The total worldwide market for antibiotics in 2003 was approximately $25 billion, and it is estimated to grow to $32 billion by 2010. Bacterial infections occur when bacteria that naturally exist in the body, or that are acquired through inhalation, ingestion or direct penetration, are not controlled by the normal immune defense system. These uncontrolled bacteria can multiply and either excrete toxins or provoke the immune system to mount a response, in either case damaging tissue. Antibiotics work by binding to specific targets in a bacterial pathogen, thereby inhibiting a function that is essential to the pathogen's survival. Many antibiotics were developed and introduced into the market during the 1970s and 1980s and have proven to be effective in treating most bacterial infections. It is believed this historic efficacy prompted pharmaceutical companies to shift their resources to other areas of drug discovery and development. As a result, very few antibiotics from new chemical classes have been introduced in the last several years.

Antibiotic resistance has become widely considered a significant threat to public health, and the problem continues to worsen. The Centers for Disease Control, or CDC, continue to report on new strains of bacteria that are resistant to one or more antibiotics currently on the market. The increasing prevalence of drug-resistant bacteria has led to prolonged illnesses and hospitalizations, increased healthcare costs and significantly higher mortality rates. As a result, there is a strong demand for new treatments that are more effective against resistant strains and do not show potential for inducing the rapid development of additional resistant strains.

The Company’s most advanced product candidate, Cethromycin, is a novel ketolide antibiotic in Phase III clinical development for the treatment of respiratory tract infections. The Company is initially developing Cethromycin as a treatment for mild-to-moderate community acquired pneumonia. As a new class of antibiotics, ketolides have shown activity against penicillin-and macrolide-resistant Gram-positive pathogens. Clinical trials indicate that Cethromycin has enhanced activity towards drug-resistant Streptococcus pneumoniae and Haemophilus influenzae, two of the pathogens commonly found in community acquired pneumonia, when compared to published data on antibiotics currently on the market. Cethromycin has also shown in vitro evidence of an extended post-antibiotic effect, meaning that the suppression of bacterial growth persists in the absence of measurable antibiotic concentration.

The Company is managing the development of Calanolide A, a natural non-nucleoside reverse transcriptase inhibitor for the treatment of patients with HIV. Currently, HIV-positive patients are usually treated with three or more anti-HIV drugs used in combination. However, some patients do not respond to current drug regimens, and some HIV strains are resistant to current antiviral therapies. In vitro, Calanolide A has shown a broad spectrum of antiviral activity against several different strains of HIV. In Phase I clinical trials at the doses studied, Calonolide A demonstrated a favorable safety profile associated with a reduction of viral load. These results lead the Company to believe that Calanolide A may be effective for both treatment-naïve HIV patients and for HIV patients who are failing current treatments, known as salvage therapy, in combination with currently available anti-HIV medications.

The Company is developing ALS-886, a novel treatment intended to reduce and prevent the tissue damage associated with diseases such as ARDS. ARDS is a serious medical condition often caused by the inflammation and tissue damage associated with excess free radicals in the lungs. In preclinical testing, ALS-886 has demonstrated efficacy in reducing harmful increases in lung leakage. The Company believes the compound may also be effective as a prophylactic therapy against the initial tissue damage that often leads to ARDS. ALS-886 may also have applicability for other conditions in which free radicals cause tissue damage, such as ischemic stroke and myocardial infarction.

ALS-357 is a natural product the Company is developing that has demonstrated anti-tumor activity against malignant melanoma. ALS-357 has shown promise in both in vivo and in vitro preclinical studies. In preclinical animal studies, ALS-357 has been shown to concentrate in tumors, resulting in rapid tumor regression with no observable toxicity to the animal even at high doses. In addition, preclinical studies have shown that direct injection of ALS-357 into grafted human tumors induced apoptosis, or programmed cell death, within the tumors.

Research and development expense increased 13% to $340,000 for the three months ended March 31, 2005 from $300,000 for the three months ended March 31, 2004.

General and administrative expense increased 108% to $636,000 for the three months ended March 31, 2005 from $306,000 for the three months ended March 31, 2004.

Interest expense—net increased 98% to $95,000 for the three months ended March 31, 2005 from $48,000 for the three months ended March 31, 2004.