Note 2 – Liquidity Risks and Management's Plans

We have incurred substantial losses since inception, due to investments in research and development, manufacturing and potential commercialization activities and we expect to continue to incur substantial losses over the next several years. Historically, we have funded our business operations through various sources, including public and private securities offerings, draw downs under a series of Committed Equity Financing Facilities (CEFFs), capital equipment and debt facilities, and strategic alliances. We expect to fund our business operations primarily through a combination, or all, of public offerings, including our CEFF and At-the-Market (ATM) Program (see, Note 10); anticipated revenue from the commercial introduction of SURFAXIN® and AFECTAIR®; strategic alliances; the exercise of outstanding warrants; and debt facilities.

Our future capital requirements depend upon many factors, primarily the success of our efforts (i) to execute the commercial introduction of SURFAXIN and AFECTAIR in the United States and other markets, as planned, (ii) to secure one or more strategic alliances or other collaboration arrangements to support the development and, if approved, commercial introduction of SURFAXIN LS™ and AEROSURF® in the European Union and markets outside the U.S., (iii) to advance the SURFAXIN LS and AEROSURF development programs to be in a position to initiate planned Phase 3 and Phase 2 clinical trials, respectively, and (iv) to procure the additional capital necessary and desirable to support our activities until such time as the net revenues from our approved products, from potential strategic alliance and other collaboration arrangements and from other sources, such as future warrant exercises, are sufficient to offset cash flow requirements.

As of December 31, 2011, we had cash and cash equivalents of $10.2 million. From January 1, 2012 through March 21, 2012, (i) holders of 15-month warrants we issued in February 2011 have exercised warrants to purchase 2,233,000 shares of our common stock at an exercise price of $2.94 per share, resulting in proceeds to us of $6.6 million; and (ii) holders of the five-year warrants we issued in February 2011 have exercised warrants to purchase 46,250 shares of our common stock at an exercise price of $3.20 per share, resulting in proceeds to us of $148,000. In addition, on March 7, 2012, we delivered a sales notice under our ATM Program to sell shares of common stock. We terminated the offering on March 8, 2012. As a result of that offering, we issued an aggregate 350,374 shares of common stock at an aggregate purchase price of approximately $1.56 million, resulting in net proceeds to us of approximately $1.52 million, after deducting commissions due to the sales agent. On March 21, 2012, we completed a public offering of 16,071,429 shares of common stock for net proceeds to us (after underwriter fees and anticipated expenses) of approximately $42.1 million. In addition, we granted the underwriters a 30-day option to purchase up to an additional 2,410,714 shares of common stock at a public offering price of $2.80 per share, with respect to which we potentially could realize additional net proceeds to us of $6.3 million.

As of December 31, 2011 and March 21, 2012, of the 100 million shares of common stock authorized under our Amended and Restated Certificate of Incorporation, we had available for issuance, and not otherwise reserved for future issuance, approximately 56.5 million and 40.0 million shares of common stock, respectively.

To execute our business strategy over time, we anticipate potentially securing additional infusions of capital from a combination of some or all of the following sources:

Exercise of outstanding warrants:

In connection with our February 2011 public offering, we issued 15-month warrants to purchase five million shares of our common stock at an exercise price of $2.94 per share (15-month warrants) of which 2,233,000 warrants have been exercised through March 21, 2012. If the market price of our common stock should exceed $2.94 at any time prior to May 2012 (the expiration date of these warrants), and if the holders determine (in their discretion) to exercise the 15-month warrants and we have an effective registration statement covering the warrant shares, we potentially could raise up to an additional $8.1 million.

Also in connection with the February 2011 public offering, we issued five-year warrants to purchase five million shares of our common stock at an exercise price of $3.20 per share (2011 five-year warrants). These warrants also contain anti-dilutive provisions that adjust the exercise price if we issue any common stock, securities convertible into common stock, or other securities (subject to certain exceptions) at a value below the then-existing exercise price. As a result of the March 2012 public offering, the exercise price of these warrants has been adjusted downward to $2.80 per share. Thus, if the market price of our common stock should remain above $2.80 at any time prior February 2016 (the expiration date of these warrants), and if the holders determine (in their discretion) to exercise the five-year warrants and we have an effective registration statement covering the warrant shares to be issued upon exercise of the warrants, we potentially could raise up to an additional $13.9 million.

Upfront and milestone payments and co-funding of development activities associated with potential strategic alliances or other similar transactions:

We are engaged in discussions with potential strategic partners who could provide development and commercial expertise as well as financial resources (potentially in the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses) to support the development of SURFAXIN LS and AEROSURF and, if approved, the introduction of these products in Europe and various markets outside the U.S.

Secured debt arrangements to fund working capital and/or investment in capital assets:

In the future, if our efforts are successful, we believe that debt could potentially be a component of our capital structure and financing plans. We could potentially enter into capital equipment financing facilities, revolving working capital lines of credit, term loans and other similar transactions to satisfy our working capital requirements.

In appropriate circumstances, to secure additional capital and strengthen our financial condition, we will also consider equity public offerings and other financing transactions:

We have a CEFF with Kingsbridge Capital Ltd. (Kingsbridge) that could allow us, at our discretion, to raise capital (subject to certain conditions, including volume limitations) at a time and in amounts we deem suitable to support our business plans. Based on the closing market price of our common stock on March 21, 2012 ($2.80) and assuming that all available shares are issued, the potential availability under our CEFF is approximately $2.8 million. See, Note 10.

In December 2011, we established an “at-the-market” program (ATM Program), which allows us, at our discretion and at such times that we may choose, to sell up to a maximum of $15 million of shares of common stock. Based on the closing market price of our common stock on March 21, 2012 ($2.80), and assuming that the full amount available under the ATM Program ($13.4 million) is sold, we may issue up to approximately 4.8 million additional shares under the ATM Program. See, “– Financings Pursuant to Common Stock Offerings.”

·	We have agreed in connection with our March 2012 public offering that we will not issue or sell (with certain limited exceptions) securities for a period of 90 days ending in June 2012. See, “- Financings Pursuant to Common Stock Offerings.”

There can be no assurance that the market price of our common stock will remain at levels that make exercise of outstanding warrants likely or that holders of outstanding warrants will choose to exercise any or all of their warrants prior to the warrant expiration date; that we will be successful in concluding any strategic alliance, collaboration or other financing transaction; that the CEFF will be available at any time, or, even if available, that we will utilize the CEFF prior to its expiration in June 2013; that we will issue any shares pursuant to the ATM Program, or that the entire amount provided under the ATM Program will be realized prior the expiration or earlier termination of the ATM Program; or that we will undertake any financings or similar transactions, on favorable terms or otherwise.

We believe, if we are successful in implementing our strategic business plan, that the anticipated net revenues from the sale of SURFAXIN and AFECTAIR, when combined with the other sources of anticipated capital outlined above, including from potential strategic alliances and collaboration arrangements to support the SURFAXIN LS and AEROSURF development programs, potentially could be sufficient to support our future operations. In that event, we would nevertheless continue to consider financings and similar transactions that would strengthen our financial condition and build value for our stockholders.

Although we currently believe that we will be successful in meeting our strategic planning goals within the time frame set forth above, there can be no assurance that we will successfully fund and build our own commercial organization to support the commercial introduction of SURFAXIN and AFECTAIR; that we will successfully execute the launch of SURFAXIN and AFECTAIR within the anticipated time frame; that the revenues we may realize from the sale of SURFAXIN and AFECTAIR will be in line with current expectations; that we will successfully identify one or more strategic partners or collaboration arrangements to support development and, if approved, commercial introduction of the SURFAXIN LS and AEROSURF product candidates; or that the revenues, if any, that we generate in the future will be sufficient at any time to fund the further development of our research and development programs and support our operations. If we are unable to identify and enter into strategic alliances for the development of SURFAXIN LS and AEROSURF, and if approved, commercialization of SURFAXIN LS and AEROSURF in the European Union and other markets outside the U.S., we may be unable to fund planned clinical trials, which would have a material adverse effect on our research and development programs.