                                                                                                                                         |  | $                  | 2,053    |   |                   | $ | 2,427    |  
|                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                     |  |                    | 2,053    |   |                   |   | 2,427    |  
|Other liabilities                                                                                                                                                             |  |                    | 70       |   |                   |   | 1,770    |  
|                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                             |  |                    | 2,123    |   |                   |   | 4,197    |  
|                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Commitments and contingencies (Note 6)                                                                                                                                        |  |                    |          |   |                   |   |          |  
|                                                                                                                                                                              |  |                   
|Stockholders equity (Note 2):                                                                                                                                                |  |                    |          |   |                   |   |          |  
|Preferred stock$0.001 par value per share, 9,211 shares authorized, none issued and outstanding at September 30, 2007 and
December 31, 2006                                  |  |                    |         |   |                   |   |         |  
|Common stock$0.002 par value per share; 150,000 shares authorized; 17,459 and 17,442 shares issued and outstanding at September 30,
2007 and December 31, 2006, respectively |  |                    | 35       |   |                   |   | 35       |  
|Additional paid-in capital                                                                                                                                                    |  |                    | 292,863  |   |                   |   | 291,843  |  
|Accumulated other comprehensive income (loss)                                                                                                                                 |  |                    | 20       |   |                   |   | (59      | )
|Accumulated deficit                                                                                                                                                           |  |                    | (270,663 | ) |                   |   | (260,766 | )
|                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                    |  |                    | 22,255   |   |                   |   | 31,053   |  
|                                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                    |  | $                  | 24,378   |   |                   | $ | 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 EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                        |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|Collaborative research agreement and grant revenues     |  | $                               | 51     |   |                                | $ | 119    |      |  | $ | 2,660   |   |  | $ | 364     |  
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                        |  |                                 |        |  
|Costs and expenses:                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                |  |                                 | 2,898  |   |                                |   | 3,863  |      |  |   | 9,457   |   |  |   | 14,613  |  
|General and administrative                              |  |                                 | 1,187  |   |                                |   | 1,389  |      |  |   | 4,258   |   |  |   | 4,491   |  
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                        |  |                                 | 4,085  |   |                                |   | 5,252  |      |  |   | 13,715  |   |  |   | 19,104  |  
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                    |  |                                 | (4,034 | ) |                                |   | (5,133 | )    |  |   | (11,055 | ) |  |   | (18,740 | )
|Interest income                                         |  |                                 | 305    |   |                                |   | 635    |      |  |   | 1,011   |   |  |   | 1,121   |  
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss before income taxes                                |  |                                 | (3,729 | ) |                                |   | (4,498 | )    |  |   | (10,044 | ) |  |   | (17,619 | )
|Income tax benefit                                      |  |                                 |       |   |                                |   |       |      |  |   | 147     |   |  |   |        |  
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                |  | $                               | (3,729 | ) |                                | $ | (4,498 | )    |  | $ | (9,897  | ) |  | $ | (17,619 | )
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss per share  basic and diluted                  |  | $                               | (0.21  | ) |                                | $ | (0.26  | )    |  | $ | (0.57   | ) |  | $ | (1.30   | )
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding  basic and diluted |  |                                 | 17,456 |   |                                |   | 17,430 |      |  |   | 17,449  |   |  |   | 13,506  |  
|                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes to financial statements.



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GENAERA CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                            |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Nine Months Ended September 30, |        
|                                                                            |  | 2007                            |         |   | 2006 |  
|Cash Flows From Operating Activities:                                       |  |                                 |         |   |      |   |         |  
|Net loss                                                                    |  | $                               | (9,897  | ) |      | $ | (17,619 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                                 | 317     |   |      |   | 311     |  
|Amortization of investment premiums                                         |  |                                 | 38      |   |      |   | 72      |  
|Compensation expense on option grants and equity awards                     |  |                                 | 1,020   |   |      |   | 2,114   |  
|Deferred revenue recognized                                                 |  |                                 | (1,713  | ) |      |   |        |  
|Changes in operating assets and liabilities:                                |  |                                 |         |   |      |   |         |  
|Prepaid expenses and other assets                                           |  |                                 | (30     | ) |      |   | (177    | )
|Accounts payable and accrued expenses                                       |  |                                 | (374    | ) |      |   | (2,015  | )
|Other liabilities                                                           |  |                                 | 13      |   |      |   | (25     | )
|                                                                            |  |                                 |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                                 | (10,626 | ) |      |   | (17,339 | )
|                                                                            |  |                                 |         |   |      |   |         |  
|Cash Flows From Investing Activities:                                       |  |                                 |         |   |      |   |         |  
|Purchase of investments                                                     |  |                                 | (14,000 | ) |      |   | (30,000 | )
|Proceeds from maturities of investments                                     |  |                                 | 22,000  |   |      |   | 18,000  |  
|Capital expenditures                                                        |  |                                 | (16     | ) |      |   | (316    | )
|                                                                            |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                         |  |                                 | 7,984   |   |      |   | (12,316 | )
|                                                                            |  |                                 |         |   |      |   |         |  
|Cash Flows From Financing Activities:                                       |  |                                 |         |   |      |   |         |  
|Proceeds from issuance of common stock and warrants                         |  |                                 |        |   |      |   | 23,216  |  
|Proceeds from exercise of stock options and warrants                        |  |                                 |        |   |      |   | 40      |  
|                                                                            |  |                                 |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                                 |        |   |      |   | 23,256  |  
|                                                                            |  |                                 |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                                 | (2,642  | ) |      |   | (6,399  | )
|Cash and cash equivalents at beginning of period                            |  |                                 | 11,965  |   |      |   | 16,418  |  
|                                                                            |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                               | 9,323   |   |      | $ | 10,019  |  
|                                                                            |  |                                 |         |   |      |   |         |  

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.

On May 11, 2007, the Company effected a one-for-six reverse stock split of the Companys
issued and outstanding common stock upon the filing of an amendment to the Companys Fifth Amended and Restated Certificate of Incorporation. Authority to effect a reverse stock split was granted to the board of directors by the Companys
stockholders at a Special Meeting of Stockholders held on October 3, 2006. As a result of the reverse stock split, every six shares of the Companys issued and outstanding common stock was automatically combined into one issued and
outstanding share without any change in the par value of such shares. No fractional shares were issued in connection with the reverse stock split. Stockholders who were entitled to a fractional share received a cash payment for the value of the
fractional share. The reverse split affected all of the holders of the Companys common stock uniformly and did not materially affect any stockholders percentage of stock ownership interest. Any shares of the Companys common stock
or shares of common stock underlying options, restricted stock and warrants were proportionately reduced and the exercise prices of any warrants or options were proportionately increased as a result of the reverse stock split. All impacted amounts
included in the financial statements and notes thereto have been retroactively restated for the reverse stock split. Impacted amounts include shares outstanding, share issuances, shares underlying stock options and warrants, loss per share and
the fair value of equity-based instruments. A $174,000 reclassification between common stock and additional-paid-in capital has been recorded as of December 31, 2006 as a result of the one-for-six reverse stock split.

NOTE 2. Stockholders Equity

The changes in
stockholders equity from December 31, 2006 to September 30, 2007 are summarized as follows (in thousands):



|                                                          |  |                 |  |                           |    |                                             |   |         |                    |   |     |                           |  |   |          |   |  |   |        |  
|--------------------------------------------------------- |  | --------------- |  | ------------------------- | -- | ------------------------------------------- | - | ------- | ------------------ | - | --- | ------------------------- |  | - | -------- | - |  | - | ------ | -
|                                                          |  | Common Stock    |  | AdditionalPaid-in Capital |    | AccumulatedOtherComprehensive Income (Loss) |   |         | AccumulatedDeficit |   |     | TotalStockholders
Equity | 
|                                                          |  | Numberof Shares |  | Amount                    |    |                                             |   |        
|Balance at December 31, 2006                              |  | 17,442          |  | $                         | 35 |                                             | $ | 291,843 |                    | $ | (59 | )                         |  | $ | (260,766 | ) |  | $ | 31,053 |  
|Compensation expense under option grants and stock awards |  | 17              |  |                           |   |                                             |   | 1,020   |                    |   |    |                           |  |   |         |   |  |   | 1,020  |  
|Comprehensive loss:                                       |  |                 |  |                           |    |                                             |   |         |                    |   |     |                           |  |   |          |   |  |   |        |  
|Net loss                                                  |  |                |  |                           |   |                                             |   |        |                    |   |    |                           |  |   | (9,897   | ) |  |   | (9,897 | )
|Unrealized gain on investments                            |  |                |  |                           |   |                                             |   |        |                    |   | 79  |                           |  |   |         |   |  |   | 79     |  
|                                                          |  |                 |  |                           |    |                                             |   |         |                    |   |     |                           |  |   |          |   |  |   |        |  
|Total comprehensive loss                                  |  |                 |  |                           |    |                                             |   |         |                    |   |     |                           |  |   |          |   |  |   | (9,818 | )
|                                                          |  |                 |  |                           |    |                                             |   |         |                    |   |     |                           |  |   |          |   |  |   |        |  
|Balance at September 30, 2007                             |  | 17,459          |  | $                         | 35 |                                             | $ | 292,863 |                    | $ | 20  |                           |  | $ | (270,663 | ) |  | $ | 22,255 |  
|                                                          |  |                 |  |                           |    |                                             |   |         |                    |   |     |                           |  |   |          |   |  |   |        |  

NOTE 3. Common Stock Warrants

The table below sets forth the outstanding warrants which were all issued as of September 30, 2007:



|               |  |           |  |                |        |     |                 |            |        |            
|-------------- |  | --------- |  | -------------- | ------ | --- | --------------- | ---------- | ------ | -----------
|Grant Date     |  | Amount    |  | Exercise Price |        |     | Expiration Date |            | Status
|June 2006      |  | 4,448,747 |  | $              | 3.66   | (1) |                 | 12/30/2011 |        | Exercisable
|September 2005 |  | 570,000   |  | $              | $18.90 | (1) |                 | 3/13/2011  |        | Exercisable
|January 2004   |  | 165,017   |  | $              | 32.28  | (1) |                 | 1/23/2009  |        | Exercisable

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|(1) | The exercise price and the number of shares that may be purchased upon exercise of
the warrants may be adjusted from time to time as a result of a stock dividend, split or subdivision of shares, as well as a combination of shares, merger or consolidation.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 4. Stock-Based Compensation

In May 1998, the stockholders of the Company 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. In May 2001, the stockholders approved an amendment to the 1998 Plan to increase the number of shares of common stock issuable thereunder to 3,500,000 shares. As a result of the reverse stock split of the Companys issued and outstanding
common stock effected on May 11, 2007, proportionate adjustments were made to the per-share exercise price and the number of shares issuable upon the exercise of all outstanding options under the Companys 1998 Plan. The number of shares
available for issuance under the Companys 1998 Plan was not affected.

In May 2004, the stockholders approved the 2004 Stock-Based
Incentive Compensation Plan (the 2004 Plan), which provides for the granting of options and stock awards of up to 750,000 shares of common stock. In May 2006, the stockholders approved an amendment to the 2004 Plan to increase the number
of shares of the Companys common stock issuable thereunder to 1,250,000 shares of common stock. In October 2006, the stockholders approved an amendment to the 2004 Plan to increase the number of shares of the Companys common stock
issuable thereunder to 1,833,334 shares. As a result of the reverse stock split of the Companys issued and outstanding common stock effected on May 11, 2007, proportionate adjustments were made to the per-share exercise price and the
number of shares issuable upon the exercise of all outstanding options under the Companys 2004 Plan. The number of shares available for issuance under the Companys 2004 Plan was proportionately reduced by the reverse stock split.

A summary of the status of the Companys stock options as of September 30, 2007 and changes during the nine-month period then
ended is presented below (in thousands, except per share data):



|                                  |  |                 |   |  |                               |      
|--------------------------------- |  | --------------- | - |  | ----------------------------- | -----
|                                  |  | Number ofShares |   |  | WeightedAverage ExercisePrice
|Outstanding at January 1, 2007    |  | 1,144           |   |  | $                             | 12.06
|Granted                           |  | 3,859           |   |  |                               | 2.90 
|Forfeited                         |  | (176            | ) |  |                               | 5.26 
|Expired                           |  | (50             | ) |  |                               | 23.90
|                                  |  |                 |   |  |                               |      
|Outstanding at September 30, 2007 |  | 4,777           |   |  | $                             | 4.79 
|                                  |  |                 |   |  |                               |      

During the nine-month period ended September 30, 2007, the Company modified certain stock
option grants previously awarded to an executive of the Company. The modification resulted in a reversal of $261,000 of stock-based compensation expense previously recognized. Additionally, during the three- and nine-month periods ended September
30, 2007, the Company recorded a reduction in stock compensation expense of $372,000 due to a revision of the estimated forfeiture rate.

The 1998 Plan provides for the issuance of common stock awards, up to a maximum of 875,000 shares. The 2004 Plan provides for the issuance of common stock awards with no restriction as to the percentage of shares issued as stock awards in
relation to the maximum shares allowable under the plan. Such awards shall be made subject to such performance requirements, vesting provisions, transfer restrictions or other restrictions and conditions as a committee of the Companys board of
directors may determine. A summary of the status of the Companys nonvested stock awards as of September 30, 2007 and the changes during the nine-month period then ended is presented below:



|                                |  |                 |   |  |                                       |      
|------------------------------- |  | --------------- | - |  | ------------------------------------- | -----
|                                |  | Number ofShares |   |  | Weighted AverageGrant Date Fair Value
|Nonvested at January 1, 2007    |  | 26,641          |   |  | $                                     | 12.45
|Vested                          |  | (19,223         | ) |  |                                       | 11.68
|Forfeited                       |  | (209            | ) |  |                                       | 23.88
|                                |  |                 |   |  |                                       |      
|Nonvested at September 30, 2007 |  | 7,209           |   |  | $                                     | 14.17
|                                |  |                 |   |  |                                       |      

NOTE 5. Collaborative Arrangements

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 interleukin-9 (IL9) program. MedImmune provided funding of $2,500,000 to the Company for research and development activities at the Company over a



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two-year period from April 2001 to April 2003 (the R&D Funding). The R&D Funding was paid in eight quarterly installments and was
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 any further 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. The external cost reimbursements
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- and nine-month periods ended
September 30, 2007, the Company recognized $51,000 and $406,000 of revenue from external cost reimbursements, respectively. During the nine-month period ended September 30, 2007, the Company recognized $150,000 of external cost
reimbursements and $200,000 of related expenses related to prior periods. For the three- and nine-month periods ended September 30, 2006, the Company recognized $19,000 and $149,000 of revenue from external cost reimbursements, respectively.
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 a number of factors, including 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 Food and
Drug Administration.

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. 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 was reduced from $2,863,000 to $2,521,478 or $2,452,000, depending upon the final milestone achieved. On June 29, 2007, the Company
and CFFT agreed, for reasons of futility, to discontinue the Phase II trial of LOMUCIN and terminated the award agreement. As a result of the termination, the Company recognized revenue of $2,102,000 in the nine-month period ended September 30,
2007, of which $1,713,000 was recorded as a long-term liability at December 31, 2006.

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 the
Companys trodusquemine program. The grant extended over a one-year period which ended 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- and nine-month periods ended September 30, 2007. The Company recognized $100,000 of revenue related to this grant during
the nine-month period ended September 30, 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 in the three- and nine-month periods ended
September 30, 2007. The Company recognized $100,000 of revenue related to this grant during the three- and nine-month periods ended September 30, 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 nine-month period ended September 30, 2006.

In May 2007, the Company received a one-time payment as a result of the licensing
by the Ludwig Institute of Cancer Research (LICR) of certain patents jointly owned by LICR and the Company pursuant to the Second Research Agreement between the Company and LICR dated December 20, 1999. The Company recognized the
payment of $152,000, which related to a prior period, as revenue in the nine-month period ended September 30, 2007. The revenue amount related to a prior period was determined to be immaterial to the current and prior period.

In July 2007, the Company granted an exclusive option to acquire license rights for drug uses of pexiganan (the Option Agreement) to
MacroChem Corporation (MacroChem). The Option Agreement gave MacroChem a 90-day



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exclusive right to enter into a license agreement. The Company received a payment of $250,000 upon execution of the Option Agreement in July 2007. The
$250,000 is recorded as deferred revenue as of September 30, 2007.

NOTE 6. 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.

In 2007, the Company reduced its workforce as a result of the decision to terminate the EVIZON clinical development program in wet
age-related macular degeneration and the board of directors approval of managements plan to focus corporate resources on the development of trodusquemine for the treatment of obesity. As a result, the Company incurred restructuring charges of
approximately $1,000 and $427,000 during the three- and nine-month periods ended September 30, 2007. Approximately $87,000 and $415,000 of these charges were paid in the three- and nine-month periods ended September 30, 2007, respectively.

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 cash, cash equivalents and shortterm investments as of September 30, 2007 are sufficient to meet its research and development
goals for its programs and sustain operations at least through December 2008.

NOTE 7. Income Taxes

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 an impact on the Companys results of operations or financial condition.

During the nine-month period ended September 30, 2007, the Company sold a portion of its Pennsylvania research and development credit carryforwards to a third party for net proceeds of $147,000, resulting in the recognition of an
income tax benefit in the statement of operations.

NOTE 8. Subsequent Events

On October 2, 2007, MacroChem exercised its exclusive option to acquire from the Company the exclusive worldwide license rights for use of pexiganan
as a drug. Under the terms of the license agreement, MacroChem will pay the Company an initial fee of $1,000,000 in several installments through February 1, 2008, of which $250,000 was received upon signing of the license agreement. The terms
of the agreement also include up to $7,000,000 in milestone payments to the Company upon the achievement of clinical milestones, including the start of Phase III clinical trials and regulatory approval, sales-based milestones of up to $35,000,000
and royalty payments of 10% on net sales of commercial products resulting from the license agreement. As a result of the license agreement, MacroChem will assume responsibility for all clinical development, manufacturing, regulatory and
commercialization activities for pexiganan as a drug. Receipt of future milestones and royalties is dependent upon a number of factors, including favorable results in the future from clinical trials to be conducted by MacroChem.



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|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 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
financings 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 $23.2 million at September 30, 2007 as compared to $33.8 million at December 31, 2006. The primary use of cash during the three- and nine-month periods ended
September 30, 2007 was to finance our research and development operations.

Current liabilities were $2.1 million and $2.4 million at
September 30, 2007 and December 31, 2006, respectively. As of September 30, 2007, current liabilities include $0.3 million received from MacroChem Corporation (MacroChem) for an exclusive option to acquire license rights
for drug uses of pexiganan.

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 September 30, 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.

Contractual Cash Obligations

The table below sets forth our contractual cash obligations at September 30, 2007 (in
thousands):



|                                                        |  |       |       |                             |   |           |  |           |     |              |   |   |  |   |  
|------------------------------------------------------- |  | ----- | ----- | --------------------------- | - | --------- |  | --------- | --- | ------------ | - | - |  | - | -
|                                                        |  |       |       | Cash Payments Due by Period
|Contractual Cash Obligations 1                          |  | Total |       | Less than1 year             |   | 1-3 years |  | 4-5 years |     | After5 years
|Operating lease on building 2                           |  | $     | 1,009 |                             | $ | 453       |  | $         | 556 |              | $ |  |  | $ | 
|Operating leases and maintenance contracts on equipment |  |       | 122   |                             |   | 86        |  |           | 36  |              |   |  |  |   | 
|                                                        |  |       |       |                             |   |           |  |           |     |              |   |   |  |   |  
|Total contractual cash obligations                      |  | $     | 1,131 |                             | $ | 539       |  | $         | 592 |              | $ |  |  | $ | 
|                                                        |  |       |       |                             |   |           |  |           |     |              |   |   |  |   |  

---

|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 for the costs of these
agreements based on estimates of work completed to date.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|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 nine months ended September 30, 2007.

Results of Operations

Revenues

We recognized revenue of $0.1 million and $0.1 million in the three-month periods
ended September 30, 2007 and 2006, respectively. We recognized revenue of $2.7 million and $0.4 million in the nine-month periods ended September 30, 2007 and 2006, respectively. 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, Inc. (MedImmune) to develop and commercialize therapies related to our anti-interleukin-9 (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- and
nine-month periods ended September 30, 2007, we recognized $0.1 million and $0.4 million as revenue related to external cost reimbursements, respectively. During the nine-month period ended September 30, 2007, $0.2 million of the revenue
related to reimbursement for expenses incurred in prior periods. For the nine-month period ended September 30, 2006, we recognized $0.1 million as revenue related to external cost reimbursements.

In September 2001, we received a contingent award of up to $1.7 million from Cystic Fibrosis Foundation Therapeutics (CFFT) to support early
clinical evaluation of LOMUCIN involving subjects with cystic fibrosis. In April 2005, the award was increased to $2.9 million, consisting of $0.5 million previously received in connection with our initial Phase II trial of LOMUCIN and up to $2.4
million 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. As a result of the decrease in the number of evaluable subjects, the total contract funding for our Phase II clinical evaluation of LOMUCIN was reduced from $2.9
million to $2.52 million or $2.45 million, depending upon the final milestone achieved. On June 29, 2007, we and CFFT agreed, for reasons of futility, to discontinue the Phase II trial of LOMUCIN and terminated the award agreement. As a result
of the termination, we recognized revenue of $2.1 million in the nine-month period ended September 30, 2007, of which $1.7 million was recorded as a long-term liability at December 31, 2006.

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 Institutes of Health (NIH) in the amount of $0.1 million to support our trodusquemine 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- and nine-month periods ended
September 30, 2007. We recognized $0.1 million of revenue related to this grant in the nine-month period ended September 30, 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 $0.1 million to support its aminosterols for age-related macular degeneration (AMD) 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 in the three- and nine-month periods ended September 30, 2007. The Company recognized $0.1 million of revenue related to this grant during the three- and nine-month periods ended
September 30, 2006.



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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 nine-month period ended September 30, 2006.

In May 2007, we received a one-time payment as a result of the licensing by the Ludwig Institute of Cancer Research (LICR) of certain patents jointly owned by LICR and Genaera pursuant to the Second
Research Agreement between LICR and Genaera dated December 20, 1999. We recognized the payment of $0.2 million, which related to a prior period, as revenue in the nine-month period ended September 30, 2007. The revenue amount related to a
prior period was determined to be immaterial to the current and prior period.

Research and Development Expenses

Our research and development programs include trodusquemine (MSI-1436) for the treatment of obesity and metabolic disorders, squalamine
lactate, LOMUCIN (talniflumate), anti-IL9 antibody 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        |  | Phase I           |  | Active     
|Squalamine:          |  |                   |  |            
|Squalamine           |  | Phase II          |  | Inactive(1)
|EVIZON (squalamine) |  | Phase II/III      |  | Inactive(2)
|LOMUCIN             |  | Phase II          |  | Active(3)  
|IL9                  |  | Phase II          |  | Active(4)  
|Other programs:      |  |                   |  |            
|Other aminosterols   |  | Research          |  | Active     
|LOCILEX Cream        |  | Phase III         |  | Inactive(5)

---

|(1) | In July 2007, we announced the termination of our squalamine clinical development
program for the treatment of prostate cancer.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(2) | In January 2007, we announced the termination of our EVIZON clinical
development program for the treatment of wet AMD.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(3) | In June 2007, we closed enrollment in our LOMUCIN clinical development
program for the treatment of cystic fibrosis. Final data collection and evaluation will continue throughout the remainder of 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In April 2001, we entered into a collaborative agreement with MedImmune to develop
and commercialize therapies related to our IL9 program.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(5) | In October 2007, we entered into an agreement to license the exclusive worldwide
rights for use of LOCILEX Cream (pexiganan) as a drug to MacroChem.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

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 $2.9 million and $3.9 million in the three-month periods ended September 30, 2007 and 2006, respectively. We recognized research and development expenses of $9.5 million and $14.6 million in the nine-month
periods ended September 30, 2007 and 2006, respectively. The following table illustrates research and development expenses incurred during the three- and nine-month periods ended September 30, 2007 and 2006 for our significant groups of
research and development projects (in thousands).



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|                               |  |                                  |       |                                 |   |       |  |      |       |  |   |       
|------------------------------ |  | -------------------------------- | ----- | ------------------------------- | - | ----- |  | ---- | ----- |  | - | ------
|                               |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                               |  | 2007                             |       | 2006                            |   | 2007  |  | 2006
|Squalamine program expenses    |  | $                                | 100   |                                 | $ | 2,118 |  | $    | 465   |  | $ | 9,336 
|LOMUCIN program expenses      |  |                                  | 167   |                                 |   | 167   |  |      | 719   |  |   | 793   
|IL9 program expenses           |  |                                  | 70    |                                 |   | 1     |  |      | 425   |  |   | 25    
|Trodusquemine program expenses |  |                                  | 1,765 |                                 |   | 289   |  |      | 4,784 |  |   | 688   
|Other program expenses         |  |                                  | 16    |                                 |   | 9     |  |      | 49    |  |   | 34    
|Indirect expenses              |  |                                  | 780   |                                 |   | 1,279 |  |      | 3,015 |  |   | 3,737 
|                               |  |                                  |       |                                 |   |       |  |      |       |  |   |       
|                               |  | $                                | 2,898 |                                 | $ | 3,863 |  | $    | 9,457 |  | $ | 14,613
|                               |  |                                  |       |                                 |   |       |  |      |       |  |   |       

Research and development expenses decreased in the three-month period ended September 30,
2007, as compared to the same period a year ago, due to decreases in clinical trial costs ($0.8 million), manufacturing expenses ($0.2 million) and personnel costs ($1.0 million) related to our squalamine program for the treatment of wet AMD as a
result of the discontinuation of the program, and decreases in indirect expenses due to a reduction in stock-based compensation expense for stock options ($0.1 million), consulting expense ($0.1 million), temporary labor ($0.1 million), equipment
rental and maintenance expense ($0.1 million) and indirect personnel costs ($0.1 million). These decreases were partially offset by increases in personnel costs ($0.5 million), manufacturing expenses ($0.2 million), clinical trial costs ($0.5
million) and third-party contract research ($0.2 million) related to our trodusquemine program for the treatment of obesity. In addition, there was an increase in third-party contract research ($0.1 million) related to our IL9 program.

Research and development expenses decreased in the nine-month period ended September 30, 2007, as compared to the same period a year ago, due to
decreases in clinical trial costs ($5.0 million), third-party contract research ($0.3 million), manufacturing expenses ($0.8 million), consulting expenses and research and development supplies ($0.4 million) and personnel costs ($2.4 million)
related to our squalamine program for the treatment of wet AMD as a result of the discontinuation of the program, and decreases in indirect expenses due to a reduction in stock-based compensation expense for stock options ($0.4 million), temporary
labor ($0.4 million), recruiting fees ($0.1 million) and consulting expense ($0.2 million). These decreases were partially offset by increases in personnel costs ($1.4 million), manufacturing expenses ($1.3 million), clinical trial costs ($1.0
million), and third-party contract research ($0.4 million) related to our trodusquemine program for the treatment of obesity, as well as increases in third-party contract research ($0.3 million) and personnel costs ($0.1 million) related to our IL9
program. In addition, indirect expenses increased partially due to realignment costs associated with the 2007 reductions in force ($0.4 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
the 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 the development of squalamine lactate
(trade name EVIZON) for AMD; (ii) clinical trial work pursuant to our Investigational New Drug (IND) application for cancer forms part of the safety data base for the IND application we filed with the Food and Drug
Administration 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



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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 our staff and through
contractors under our supervision.

General and Administrative Expenses

We recognized general and administrative expenses of $1.2 million and $1.4 million in the three-month periods ended September 30, 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 September 30, 2007, as
compared to the same period a year ago, due principally to decreases in stock-based compensation expense for stock options ($0.1 million) and restricted stock ($0.1 million).

We recognized general and administrative expenses of $4.3 million and $4.5 million in the nine-month periods ended September 30, 2007 and 2006,
respectively. General and administrative costs decreased in the nine-month period ended September 30, 2007, as compared to the same period a year ago, due principally to decreases in stock-based compensation expense for stock options ($0.5
million) and restricted stock ($0.2 million), partially offset by increases in realignment costs associated with the 2007 reductions in force. ($0.3 million) and legal fees ($0.2 million).

Interest Income

We recognized interest income of
$0.3 million and $0.6 million in the three-month periods ended September 30, 2007 and 2006, respectively. We recognized interest income of $1.0 million and $1.1 million in the nine-month periods ended September 30, 2007
and 2006, respectively. Interest income is primarily comprised of income generated from cash, cash equivalents and short-term investments. Interest income decreased during the three- and nine-month periods ended September 30, 2007, as compared
to the same periods in 2006, due to lower average investment balances.

Income Tax Benefit

We recognized an income tax benefit of $0.1 million during the nine-month period ended September 30, 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.



|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 September 30, 2007, our investment portfolio consisted of $9.3 million in cash and cash equivalents and $13.9 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 nine-month period ended September 30, 2007 would have decreased by approximately
$0.2 million. Correspondingly, if the average annualized yield of our investments had increased by 100 basis points, our interest income for the nine-month period ended September 30, 2007 would have increased by approximately
$0.2 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.



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##### Table of Contents

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

Evaluation of
disclosure controls and procedures:For the quarterly period ended September 30, 2007, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer
(the principal executive officer) and our Senior 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.

Our
management, including our President and Chief Executive Officer and our Senior 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 Senior Vice President and Chief Financial Officer concluded that, as of September 30, 2007, our disclosure controls and procedures were effective at providing such
reasonable assurance.

Internal control over financial reporting: There were no changes in our internal control over financial
reporting during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

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.

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 for the development of anti-IL9 antibody as a treatment for asthma. In connection with this realignment, we reduced our workforce
by approximately 30 percent during May and June of 2007 and we will 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.



|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.



|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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##### Table of Contents

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: November 9, 2007 |  | By:                 |  | /s/ Leanne M. Kelly                              
|                       |  |                     |  | Leanne M. Kelly                                  
|                       |  |                     |  | Senior Vice President and Chief Financial Officer
|                       |  |                     |  | (Principal Financial and Accounting Officer)     



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##### Table of Contents

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.                                                                         



18