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) and a previous at-the-market Program that we entered in December 2011 with Lazard Capital Markets (Lazard ATM Program), capital equipment and debt facilities, and strategic alliances.

The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is dependent on our ability to raise additional capital, to fund our research and development and commercial programs and meet our obligations on a timely basis. Before additional financing activities, including the second disbursement under the Deerfield Facility and under the ATM Program, as discussed below, we anticipate that we have sufficient cash available to support our operations and debt service obligations through the third quarter of 2013. If we are unable to successfully raise sufficient additional capital, through future debt and equity financings and/or strategic and collaborative arrangements with potential partners, we will likely not have sufficient cash flows and liquidity to fund our business operations, which could significantly limit our ability to continue as a going concern. In that event, we may be forced to further limit development of many, if not all, of our programs and consider other means of creating value for our stockholders, such as licensing the development and/or commercialization of products that we consider valuable and might otherwise plan to develop ourselves. If we are unable to raise the necessary capital, we may be forced to curtail all of our activities and, ultimately, cease operations. Even if we are able to raise additional capital, such financings may only be available on unattractive terms, or could result in significant dilution of stockholders' interests and, in such event, the market price of our common stock may decline. Our December 31, 2012 financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue in existence.

To execute our business strategy and fund our operations over time, we will require additional infusions of capital until such time as the net revenues from SURFAXIN and AFECTAIR, from potential strategic alliance and collaboration arrangements and from other sources are sufficient to offset cash flow requirements. Given the time required to secure formulary acceptance at our target hospitals and acceptance of a new product, we expect our revenues from SURFAXIN and AFECTAIR will not increase immediately but rather slowly over a period of years. As a result, our investments in our operations are expected to outpace the rate at which we generate revenues in the near term. Even if we are successful in executing the commercial introduction of these products within our planned timeframe, we will require significant additional capital to support our operations. We expect that we may potentially secure additional capital under our Deerfield Facility (discussed below) as well as equity public offerings and other financing transactions, including but not limited to our June 2010 CEFF with Kingsbridge Capital Ltd. (Kingsbridge), pursuant to which, through June 11, 2013, we may sell to Kingsbridge up to approximately 1.1 million shares of our common stock. Based on the closing market price of our common stock on March 1, 2013 ($2.44) we could realize proceeds from the sale of shares under our CEFF of approximately $2.5 million. See, "Committed Equity Financing Facility." In addition, under our February 2013 ATM Program with Stifel (discussed below), we have the ability to sell up to $25,000,000 of common stock over a period of three years, at such times and in such amounts that we deem appropriate. However, the ATM Program can be cancelled at any time by either us or Stifel. See, Note 17 – Subsequent Events, to our Consolidated Financial Statements. We also may consider public and private equity offerings or other financing transactions, including potentially secured equipment financing facilities or other similar transactions. To fund our long-term development programs, we would prefer to enter into strategic alliances or collaboration agreements that 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) and, if approved, the introduction of our approved products in various markets outside the U.S.

Our future capital requirements depend upon many factors, primarily the success of our efforts to (i) execute the commercial introduction of SURFAXIN and AFECTAIR in the U.S. as planned; (ii) advance the AEROSURF development program to initiation of the planned Phase 2 clinical program in the fourth quarter of 2012, and the SURFAXIN LS development program towards potential clinical trials; and (iii) secure one or more strategic alliances or other collaboration arrangements to (a) support the further development and, if approved, commercialization of AEROSURF, and (b) to support the commercial introduction of SURFAXIN and AFECTAIR and , if approved, AEROSURF and SURFAXIN LS, in markets outside the U.S. We believe that our ability to successfully enter into meaningful strategic alliances has likely improved with receipt of marketing approval in the U.S. for SURFAXIN and will further improve if we are able to initiate our AEROSURF Phase 2 clinical program in the fourth quarter of 2013 and advance our SURFAXIN LS program towards initiation of clinical trials. There can be no assurance, however, that our efforts will be successful, or that we will be able to obtain additional capital to support our activities when needed on acceptable terms, if at all.

During the year ended December 31, 2012, we completed the following financing transactions:

o	On March 21, 2012, we completed a public offering of 16,071,429 shares of common stock, resulting in net proceeds to us (after underwriter fees and anticipated expenses) of approximately $42.1 million.

o	In March 2012, we initiated an offering under our Lazard ATM Program and issued 350,374 shares of our common stock at an aggregate purchase price of approximately $1.6 million, resulting in net proceeds to us of approximately $1.5 million, after deducting commissions due to the sales agent.

Holders of the 15-month warrants that we issued in February 2011 exercised warrants to purchase 2,238,000 shares of our common stock at an exercise price of $2.94 per share, resulting in proceeds to us of $6.6 million. The remaining 15-month warrants to purchase 2,762,000 shares expired unexercised on May 22, 2012.

o	Holders of the five-year warrants that we issued in February 2011 (February 2011 five-year warrants) exercised warrants to purchase 51,250 shares of our common stock at an exercise price ranging from $2.80 to $3.20 per share, resulting in proceeds to us of $162,000.

As of December 31, 2012, 100 million shares of common stock were authorized under our Amended and Restated Certificate of Incorporation, as amended, and approximately 40.3 million shares of common stock were available for issuance and not otherwise reserved.

As of December 31, 2012, we had cash and cash equivalents of $26.9 million. In February 2013, we entered into a Facility Agreement (Deerfield Facility) with affiliates of Deerfield Management Company, L.P. (Deerfield), pursuant to which Deerfield agreed to loan to us up to $30 million on a secured basis. Deerfield advanced $10 million upon execution of the agreement and agreed to advance an additional $20 million, subject to certain conditions, following the first commercial sale of SURFAXIN, provided that the first sale occurs not later than December 31, 2013. At the time of each disbursement, we agreed to pay Deerfield a transaction fee equal to 1.5% of the amount disbursed. Interest will accrue on the outstanding principal amount of the loan at a rate of 8.75% per annum, payable quarterly in cash. We have the right to prepay the loan at any time without penalty. See, "Item 1A - Risk Factors - Our existing and future debt obligations could impair our liquidity and financial condition, and in the event we are unable to meet our debt obligations, the lenders could foreclose on our assets," and "- Even after completing our Deerfield Facility, we will need to obtain additional capital to successfully commercialize our approved products and develop our products under development, including AEROSURF and SURFAXIN LS, and continue our other research and development programs." In connection with the first disbursement, we issued to Deerfield a warrant to purchase approximately 2.3 million shares at an exercise price of $2.81, and in connection with the second disbursement, we have agreed to issue to Deerfield a warrant to purchase approximately 4.7 million shares at an exercise price of $2.81 (individually and collectively, the Deerfield Warrants). Also in February 2013, we entered into an At-the-Market Equity Offering Sales Agreement (Stifel Agreement) with Stifel, Nicolaus & Company, Incorporated (Stifel), pursuant to which Stifel, as our exclusive agent, at our discretion and at such times that we determine from time to time, may sell over a three-year period up to a maximum of $25,000,000 of shares of our common stock (Shares) through an at-the-market program (ATM Program). We are not required to sell any Shares at any time during the term of the ATM Program. We will pay Stifel a commission for each transaction equal to 3% of the gross proceeds.

In addition, as of December 31, 2012, we had outstanding warrants to purchase approximately 8.0 million shares of our common stock at various prices, exercisable on different dates into 2016. Of these warrants, approximately 4.9 million are February 2011 five-year warrants that were issued at an exercise price of $3.20 per share. These warrants contain anti-dilution 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 of the warrants. Accordingly, the exercise price of these warrants was adjusted downward to $2.80 per share following a public offering in March 2012 that we conducted at an offering price of $2.80 per share. As of December 31, 2012, 4,948,750 of the February 2011 five-year warrants were outstanding. If the market price of our common stock should exceed $2.80 at any time prior to the expiration date of these warrants (February 2016) and if the holders determine in their discretion to exercise these 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. The holders of the Deerfield Warrants may exercise the warrants either for cash or on a cashless basis. In addition, in lieu of paying cash, the holders may elect to reduce the principal amount of the related loan to satisfy the exercise price of the warrants upon exercise. If we issue the second Deerfield warrant and if the holders determine in their discretion to exercise the Deerfield Warrants in a cash exercise instead of a cashless exercise, we potentially could raise up to an additional $19.7 million. Although we believe that, in the future, we will secure additional capital from the exercise of at least a portion of our outstanding warrants, there can be no assurance that the market price of our common stock will equal or exceed price 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. Moreover, if our outstanding warrants are exercised, such exercises likely will be at a discount to the then-market value of our common stock and have a dilutive effect on the value of our shares of common stock at the time of exercise.

Although we currently believe that we will be able to meet our strategic planning goals, there can be no assurance that we will be successful. We require additional capital, either through strategic alliances or other financing transactions, to satisfy debt obligations and sustain operations, and to complete the development and support the commercial introduction of our products, including SURFAXIN, AFECTAIR, and, if approved, AEROSURF and potentially SURFAXIN LS. Failure to secure the necessary additional capital would have a material adverse effect on our business, financial condition and results of operations.