Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

As of August 5,November 8, 2011, 24,234,91224,499,497 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

As of JuneSeptember 30, 2011, we had cash and cash equivalents of $21.5$15.4 million compared to $10.2 million as of December 31, 2010.  Cash outflows before financings for the sixnine months ended JuneSeptember 30, 2011 consisted of $11.1$17.3 million used for ongoing operating activities and $0.1 million used for debt service.  During the first six months ofThrough September 30, 2011, we raised aggregate gross proceeds of $24.5$24.8 million, including $23.5 million ($21.6 million net) from a public offering in February 2011 and $1.0 million from a January 2011 financingfinancings under our CEFF.

Net cash used in operating activities was $11.1$17.2 million and $13.7$18.7 million for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

Net cash used in operating activities is a result of our net losses for the period, adjusted for non-cash items associated with the change in fair value adjustment of common stock warrants (income of $0.5($2.0 million and $6.7$6.4 million in 2011 and 2010, respectively), stock-based compensation and depreciation expense ($1.21.5 million and $1.8$2.1 million in 2011 and 2010, respectively), and changes in working capital.  Cash flows used in operating activities for the sixnine months ended JuneSeptember 30, 2010 included a one-time payment of $1.1 million to satisfy our severance obligations to our former President and Chief Executive Officer.

Net cash used in investing activities represents purchases of equipment of $26,000$88,000 and $73,000$101,000 for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

Net cash provided by financing activities was $22.5 million and $21.4$17.7 million for the sixnine months ended JuneSeptember 30, 2011 and 2010, respectively.

The financings we have completed a financing under our the CEFF resulting in gross proceeds of $1.0 million from the issuance of 314,179 shares of our common stock at an average price per share, after applicable fees and discounts, of $3.16.2011 are as follows:

Historically, we have funded, and expect that we will continue to fund, our business operations through various sources, including financings in the form of common stock offerings.  A shelf registration that we filed on Form S-3 (No. 333-151654) in June 2008 (2008 Shelf Registration Statement) recently expired.expired in June 2011.  On June 8, 2011, we filed a universal shelf registration statement on Form S-3 (No. 333-174786) that was declared effective on June 21, 2011 (2011 Shelf Registration Statement) with respect to the offering from time to time of up to $200 million of our securities, including common stock, preferred stock, varying forms of debt and warrant securities, or any combination of the foregoing, on terms and conditions that will be determined at that time.

As of JuneSeptember 30, 2011, $200 million remained unissued under the 2011 Shelf Registration Statement.  If the aggregate market value of our common stock held by non-affiliates (public float) remains below $75 million, the number of shares that we may offer and sell pursuant to the 2011 Shelf Registration Statement and any new universal shelf registration statements within any 12 calendar month period beginning as of March 31, 2011 may be limited to an amount equal to one-third of the public float at the time of the transaction.

On February 22, 2011, we completed a registered public offering of 10 million shares of our common stock, 15-month warrants to purchase five million shares of our common stock, and five-year warrants to purchase five million shares of our common stock.  The securities were sold as units, with each unit consisting of one share of common stock, a fifteen-month15-month warrant to purchase one half share of common stock, and a five-year warrant to purchase one half share of common stock, at a public offering price of $2.35 per unit, resulting in gross proceeds to us of $23.5 million ($21.6 million net).  The 15-month warrants expire in May 2012 and are exercisable at a price per share of $2.94.  The five-year warrants expire in February 2016 and are exercisable at a price per share of $3.20.  The warrants are excisable for cash only, except that if the related registration statement or an exemption from registration is not otherwise available for the resale of the warrant shares, the holder may exercise on a cashless basis.  The exercise price and number of shares or type of property issuable upon exercise of the warrants are subject to customary adjustments in the event of corporate eventsa Fundamental Transaction (as describedsuch term is defined in the warrants).   In addition, the exercise price of the five-year warrants is subject to adjustment if we issue or sell common stock or securities convertible into common stock (in each case, subject to certain exceptions) at a price (determined as set forth in the warrant) that is less than the exercise price of the warrant.

As of JuneSeptember 30, 2011, approximately $14,000 was outstandingthe Company had paid in full all amounts owed under a May 2007 Credit and Security Agreement with GE Business Financial Services Inc. (formerly Merrill Lynch Business Financial Services Inc).  The right to draw under this facility expired in 2008 and the remaining outstanding balance will be paid in full in October 2011.

As of JuneSeptember 30, 2011, approximately $0.3 million was outstanding ($64,00065,000 classified as current liabilities and $260,000$242,000 as long-term liabilities) under a Loan Agreement and Security Agreement with the Commonwealth of Pennsylvania, Department of Community and Economic Development (Department), pursuant to which the Department made a $0.5 million loan to us in September 2008 from the Machinery and Equipment Loan Fund.Fund (MELF Loan).  Interest on the principal amount accrues at a fixed rate of five percent (5.0%) per annum.

Our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.  In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the quarter ended JuneSeptember 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are not aware of any pending or threatened legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.

We have from time to time been involved in disputes and proceedings arising in the ordinary course of business, including in connection with the conduct of our clinical trials.  In addition, as a public company, we are also potentially susceptible to litigation, such as claims asserting violations of securities laws.  Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation.  There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations and financial condition.

In order to market products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory marketing registrations and/or authorizations and comply with numerous and varying regulatory requirements.  We may not obtain foreign regulatory marketing registrations or authorizations on a timely basis, if at all.  Marketing registration or authorization by the FDA would not ensure that we could achieve marketing registration or authorization by regulatory agencies in foreign countries.  A failure or delay in obtaining marketing registration or authorization in one jurisdiction may have a negative effect on the marketing authorization process in other jurisdictions, including the FDA.  The failure to obtain regulatory marketing registration and/or authorization in domestic or foreign jurisdictions could harm our business.

Our goal is to have Afectair regulated by the FDA as a Class I, exempt medical device.  A Class I, exempt classification is designed for low risk devices in which sufficient information exists to establish general and specific controls that provide reasonable assurance of safety and effectiveness.  If Afectair is classified as a Class I, exempt medical device, to obtain marketing authorization, the manufacturer must register its establishment, list the generic category or classification name of the medical device being marketed and pay a registration fee.fee through a registration and listing process.  If Afectair is classified as a non-exempt Class I or a Class II medical device, marketing authorization is obtained through a 510(k) clearance process.  In a 510(k) application, applicants must demonstrate that the proposed device is substantially equivalent to an existing approved product, or “predicate device.”  If a product employs new or novel technology such that no predicate device exists, the FDA will automatically classify the device as a Class III device under regulatory statute.  The applicant may then request that a risk-based classification determination be made for the device under Section 513(f)(2) of the U.S. Food, Drug and Cosmetic Act .Act.  This process is also known as a “de novo” or “risk based” classification.

If the FDA determines that a predicate device does not exist for Afectair, we may be required to submit a request for Pre-Market Approval under the de novo protocol as required by the Section 513(f)(2) guidance document and be subject to significant regulatory delays.  In addition, recent, widely-publicized events concerning the safety of certain drug, food and medical device products have raised concerns among members of Congress, medical professionals, and the public regarding the FDA’s handling of these events and its perceived lack of oversight over regulated products.  The increased attention to safety and oversight issues could result in a more cautious approach by the FDA to marketing authorizations for devices such as Afectair.

There is no guarantee that the FDA will permit registration of Afectair as a Class I, exempt medical device or grant market authorization or designate Afectair as a Class II device in a timely manner, if at all.  Even if FDA market authorization is received, we may encounter significant delays in receiving such authorization.  If unexpected delays occur, it could have a material adverse effect on our business.

In addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of Afectair, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products.  Later discovery of previously unknown problems with Afectair, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems or failure to comply with regulatory requirements may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market or regulatory enforcement actions.

We also may be restricted or prohibited from marketing or manufacturing a product, even after obtaining marketing authorization, if previously unknown problems with the product or its manufacture are subsequently discovered and we cannot provide assurance that newly discovered or developed safety issues will not arise following any regulatory authorization.  Any safety issues could cause us to suspend or cease marketing of our approved products, possibly subject us to substantial liabilities, and adversely affect our ability to generate revenues.

In addition, if approved for sale, we could be exposed to the risk of device failures and malfunctions, which might result in a recall of the product.  Recalls of the product can occur at any time and can impact our business operations.  Recalls can be both time consuming and costly.  Recalls might also impactaffect future sales through negative market perception, or might result in legal action against us by those affected by the recall or the regulatory authorities whose role it is to supervise the product.

Even if FDA marketing authorizationof Afectair is ultimately received for Afectair,authorized, which cannot be assured, the occurrence of subsequent, unforeseen medical complications or subsequent instances of noncompliance with FDA or other regulatory requirements could lead to enforcement action against us.  Enforcement actionactions may result in, among other things, withdrawal of marketing authorization, injunctions, suspension of production, recall or seizure of products, and fines or criminal prosecution, any and all of which could have a material adverse effect on our business and financial condition.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture.  In the case of the FDA, the authority to require a mandatory recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death.  In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture.  Manufacturers, may, under their own initiative, may initiate a field correction or removal, known as a recall, for a product if any material deficiency in a device is found.  A government mandated or voluntary recall by us or our third-party manufacturers or suppliers could occur as a result of component failures, manufacturing errors, design  or labeling defects or other deficiencies and issues.  Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations.  The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated.  We are required to maintain certain records of recalls, even if they are not reportable to the FDA.  We may initiate voluntary recalls involving our products in the future that we determine do not require notification to the FDA.  If the FDA disagrees with our determinations, they could require us to report those actions as recalls.  A future recall announcement could harm our reputation with customers and negatively affect our sales.  In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

Under the FDA medical device reporting regulation, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur.  If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us.  Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action.  Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

The components of Afectair are manufactured from high-quality medical grade materials that are generally recognized as safe.  Suppliers of these materials, due to a change in their pricing policies or an increase in raw materials costs, might charge us increasingly higher than anticipated prices.  In turn, we might experience diminishing profit margins or remain unprofitable indefinitely.

Our estimates of market size and business opportunities included in this Quarterly Report on Form 10-Q are based in part on our analysis of data derived from the following sources, among others: CDC National Vital Statistics, 2005: Births by birth weight (CDC Website) Annual Summary of Vital Statistics: 2006; Pediatrics, Martin et al. Vermont Oxford Network (VON) data; 2005, 2006; HCUP Hospital Discharge data, 2008; Hospital Insurance Claim Database, 2009; Market Intelligence Report on Number of ICU Beds in EU5 Countries; Primary Market Research, December 2010 and May 2011.  In addition, our analysis and assumptions take into account estimated patient populations, expected adoption rates of Afectair, current pricing, economics and anticipated potential pharmaco-economic benefits of our drug and medical device products, if approved.approved, as well as opinions of thought leaders in the medical community obtained through advisory boards and similar activities.  We provide estimates and projections to give the reader an understanding of our strategic priorities, but we caution that the reader should not rely on our estimates and projections.  These estimates and projections are forward-looking statements, which we intend be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.  Further, although we believe that the assumptions underlying these estimates and projections are reasonable, there can be no assurance that such assumptions will prove to be correct.  Actual results will vary from the projected results, and such variations may be material and adverse.  We also reserve the right to conduct business in a manner different from that set forth in the assumptions, as changing circumstances require.

During the three months ended JuneSeptember 30, 2011, we did not issue any unregistered shares of common stock.  We did not repurchase any shares of our common stock during the quarter ended JuneSeptember 30, 2011.

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.

The following exhibits are included with this Quarterly Report on Form 10-Q.