**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 10-Q**

** **

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**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF1934

 

**For the Quarterly PeriodEnded: June 30, 2007**

** **

**o**                                 TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**Commission FileNo: 000-51436**

** **

**ADVANCED LIFE SCIENCES HOLDINGS, INC.**

(Exact name of registrantas specified in its charter)

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| **DELAWARE**                     |   | **30-0296543**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  no.) |

 

**1440Davey RoadWoodridge, IL 60517**(Address, including zip code of registrants principalexecutive offices)

Registrant’stelephone number:**(630) 739-6744**

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes  x    No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definitionof  “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large acceleratedfiler o     Accelerated filer  o     Non-accelerated filer  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes o     No x

As of August 9, 2007, theregistrant had 28,294,677 shares of common stock, $0.01 par value per share,outstanding.

 

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.(A DEVELOPMENT STAGE ENTITY)INDEXForm 10-Q**
|                                                                | ** ** | ** **                                                                                                                                                                                 | ** ** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I —  FINANCIAL INFORMATION (UNAUDITED)** |
| Item 1.                                                   |       | Condensed Consolidated Financial Statements:                                                                                                                                               |       |       |
|                                                           |       | Condensed Consolidated Balance Sheets as of June 30,  2007 and December 31, 2006                                                                                                      |       |       |
|                                                           |       | Condensed Consolidated Statements of Operations for  the three and six months ended June 30, 2007 and 2006 and for the period  from inception (January 1, 1999) through June 30, 2007 |       |       |
|                                                           |       | Condensed Consolidated Statements of Stockholders’  Equity for period from inception (January 1, 1999) through June 30, 2007                                                          |       |       |
|                                                           |       | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2007 and 2006 and for the period from inception  (January 1, 1999) through June 30, 2007                |       |       |
|                                                           |       | Notes to Condensed Consolidated Financial Statements                                                                                                                                       |       |       |
| Item 2.                                                   |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                                                |       |       |
| Item 3.                                                   |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                                                                |       |       |
| Item 4.                                                   |       | Controls and Procedures                                                                                                                                                                    |       |       |
| ** **                                                     |       |                                                                                                                                                                                       | ** ** | ** ** |
| **PART II —  OTHER INFORMATION**                |
| Item 4.                                                        |       | Submission of Matters to a Vote of Security Holders                                                                                                                                        |       |       |
| Item 6.                                                   |       | Exhibits                                                                                                                                                                                   |       |       |
| Signatures                                                     |       |                                                                                                                                                                                       |
| Exhibit Index                                             |       |                                                                                                                                                                                       |

 

1

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**PART I —FINANCIAL INFORMATION**

**Item 1.    *Condensed Consolidated Financial Statements (Unaudited)***

**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY(A Development Stage Company)**

**CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)**
| ** **                                                                                                                                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                  |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                        |       | $                 | 13,450,776 |                  | $          | 27,054,947 |   |
| Prepaid insurance                                                                                                                                                                |       | 64,956            |       | 380,083               |       |
| Prepaid clinical trial expenses                                                                                                                                                  |       | 2,266,799         |       | 2,364,512             |       |
| Other prepaid expenses and deposits                                                                                                                                              |       | 332,020           |       | 273,572               |       |
| Total current assets                                                                                                                                                             |       | 16,114,551        |       | 30,073,114            |       |
|                                                                                                                                                                             |       |              |       |                  |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                          |       |              |       |                  |       |
| Furniture and fixtures                                                                                                                                                           |       | 221,417           |       | 250,308               |       |
| Laboratory equipment                                                                                                                                                             |       | 159,186           |       | 142,928               |       |
| Computer software and equipment                                                                                                                                                  |       | 236,781           |       | 231,022               |       |
| Leasehold improvements                                                                                                                                                           |       | 177,253           |       | 182,839               |       |
| Total property and equipment—at cost                                                                                                                                        |       | 794,637           |       | 807,097               |       |
| Less accumulated depreciation                                                                                                                                                    |       | (440,365          | )          | (398,486              | )          |
| Property and equipment—net                                                                                                                                                  |       | 354,272           |       | 408,611               |       |
|                                                                                                                                                                             |       |              |       |                  |       |
| OTHER LONG-TERM ASSETS:                                                                                                                                                          |       |              |       |                  |       |
| Deferred financing costs                                                                                                                                                         |       | 13,251            |       | 26,502                |       |
| Other assets                                                                                                                                                                     |       | 1,452             |       | 1,452                 |       |
| Total other long-term assets                                                                                                                                                     |       | 14,703            |       | 27,954                |       |
| TOTAL ASSETS                                                                                                                                                                     |       | $                 | 16,483,526 |                  | $          | 30,509,679 |   |
|                                                                                                                                                                             |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                                             |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                             |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                 |       | $                 | 4,044,335  |                  | $          | 1,011,396 |   |
| Accrued clinical trial expenses                                                                                                                                                  |       | 4,793,241         |       | 1,410,894             |       |
| Other accrued expenses                                                                                                                                                           |       | 387,822           |       | 226,881               |       |
| Accrued interest payable                                                                                                                                                         |       | 12,917            |       | 22,756                |       |
| Short-term lease payable                                                                                                                                                         |       | 11,976            |       | 19,437                |       |
| Short-term grant payable                                                                                                                                                         |       | 476,708           |       | 476,708               |       |
| Short-term notes payable - related party                                                                                                                                         |       | 2,000,000         |       | 2,000,000             |       |
| Short-term notes payable - net of $5,633 debt  discount                                                                                                                          |       | 3,909,367         |       | —                |       |
| Total current liabilities                                                                                                                                                        |       | 15,636,366        |       | 5,168,072             |       |
|                                                                                                                                                                             |       |              |       |                  |       |
| Long-term lease payable                                                                                                                                                          |       | 16,583            |       | 20,076                |       |
| Long-term grant payable                                                                                                                                                          |       | 23,292            |       | 23,292                |       |
| Notes payable - net of $11,266 debt discount                                                                                                                                     |       | —            |       | 3,903,734             |       |
| Total liabilities                                                                                                                                                                |       | 15,676,241        |       | 9,115,174             |       |
|                                                                                                                                                                             |       |              |       |                  |       |
| COMMITMENTS AND CONTINGENCIES:                                                                                                                                                   |       |              |       |                  |       |
| Minority Interest                                                                                                                                                                |       | —            |       | —                |       |
|                                                                                                                                                                             |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                       |       |              |       |                  |       |
| Common stock, $0.01 par value—60,000,000 shares  authorized;  June 30, 2007 28,294,677 issued and outstanding; December 31, 2006  28,282,677 shares issued and outstanding; |       | 282,947           |       | 282,827               |       |
| Additional paid-in capital                                                                                                                                                       |       | 88,738,121        |       | 88,370,853            |       |
| Deficit accumulated during the development stage                                                                                                                                 |       | (88,213,783       | )          | (67,259,175           | )          |
| Total stockholders’ equity                                                                                                                                                  |       | 807,285           |       | 21,394,505            |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                 |       | $                 | 16,483,526 |                  | $          | 30,509,679 |   |

 

See notes to unaudited condensed consolidated financial statements.

2

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY(A Development Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                                                  | ** ** | ** **                                          | ** **  | ** **                                        | ** ** | ** **  | ** ** | ** ** | ** **  | **Period From**            | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|---------------------------------------------------|------------|-------------|------------|------------|-------------|---------------------------------|------------|
| ** **                                                                  | ** ** | ** **                                          | ** **  | ** **                                        | ** ** | ** **  | ** ** | ** ** | ** **  | **Inception**                   | ** ** |
| ** **                                                                  | ** ** | ** **                                          | ** **  | ** **                                        | ** ** | ** **  | ** ** | ** ** | ** **  | **(January 1, 1999)** | ** ** |
| ** **                                                                  | ** ** | **Three months ended June 30,** | ** **  | **Six months ended June 30,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2007**                                            | ** **  | **2006**                                          | ** ** | **2007**    | ** ** | **2006**   | ** **  | **June 30, 2007**     | ** ** |
| Revenue:                                                                    |       |                                                |        |                                              |       |        |       |       |        |                            |       |
| Management fees                                                             |       | $                                                   | —      |                                              | $          | —      |       | $          | —      |                            | $          | — |   | $ | 1,161,180 |   |
| Grants                                                                      |       | —                                              |        | —                                            |       | —      |       | 35,127     |        | 1,035,571                       |       |
| Royalty—related party                                                  |       | —                                              |        | —                                            |       | —      |       | —     |        | 45,238                          |       |
| Total revenue                                                               |       | —                                              |        | —                                            |       | —      |       | 35,127     |        | 2,241,989                       |       |
|                                                                        |       |                                                |        |                                              |       |        |       |       |        |                            |       |
| Expenses:                                                                   |       |                                                |        |                                              |       |        |       |       |        |                            |       |
| Research and development                                                    |       | 8,833,078                                           |        | 3,579,038                                         |       | 17,883,990  |       | 5,839,416  |        | 67,019,339                      |       |
| Contracted research and development—related party                      |       | —                                              |        | —                                            |       | —      |       | —     |        | 7,980,299                       |       |
| Selling, general and administrative                                         |       | 1,810,249                                           |        | 1,338,842                                         |       | 3,358,412   |       | 2,488,012  |        | 16,450,925                      |       |
| Total expenses                                                              |       | 10,643,327                                          |        | 4,917,880                                         |       | 21,242,402  |       | 8,327,428  |        | 91,450,563                      |       |
| Loss from  operations                                                       |       | (10,643,327                                         | )           | (4,917,880                                        | )          | (21,242,402 | )          | (8,292,301 | )           | (89,208,574                     | )          |
|                                                                        |       |                                                |        |                                              |       |        |       |       |        |                            |       |
| Other (income)  expense:                                                    |       |                                                |        |                                              |       |        |       |       |        |                            |       |
| Interest Income                                                             |       | (214,495                                            | )           | (520,100                                          | )          | (521,064    | )          | (800,958   | )           | (2,445,196                      | )          |
| Interest expense                                                            |       | 116,836                                             |        | 128,007                                           |       | 233,270     |       | 272,877    |        | 2,389,457                       |       |
| Gain on sale of  interest in Sarawak Medichem Pharmaceuticals joint venture |       | —                                              |        | —                                            |       | —      |       | —     |        | (939,052                        | )          |
| Net other income                                                            |       | (97,659                                             | )           | (392,093                                          | )          | (287,794    | )          | (528,081   | )           | (994,791                        | )          |
| Net loss                                                                    |       | (10,545,668                                         | )           | (4,525,787                                        | )          | (20,954,608 | )          | (7,764,220 | )           | (88,213,783                     | )          |
| Less accumulated  preferred dividends for the period                        |       | 43,750                                              |        | 43,750                                            |       | 87,500      |       | 87,500     |        | 1,407,292                       |       |
| Net loss  available to common shareholders                                  |       | $                                                   | (10,589,418 | )                                                 | $          | (4,569,537  | )          | $          | (21,042,108 | )                               | $          | (7,851,720 | ) | $ | (89,621,075 | ) |
| Basic and  diluted net loss per share available to common shareholders      |       | $                                                   | (0.37       | )                                                 | $          | (0.16       | )          | $          | (0.74       | )                               | $          | (0.32 | ) |   |   |
| Weighted average number  common shares outstanding—basic and diluted   |       | 28,294,380                                          |        | 28,252,354                                        |       | 28,290,865  |       | 24,790,486 |        |                            |       |

 

See notes to unaudited condensed consolidated financial statements.

3

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY(A Development Stage Company)**

**CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY****FORTHE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH JUNE 30, 2007(Unaudited)**
| ** **                                                                | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**         | ** ** | ** **  | ** **  |
|---------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|---------------------|------------|-------------|-------------|
| ** **                                                                | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated**     | ** ** | ** **  | ** **  |
| ** **                                                                | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | **During the** | ** ** | ** **  | ** **  |
| ** **                                                                | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | ** **          | ** ** |
| ** **                                                                | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**           | ** ** | **Total**   | ** **  |
|                                                                      |       |                  |       |        |       |            |       |                |       |        |        |
| BALANCE—January  1, 1999 (inception)                                 |       | —                |       | $           | —     |            | $          | —              |       | $           | —      |   | $ | — |   |
|                                                                      |       |                  |       |        |       |            |       |                |       |        |        |
| Issuance of stock (since inception)                                       |       | 1,588,000             |       | 250,000     |       |            |       |                |       | 250,000     |        |
| Compensation expense related to stock options (since  inception)          |       |                  |       |        |       | 15,097          |       |                |       | 15,097      |        |
| Capital contributions (since inception)                                   |       | —                |       | —      |       | 10,415,599      |       | —              |       | 10,415,599  |        |
| Net loss (since inception)                                                |       | —                |       | —      |       | —          |       | (13,087,375         | )          | (13,087,375 | )           |
| BALANCE—December  31, 2003                                           |       | 1,588,000             |       | 250,000     |       | 10,430,696      |       | (13,087,375         | )          | (2,406,679  | )           |
|                                                                      |       |                  |       |        |       |            |       |                |       |        |        |
| Issuance of common stock at $0.157 per share                              |       | 41,685                |       | 6,563       |       | —          |       | —              |       | 6,563       |        |
| Compensation expense related to stock options                             |       | —                |       | —      |       | 5,604           |       | —              |       | 5,604       |        |
| Exchange of shares under recapitalization                                 |       | (1,629,685            | )          | (256,563    | )          | —          |       | —              |       | (256,563    | )           |
| Issuance of shares under recapitalization                                 |       | 9,482,015             |       | 94,820      |       | 161,743         |       | —              |       | 256,563     |        |
| Capital contributions                                                     |       | —                |       | —      |       | 2,295,731       |       | —              |       | 2,295,731   |        |
| Issuance of 14,887 warrants                                               |       | —                |       | —      |       | 11,898          |       | —              |       | 11,898      |        |
| Issuance of common stock in exchange for licenses                         |       | 1,122,569             |       | 11,226      |       | 8,988,774       |       | —              |       | 9,000,000   |        |
| Net loss                                                                  |       | —                |       | —      |       | —          |       | (27,186,918         | )          | (27,186,918 | )           |
| BALANCE—December  31, 2004                                           |       | 10,604,584            |       | 106,046     |       | 21,894,446      |       | (40,274,293         | )          | (18,273,801 | )           |
|                                                                      |       |                  |       |        |       |            |       |                |       |        |        |
| Issuance of common stock, net of offering costs                           |       | 6,721,814             |       | 67,218      |       | 29,210,558      |       | —              |       | 29,277,776  |        |
| Issuance of stock related to option exercises                             |       | 63,924                |       | 639         |       | 14,240          |       | —              |       | 14,879      |        |
| Compensation expense related to stock options                             |       | —                |       | —      |       | 696,204         |       | —              |       | 696,204     |        |
| Issuance of common stock in exchange for reduction  of milestones payable |       | 600,000               |       | 6,000       |       | 3,000,000       |       | —              |       | 3,006,000   |        |
| Modification of 14,887 warrants                                           |       | —                |       | —      |       | 18,925          |       | —              |       | 18,925      |        |
| Net loss                                                                  |       | —                |       | —      |       | —          |       | (6,444,246          | )          | (6,444,246  | )           |
| BALANCE—December  31, 2005                                           |       | 17,990,322            |       | 179,903     |       | 54,834,373      |       | (46,718,539         | )          | 8,295,737   |        |
|                                                                      |       |                  |       |        |       |            |       |                |       |        |        |
| Issuance of common stock, net of offering costs                           |       | 10,233,464            |       | 102,335     |       | 33,266,653      |       | —              |       | 33,368,988  |        |
| Issuance of stock related to option exercises                             |       | 58,891                |       | 589         |       | 8,656           |       | —              |       | 9,245       |        |
| Compensation expense related to stock options                             |       | —                |       | —      |       | 261,171         |       | —              |       | 261,171     |        |
| Net loss                                                                  |       | —                |       | —      |       | —          |       | (20,540,636         | )          | (20,540,636 | )           |
| BALANCE—December  31, 2006                                           |       | 28,282,677            |       | $           | 282,827    |            | $          | 88,370,853          |       | $           | (67,259,175 | ) | $ | 21,394,505 |   |
|                                                                      |       |                  |       |        |       |            |       |                |       |        |        |
| Issuance of stock related to option exercises                             |       | 12,000                |       | 120         |       | 1,764           |       | —              |       | 1,884       |        |
| Compensation expense related to stock options                             |       | —                |       | —      |       | 365,504         |       | —              |       | 365,504     |        |
| Net loss                                                                  |       | —                |       | —      |       | —          |       | (20,954,608         | )          | (20,954,608 | )           |
| BALANCE—June 30, 2007                                                |       | 28,294,677            |       | $           | 282,947    |            | $          | 88,738,121          |       | $           | (88,213,783 | ) | $ | 807,285 |   |

 

See notes to unaudited condensed consolidated financial statements.

4

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY(A Development Stage Company)**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                         | ** ** | ** **                     | ** **  | ** **                      | ** ** | **Inception**               | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|-------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **Six months ended** | ** **  | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **June 30,**              | ** **  | **Through**                     | ** ** |
| ** **                                                                         | ** ** | **2007**                       | ** **  | **2006**                        | ** ** | **June 30, 2007** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                           |        |                            |       |                        |       |
| Net loss                                                                           |       | $                              | (20,954,608 | )                               | $          | (7,764,220                  | )          | $ | (88,213,783 | ) |
| Adjustments to reconcile net loss to net cash flows used  in operating activities: |       |                           |        |                            |       |                        |       |
| Depreciation and amortization                                                      |       | 105,088                        |        | 47,729                          |       | 521,107                     |       |
| Non-cash interest expense                                                          |       | 18,884                         |        | 18,884                          |       | 81,939                      |       |
| Stock compensation expense                                                         |       | 365,504                        |        | 117,605                         |       | 1,343,580                   |       |
| Non-cash research and development                                                  |       | —                         |        | —                          |       | 24,466,667                  |       |
| Non-cash settlement of milestone payment                                           |       | —                         |        | —                          |       | 6,000                       |       |
| Gain on sale of interest in Sarawak Medichem  Pharmaceuticals (SMP)                |       | —                         |        | —                          |       | (939,052                    | )          |
| Loss on disposal                                                                   |       | 1,761                          |        | —                          |       | 13,294                      |       |
| Changes in operating assets and liabilities:                                       |       |                           |        |                            |       |                        |       |
| Clinical supplies                                                                  |       | —                         |        | —                          |       | 533,333                     |       |
| Accounts receivable, related party                                                 |       | —                         |        | 6,160                           |       | —                      |       |
| Prepaid expenses                                                                   |       | 354,392                        |        | (2,346,163                      | )          | (2,663,775                  | )          |
| Other assets                                                                       |       | —                         |        | 2,408                           |       | (1,452                      | )          |
| Accounts payable                                                                   |       | 3,028,893                      |        | (218,869                        | )          | 4,040,289                   |       |
| Accrued expenses                                                                   |       | 3,543,288                      |        | 1,428,225                       |       | 5,181,063                   |       |
| Licenses payable                                                                   |       | —                         |        | —                          |       | (11,000,000                 | )          |
| Accrued interest on debt                                                           |       | (9,839                         | )           | (757,931                        | )          | 590,980                     |       |
| Net cash flows from operating activities                                           |       | (13,546,637                    | )           | (9,466,172                      | )          | (66,039,810                 | )          |
|                                                                               |       |                           |        |                            |       |                        |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                           |        |                            |       |                        |       |
| Purchase of property and equipment                                                 |       | (48,464                        | )           | (45,075                         | )          | (720,376                    | )          |
| Proceeds from the sale of SMP                                                      |       | —                         |        | —                          |       | 939,052                     |       |
| Proceeds from the sales of investments                                             |       | —                         |        | 14,807,158                      |       | 31,557,158                  |       |
| Purchase of investments                                                            |       | —                         |        | (4,332,158                      | )          | (31,557,158                 | )          |
| Net cash flows from investing activities                                           |       | (48,464                        | )           | 10,429,925                      |       | 218,676                     |       |
|                                                                               |       |                           |        |                            |       |                        |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                           |        |                            |       |                        |       |
| Proceeds from issuance of common stock and capital  contributions                  |       | —                         |        | 33,455,801                      |       | 69,856,339                  |       |
| Proceeds from issuance of notes payable                                            |       | —                         |        | 3,915,000                       |       | 12,933,691                  |       |
| Payments on notes payable                                                          |       | —                         |        | (3,915,000                      | )          | (3,915,000                  | )          |
| Proceeds from grants                                                               |       | —                         |        | —                          |       | 500,000                     |       |
| Proceeds from stock options exercised                                              |       | 1,884                          |        | 5,512                           |       | 32,571                      |       |
| Payments on capital leases                                                         |       | (10,954                        | )           | (7,497                          | )          | (135,691                    | )          |
| Net cash flows from financing activities                                           |       | (9,070                         | )           | 33,453,816                      |       | 79,271,910                  |       |
|                                                                               |       |                           |        |                            |       |                        |       |
| NET (DECREASE)  INCREASE IN CASH                                                   |       | (13,604,171                    | )           | 34,417,569                      |       | 13,450,776                  |       |
|                                                                               |       |                           |        |                            |       |                        |       |
| CASH—Beginning  of period                                                     |       | 27,054,947                     |        | 4,749,932                       |       | —                      |       |
| CASH—End of  period                                                           |       | $                              | 13,450,776  |                            | $          | 39,167,501                  |       | $ | 13,450,776 |   |
|                                                                               |       |                           |        |                            |       |                        |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                 |       |                           |        |                            |       |                        |       |
| Cash paid during the period for interest                                           |       | $                              | 211,594     |                            | $          | 1,025,188                   |       | $ | 1,707,817 |   |
|                                                                               |       |                           |        |                            |       |                        |       |
| SUPPLEMENTAL  DISCLOSURE OF NONCASH TRANSACTIONS                                   |       |                           |        |                            |       |                        |       |
| Noncash investment activity:                                                       |       |                           |        |                            |       |                        |       |
| Purchase of property and equipment under capital  leases                           |       | $                              | —      |                            | $          | 20,693                      |       | $ | 164,249 |   |
| Capital expenses included in accounts payable                                      |       | 4,046                          |        | 14,232                          |       | 4,046                       |       |
| Noncash financing activity:                                                        |       |                           |        |                            |       |                        |       |
| Issuance of common shares for licenses                                             |       | —                         |        | —                          |       | 9,000,000                   |       |
| Issuance of common shares for reduction of milestone  payment                      |       | —                         |        | —                          |       | 3,000,000                   |       |
| Cost of proceeds                                                                   |       | —                         |        | 86,813                          |       | —                      |       |
| Debt discount                                                                      |       | —                         |        | —                          |       | 30,823                      |       |
| Deferred  financing costs                                                          |       | $                              | —      |                            | $          | —                      |       | $ | 30,000 |   |

 

See notes to unaudited condensed consolidated financial statements.

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**ADVANCED LIFE SCIENCES HOLDINGS, INC(A DEVELOPMENT STAGE COMPANY)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2007(UNAUDITED)**

**1.      Summary of Significant Accounting Policies**

***Nature of Business-******Advanced***LifeSciences Holdings, Inc. and its subsidiary Advanced Life Sciences, Inc.(together, the “Company”) conducts new drug research and development in thefields of infectious disease, oncology and inflammation.  Since inception, the Company has devotedsubstantially all of its efforts to activities such as financial planning,capital raising and product development, and has not derived significantrevenues from its primary business activity. Accordingly, the Company is in the development stage, as defined byStatement of Financial Accounting Standards (“SFAS”) No. 7, *Accounting and Reporting by Development Stage Enterprises*.

***Basis of Presentation-***Theaccompanying unaudited condensed consolidated financial statements of theCompany have been prepared in accordance with accounting principles generallyaccepted in the United States of America and with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  However, in theopinion of management, all adjustments, consisting only of normal recurringadjustments, unless otherwise noted herein, necessary to present fairly theresults of operations, financial position and cash flows have been made.  Therefore, these condensed consolidatedfinancial statements should be read in conjunction with the Company’s mostrecent audited financial statements for the year ended December 31, 2006 andnotes thereto. The condensed consolidated financial statements include theaccounts of the Advanced Life Sciences Holdings, Inc. and its wholly-ownedsubsidiary Advanced Life Sciences, Inc. (“ALS Inc.”)  All intercompany balances and transactionshave been eliminated.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations expected for the full year.

The condensed consolidated financial statements have been prepared on agoing concern basis, which contemplates continuity of operations and therealization of assets and liquidation of liabilities in the ordinary course ofbusiness.  However, as a result of theCompany’s continued losses and current cash and financing position, suchrealization of assets or liquidation of liabilities, without substantialadjustments is uncertain.  Given thisuncertainty, there is significant doubt as to the Company’s ability to continueas a going concern.

***Business and Credit Risks*****-**The Company is subject to risks anduncertainties common to drug discovery companies, including technologicalchange, potential infringement on intellectual property of third parties, newproduct development, regulatory approval and market acceptance of its products,activities of competitors and its limited operating history.

The Company has incurred losses since its incorporation inJanuary 1999, and, prior to its incorporation, its business activities asa segment of MediChem incurred losses. The Company has funded its operations to date primarily from debtfinancings and capital contributions from its founder and Chief ExecutiveOfficer, proceeds from the initial public offering of its common stock and thesubsequent sale of its common stock in a private placement.  The Company will not be generating revenuesor realizing cash flows from operations in the near term, and will requireadditional equity or debt financing to meet working capital needs, to fundoperating losses associated with research and development and to fund clinicaltrials.  In order to address its workingcapital shortfall the Company intends to raise additional capital during 2007through the issuance of equity securities or the receipt of milestone paymentswhich would be paid as a result of consummating a commercial partnership forcethromycin, or a combination of both. Although management believes the Company could obtain such financing,there can be no assurances that such financing will be available in the futureat terms acceptable to the Company, if at all. To the extent the Company raises additional capital by issuing equitysecurities; its stockholders could experience substantial dilution.  The accompanying financial statements do notinclude any adjustments that might result from the outcome of theseuncertainties.

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**2.      Private Placement**

In March 2006, the Company completed the privateplacement of 10,233,464 shares of its common stock to a group of institutionalinvestors at $3.53 per share, resulting in gross proceeds of $36.1million.  In addition to the shares sold,the Company issued warrants to purchase 5,116,732 shares of its common stock ata price of $3.81 per share.  The warrantsbecame exercisable upon issuance and will expire five years from the date ofgrant.  The warrants contain the right,at the discretion of the purchaser, to convert into common stock through a netexercise provision.  The Company hasrecorded the issuance of the warrants as a permanent component of equity.  In connection with the offering, the Companypaid approximately $2.5 million in underwriting discounts and incurred otheroffering expenses of approximately $226,000. The net cash proceeds from theoffering were approximately $33.4 million.

**3.      Related Party Transactions**

The Company’sChief Executive Officer, Michael T. Flavin Ph.D., loaned $2.0 million to theCompany in 2001 (see Note 4). Interest expense of $78,000 and $97,000 was recorded for the six monthsended June 30, 2007 and 2006, respectively, related to the note.

The Company’s lineof credit is secured by substantially all of the Company’s assets, except thatthe collateral specifically excludes any rights that the Company has as aresult of its license agreement with Abbott Laboratories for cethromycin, andis further secured by 2.5 million shares of the Company’s stock held by ALSVentures, LLC (see Note 4), which is beneficially owned by the Company’sChief Executive Officer.

The Company leasesfacilities from the BioStart Property Group, LLC. (“BioStart”), a wholly-ownedsubsidiary of Flavin Ventures, which is owned by the Company’s Chief ExecutiveOfficer.  Lease payments totaledapproximately $119,000 and $132,000 for the six months ended June 30, 2007 and2006, respectively.

**4.**              Debt Obligations

In September 2001, theCompany incurred indebtedness under a $2.0 million promissory note with theChief Executive Officer of the Company, which bears interest at 7.75%.  Accrued but unpaid interest is added to theoutstanding principal annually. Principal plus accrued interest is due in a lump sum on December 31,2007.  In May 2006, the Company’s Boardof Directors authorized the payment of accumulated interest on the loan withthe Chief Executive Officer, totaling $837,000. The authorization also providesfor monthly payments of accumulated interest until the loan matures onDecember 31, 2007.  As of June 30,2007 and December 31, 2006, the Company had $2.0 million outstanding under thenote.

The Company has a$4.0 million line of credit with a financial institution.  Interest under the line is payable monthly ata fixed interest rate of 6.75% per annum, and outstanding principal andinterest are payable on January 1, 2008. The line of credit is secured by substantially all of the Company’sassets, except that the collateral specifically excludes any rights that theCompany has a result of its license agreement with Abbott Laboratories forcethromycin.  The line of credit isfurther secured by 2.5 million shares of the Company’s common stock held by ALSVentures, LLC.  As of June 30, 2007 andDecember 31, 2006, the Company had $3.9 million outstanding under thenote.  In connection with the line ofcredit, the financial institution received a warrant entitling it to purchase14,887 shares of the Company’s common stock at an exercise price of $5.00 pershare, subject to certain adjustments. The warrant is immediately exercisable and will terminate, if notexercised, on December 21, 2009. The warrant was valued, using theBlack-Scholes option pricing model, at $27,000. The amount was recorded as adiscount to the related debt and is being amortized to interest expense overthe term of the debt.

7

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**5.      Commitments**

***Vendor Contracts-***The Company administers itscethromycin development program largely under contracts with thirdparties.  To date, contracts totaling$41.0 million have been executed related to the cethromycin program, whichincludes anthrax related studies.  Theremaining balance of $16.7 million is expected to be paid in 2007.  In addition, to date the Company has executed$423,000 in contracts related to the ALS-357 program, of which the majority ofthe remaining balance of $266,000 is expected to be paid in 2007.

***Grant Payable-*** In April 2005, the Company wasawarded a $500,000 grant from the State of Illinois to fund expansion of itscorporate headquarters in Woodridge, Illinois. Under the terms of the grant, the Company is to utilize the funds forconstruction costs associated with expanding its corporate headquarters andcreate 100 full-time jobs at the same location between January 31, 2005 andDecember 31, 2007 (“grant period”). During the second quarter of 2007 the period in which construction costscould be expended was extended six months to December 31, 2007 and the periodthat the Company has to create 100 full time jobs was extended 3.5 years toDecember 31, 2010.  Funds that are not expendedin a manner consistent with the grant award are to be repaid at the end of thegrant period.  In addition, if theCompany does not create the specified number of full-time jobs, it is requiredto repay the grant proceeds on a pro-rata basis of actual jobs created comparedto the total defined in the grant.  As ofJune 30, 2007 the Company classified approximately $477,000 of the grantproceeds as a short term liability based upon the actual costs of the facilityexpansion incurred and the number of jobs created during the grant period.  The remaining $23,000 has been classified asa long-term liability as the Company must maintain the positions created duringthe grant period through January 31, 2010. If the Company does not maintain the positions created until January 31,2010, it will owe the State of Illinois grant proceeds equal to a pro-ratashare of the positions that were retained as compared to the total createdduring the grant period.

**6.      Minority Interest**

The Series Apreferred stock (“Series A Preferred Stock”) of the Company’s  subsidiary, ALS, Inc., is held by deCODEGenetics (“deCODE”) as a result of ALS Inc.’s spin-off from MediChem LifeSciences in January 1999, and MediChem’s subsequent acquisition by deCODEGenetics in March 2002. deCODE provides analytical services to the Companyon an as needed basis.

As of June 30, 2007, ALSInc. had 250,000 shares of Series A Cumulative Preferred Stock authorized,issued and outstanding to deCODE. The Series A Preferred Stock isnonvoting except as to certain matters including the issuance of any class ofstock ranking prior to the shares of Series A Preferred Stock, or themerger or consolidation of ALS Inc. if such merger would adversely affect thepowers, preferences or rights of the Series A Preferred Stock. TheSeries A Preferred stockholder is entitled to receive dividends payable incash at the rate of 7.0% per annum per share on the amount of liquidationpreference of the shares.  Dividends areonly payable when, as and if declared by our board of directors.

**7.      Stock Option Grants**

For the six months ended June 30, 2007 and 2006, theCompany granted stock options to purchase up to 724,300 and 233,500 shares ofcommon stock, respectively, to certain employees and scientific advisory boardmembers and directors. The exercise price of the options was the fair marketprice of the Company’s common stock on the date of grant.  The Company recognized compensation expensetotaling approximately $366,000 and $118,000 for the six months endedJune 30, 2007 and 2006, respectively, in accordance with SFAS No. 123(R), *Share based Payment*.

**8.     Net Loss Per Share**

Basic loss per share iscomputed by dividing net loss by the number of weighted average common sharesoutstanding during the reporting period. Diluted loss per share is calculated to give effect to all potentiallydilutive common shares that were outstanding during the reporting period.  The computation of diluted shares outstandingfor the periods ended June 30, 2007 and 2006 excludes incremental shares of6,988,180 and 6,265,536, related to employee stock options and warrants.  These shares are excluded due to theiranti-dilutive effect as a result of the Company’s losses for the periods endedJune 30, 2007 and 2006.

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**9.      Income Taxes**

In 2006, the FinancialAccounting Standards Board issued Interpretation No. 48 *Accountingfor Uncertainty in Income Taxes*(“FIN 48”)*.*  FIN 48 requires reporting of taxes based ontax positions which meet a more likely than not standard and which are measuredat their more likely than not settlement. Differences between financial and tax reporting which do not meet thisthreshold are required to be recorded as unrecognized tax benefits.  FIN 48 also provides guidance on thepresentation of tax matters and the recognition of potential IRS interest andpenalties.

The provisions of FIN 48became effective on January 1, 2007, and had no effect on the Company’sfinancial position, cash flows or results of operations upon adoption as theCompany does not have any unrecognized tax benefits.  The Company also evaluated its tax positionsas of June 30, 2007 and reached the same conclusion.

The Company classifiespenalty and interest expense related to income tax liabilities as an income taxexpense. There are no interest and penalties recognized in the statement ofoperations or accrued on the balance sheet.

The Company files taxreturns in the US, and in the state of Illinois.  The tax years 2003 through 2006 remain opento examination by the major taxing jurisdictions to which the Company issubject.

**10.   Recent Accounting Pronouncements**

In March 2007, theEmerging Issues Task Force (“EITF”) issued a tentative conclusion on EITF07-03, “*Accounting for Advance Payments forGoods or Services to Be Used in Future Research and Development”* andthe FASB ratified the tentative conclusion. EITF 07-03 addresses the diversity which exists with respect to theaccounting for the non-refundable portion of a payment made by a research anddevelopment entity for future research and development activities. Under thisconclusion, an entity would defer and capitalize non-refundable advancepayments made for research and development activities until the related goodsare delivered or the related services are performed. EITF 07-03 is effectivefor interim or annual reporting periods in fiscal years beginning afterDecember 15, 2007. The Company does not expect the adoption of EITF 07-03to have a material impact on its consolidated financial statements.

 

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**Item 2. *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations***

*Youshould read the following discussion of our financial condition and results ofoperations in conjunction with our condensed consolidated financial statementsand the related notes included elsewhere in this quarterly report. Thisdiscussion contains forward-looking statements that involve risks anduncertainties. Our actual results may differ materially from those anticipatedin these forward-looking statements.*

**Overview**

We are abiopharmaceutical company focused on the discovery, development andcommercialization of novel drugs in the areas of infectious disease, oncologyand inflammation.  Using our internaldiscovery capabilities and our network of pharmaceutical and academic partners,we have assembled a promising pipeline of clinical and preclinical productcandidates.  Our most advanced productcandidate, cethromycin, is a second generation ketolide antibiotic in Phase IIIclinical development for the treatment of respiratory tract infections.  We also have product candidates in earlierstages of development for the treatment of indications includinginflammation-related tissue damage and malignant melanoma.

None of our product candidates have been approved bythe United States Food and Drug Administration (“FDA”) or any comparableforeign agencies, and we have not generated any significant revenues todate.  Our ability to generate revenuesin the future will depend on our ability to meet development or regulatorymilestones under any license agreements that trigger payments to us, to enterinto new license agreements for other products or territories and to receiveregulatory approvals for, and successfully commercialize, our productcandidates either directly or through commercial partners.

Since our inception we have incurred net losses eachyear.  Our net loss for the six monthsended June 30, 2007 was $21.0 million. As of June 30, 2007, we had an accumulated deficit of$88.2 million.  Our operations to datehave been funded principally through proceeds from our initial public offering(“IPO”) in August 2005, our private placement in March 2006, debt and capitalcontributions made by our Chief Executive Officer and borrowings under our bankline of credit.  We currently do not havesufficient cash or other funding available to complete our anticipated businessactivities during 2007.  As a result,there is significant doubt about our ability to continue as a going concern.

In December 2005, we initiated two Phase III clinicaltrials for cethromycin which compare cethromycin with standard of caretherapies for community acquired pneumonia (CAP) in the United States, Canada,Europe, South America and South Africa. Each trial seeks to demonstrate statistical non-inferiority to acomparator using a 95% confidence interval. Clinical cure rate serves as the primary endpoint in each trial withbacteriological eradication serving as the secondary endpoint.

During the second quarter of 2007 we completed thefirst of two pivotal phase III clinical trials. In the trial, cethromycin achieved non-inferiority in its primaryendpoint of per protocol clinical cure rate compared to Biaxin ® (clarithromycin) in CAP. Cethromycin was evaluated using a 300 mg once-daily dosing regimen compared to250 mg twice-daily dosing for Biaxin ®, both over a seven-day course of therapy.  No drug-related seriousadverse events were observed in any study subject.  Liver function testsand electrocardiogram monitoring demonstrated no significant differencesbetween subjects receiving cethromycin and subjects receiving Biaxin ® , consistent with the hepatic andcardiac side effect profile reported in cethromycin’s previous clinicaltrials.  We expect to have initial datafrom the second trial by the end of the third quarter of 2007.  This timeline depends on our contractresearch organization’s ability to collect, compile and report data from thisstudy.

Cethromycin has also been demonstrated to havesignificant *in vitro* activity against over 30anthrax (*Bacillus anthracis*) strains.  During the second quarter of 2007, weconcluded a study testing cethromycin’s efficacy in treating inhalation anthraxpost-exposure for prophylaxis in non-human primates.  Results from thisstudy demonstrated that a thirty (30) day course of oral cethromycin at a16 mg/kg of once-daily dosing (equivalent 300 mg) was 100% protective against alethal dose of inhaled *B. anthracis*Ames strain spores.

Clinical testing for our product candidates has beendelayed from our initial plans, resulting in increased development costs.  As a result, we will need to raise capital tofund operating activities during 2007 and beyond.  Such a capital raise could be achieved by thesale of additional common stock, the receipt of milestone payments which wouldbe paid to us as a result of entering into a commercial partnership forcethromycin, or a combination of both.

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Even if our pivotal Phase III clinical trials ofcethromycin are successfully completed, we do not expect to receive FDAapproval for commercialization until 2009 at the earliest.  As of June 30, 2007, we estimate that ourcethromycin development program will require an additional $50.5 million inresearch and development expenses which includes $40.0 million in additionalmilestones to Abbott, $7.1 million to complete the cethromycin clinical trials,$2.4 million for the preparation of the cethromycin NDA and othercommercialization-related costs.  Weexpect to incur expenses up to $1.0 million to complete our non-human primatestudies to determine cethromycin’s efficacy for the prophylactic treatment ofinhalation anthrax.  Our $10.0 millionand $30.0 million Abbott milestone payments are triggered upon submitting anNDA and receiving FDA approval, respectively. Development timelines and related costs are difficult to estimate andmay vary significantly from our current estimates.

If cethromycin is approved for marketing by the FDA,we plan to sell cethromycin using a commercial partner to access the primarycare physician market and to build and utilize a focused internal sales forcethat will market directly to early adopters such as, but not limited to,pulmonary medicine and infectious disease physicians.

**Resultsof Operations**

*Three months endedJune 30, 2007 compared to three months ended June 30, 2006*

*Revenue.**  *The Company had no revenue for the three monthsperiods ended June 30, 2007 and 2006.

*Research and development expense.*  Research and development expenses increased $5.2 million to $8.8 million forthe three months ended June 30, 2007 compared to $3.6 million for the threemonths ended June 30, 2006.  Of the totalincrease in research and development expenses of $5.2 million, $3.7 million ofthis increase consists of the costs to conduct our phase III clinical trials ofour lead compound cethromycin, $1.2 million relates to the compilation of thecethromycin NDA, $200,000 was incurred in our anthrax and ALS-357 developmentprograms and $100,000 was incurred for general research and developmentexpenses, including personnel costs.  Weestimate that the expense to complete the trials including the expense tocompile and submit the NDA is $50.5 million. Of the $50.5 million, $10.5 million of development costs will berecognized over the remainder of this year and milestones of $10.0 million and$30.0 million will be recognized in 2008 and 2009, respectively.

*Generaland administrative expense.**  *Generaland administrative expense increased $471,000 to $1.8 million for the threemonths ended June 30, 2007 as compared to the three months ended June 30,2006.  Approximately $251,000 of thetotal increase was attributable to higher compensation costs of existingpersonnel as well as compensation for new employees in the legal and accountingfunctions that will manage the Company’s Sarbanes-Oxley complianceprogram.  General corporate expensesincreased $109,000.  Marketing expenserelated to the branding of cethromycin compound increased $65,000.  Expenses related to our facilities increased$46,000 resulting from the expansion of our corporate offices to accommodateadditional personnel which occurred during the fourth quarter of 2006.

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*Interestincome.*    Interest income decreased $306,000 to$214,000 for the three months ended June 30, 2007.  Interest income is derived through theinvestment of our IPO and private placement proceeds in money market funds,until they are used in operations.  Thedecrease in interest income reflects lower cash balances this quarter versusthe same quarter the prior year.

* Interest expense.*  Interest expense decreased $11,000 to $117,000 for the three months ended June30, 2007.  In May of 2006 we restructuredour line of credit from a variable rate based on Prime to a fixed rate of6.75%.  As a result, the effective rateof interest on our line of credit decreased 1.8% which decreased our interestexpense for the three months ended June 30, 2007 as compared to the three monthsended June 30, 2006, by $11,000.

*Six months ended June 30, 2007 compared to sixmonths ended June 30, 2006*

*Revenue.**  *The Company had no revenue for the six months endedJune 30, 2007 compared to $35,000 for the six months ended June 30, 2006.  Revenue in 2006 resulted from a phase I grantthat was awarded in the third quarter of 2005.

*Research and development expense.*  Research and development expenses increased $12.0 million to $17.9 million forthe six months ended June 30, 2007 compared to $5.9 million for the six monthsended June 30, 2006.  Of the totalincrease in research and development expenses of $12.0 million, $7.7 million ofthis increase consists of the costs to conduct or phase III clinical trials ofour lead compound cethromycin, $3.0 million relates to the compilation of thecethromycin NDA, $1.1 million was incurred in our anthrax and ALS-357development programs and $200,000 was incurred for general research anddevelopment expenses, including personnel costs.

*Generaland administrative expense.**  *General and administrative expense increased $870,000 to $3.4 million for thesix months ended June 30, 2007 as compared to the six months ended June 30,2006.   Approximately $581,000 of thetotal increase was attributable to higher compensation costs of existingpersonnel as well as compensation for new employees in the legal and accountingfunctions that will manage the Company’s Sarbanes-Oxley complianceprogram.  Marketing expense related tothe branding of cethromycin increased $101,000. Expenses related to our facilities increased $92,000 resulting from theexpansion of our corporate offices to accommodate additional personnel whichoccurred during the fourth quarter of 2006. General corporate expenses increased $96,000.

* Interest income.*  Interest income decreased $280,000 to $521,000 for the six months ended June30, 2007 due to lower cash balances in the current year.

*Interestexpense.*   Interest expense decreased $40,000 to$233,000 for the six months ended June 30, 2007.  In May of 2006 we restructured our line ofcredit from a variable rate based on Prime to a fixed rate of 6.75%.  As a result, the effective rate of intereston our line of credit decreased 1.8% which decreased our interest expense forthe first half of 2007 as compared to the first half of 2006, by $40,000.

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**Liquidityand Capital Resources**

We have devoted substantially all of our cash resourcesto research and development and general and administrative expenses.  To date, we have not generated any revenuesfrom the sale of products, and we do not expect to generate any such revenuesfor a number of years, if at all.  As aresult, we have incurred an accumulated deficit of $88.2 million as ofJune 30, 2007 and we expect to incur significant operating losses for theforeseeable future.    Cash and cashequivalents was $13.5 million as of June 30, 2007.  Since our inception in 1999 to August 2005,we financed our operations primarily through debt and capital contributionsfrom our founder and controlling stockholder and borrowings under our bank lineof credit.  In August 2005 we completedour initial public offering in which we raised $28.7 million, net ofunderwriters discount and offering costs. In March 2006 we completed a private placement in which we raised $33.4million, net of underwriters discount and offering costs.  Our working capital as of June 30, 2007amounted to $478,000.

In September 2001, our Chief Executive Officer made a$2.0 million loan to us.  The loanaccrues interest at the rate of 7.75%, compounded annually, and is due andpayable on December 31, 2007.  Thebalance of the loan and accrued interest was $2.0 million as of June 30, 2007.

We have a $4.0 million line of credit with a localfinancial institution.  As of June 30,2007, the line of credit had an outstanding balance of $3.9 million bearinginterest of 6.75% per annum.  Interest ispayable monthly, and the line of credit matures on January 1, 2008.  The line of credit is secured bysubstantially all the assets of the Company, excluding any rights that we haveunder of our license agreement with Abbott Laboratories for cethromycin.  The line of credit is also secured by 2.5million shares of our common stock held by Flavin Ventures, LLC. (see Note 4 tothe unaudited condensed consolidated financial statements).

During the six months ended June 30, 2007, cash usedin operating activities totaled $13.5 million. Approximately $10.5 million was used for the development of cethromycin,$837,000 for Anthrax trials, $269,000 for research activities related to ourproprietary portfolio of compounds and $2.0 million for general operations netof $568,000 in interest income.

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*ContractualObligations*

As of June 30,2007, the annual amounts of future minimum payments under debt obligations,interest, lease obligations and other long term liabilities consisting ofresearch, development and license agreements including the potential productbased milestones which could be due to Abbott, are as follows:
| ** **                     | ** ** | **Payments Due by December 31,** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2007**                                             | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Total** | ** ** |
| Notes payable                  |       | $                                                    | 2,000,000  |       | $          | 3,915,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | 5,915,000 |   |
| Interest                       |       | 224,516                                              |       | 2,842      |       | 1,633 |   | 304 |   | — |   | 229,295 |   |
| Abbott license  payments       |       | —                                               |       | 10,000,000 |       | 30,000,000 |   | — |   | — |   | 40,000,000 |   |
| Cethromycin  development costs |       | 10,690,000                                           |       | 8,000      |       | — |   | — |   | — |   | 10,698,000 |   |
| Anthrax clinical  studies      |       | 1,093,000                                            |       | —     |       | — |   | — |   | — |   | 1,093,000 |   |
| ALS-357 clinical  supplies     |       | 314,000                                              |       | 12,000     |       | — |   | — |   | — |   | 326,000 |   |
| Operating leases               |       | 118,940                                              |       | 160,648    |       | — |   | — |   | — |   | 279,588 |   |
| Capital leases                 |       | 8,482                                                |       | 7,259      |       | 8,468 |   | 4,350 |   | — |   | 28,559 |   |
|                           |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Total                          |       | $                                                    | 14,448,938 |       | $          | 14,105,749 |   | $ | 30,010,101 |   | $ | 4,654 |   | $ | — |   | $ | 58,569,442 |   |

 

We will owe Abbott $10.0 million if we submit an NDAfor cethromycin and $30.0 million if and when the FDA approves the NDA, whichwe estimate will occur in 2008 and 2009, respectively.  The estimated timing of these payments hasbeen changed since last quarter due to the ongoing completion of thecethromycin development program. Thereafter, we would owe Abbott an additional $2.5 million upon reaching$200 million in aggregate net sales of cethromycin and $5.0 million uponreaching $400 million in aggregate net sales. The periods in which milestone obligations become payable, if at all,are only estimates due to uncertainties associated with the completion of theclinical studies and related regulatory filings.

Our long-term commitments under operating leases shownabove consist of payments made to a related party relating to our facilitylease in Woodridge, Illinois, which expires in September of 2008.

In the first seven months of 2007 we executedcontracts totaling $3.9 million, of which $2.4 million were executed after June30, 2007.  Of the total contractsexecuted, $2.5 million related to the compilation of our cethromycin NDA andNDA directed studies and $1.4 million related to clinical trials.  We anticipate executing additional contractstotaling $2.5 million related to our clinical development of cethromycin.  Of this amount, $2.0 million represents thecosts we will incur to complete the Phase III pivotal clinical trials; $400,000related to the compilation of our cethromycin NDA and NDA directed studies;$100,000 related to our ALS-357 development program.

Remaining payments due under all existing andanticipated cethromycin development contracts, including anthrax studies, total$16.7 million and are expected to be made over the next six months.  The majority of these payments are milestonebased.  The periods in which milestoneobligations become payable are only estimates due to uncertainties in clinicaltrial completion timelines.

To fund thesecontracts and our existing development commitments, indebtedness and generaloperating expenses we need to raise additional operating capital during2007.  We anticipate raising such capitalafter data from the second of our Phase III pivotal clinical trials isavailable.  Such a capital raise could beachieved by the sale of additional common stock, the receipt of milestonepayments which would be paid to us as a result of entering into a commercialpartnership for cethromycin, or a combination of both.  Based upon current market conditions anddiscussions with potential commercial partners, we believe sufficient funds canbe raised in 2007 to continue our development of cethromycin and fund our otherresearch and corporate expenditures through the expected approval of ourcethromycin NDA.  Although we believe wecan obtain sufficient financing, there can be no assurances that such financingwill be available, or available at terms acceptable to us.  We currently do not have sufficient cash orother funding available to complete our anticipated business activities during2007 and are working with certain vendors and partners to extend payment termsand take other appropriate actions to conserve cash.  As a result, there is significant doubt aboutour ability to continue as a going concern.

 

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Our future capital usesand requirements depend on numerous forward-looking factors. These factorsinclude, but are not limited to, the following:

·                                          progressin our clinical development programs, as well as the magnitude of theseprograms;

·                                          thetiming, receipt and amount of milestone and other payments, if any, from present and future collaborators;

·                                          ourability to raise additional capital through the sale of common stock or thereceipt of milestone payments that would be paid to us as a result of our enteringinto a commercial partnership for cethromycin, or a combination of both;

·                                          ourability to establish and maintain additional collaborative arrangements;

·                                          theresources, time and costs required to successfully initiate and complete ourpreclinical and clinical trials, obtain regulatory approvals, protect ourintellectual property and obtain and maintain licenses to third-partyintellectual property;

·                                          thecost of preparing, filing,prosecuting, maintaining and enforcing patent claims; and

·                                          thetiming, receipt and amount ofsales and royalties, if any, from our potential products.

If, at any time, our prospects for financing ourclinical development programs are limited, we may decide to reduce research anddevelopment expenses by delaying or discontinuing certain programs.

**CriticalAccounting Policies and Estimates**

Our discussion and analysis of our financial conditionand results of operations are based on our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America.  Thepreparation of these financial statements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities and expenses and related disclosure ofcontingent assets and liabilities.  Wereview our estimates on an ongoing basis. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions orconditions.  While our significantaccounting policies are described in more detail in the notes to ourfinancial statements included in this annual report, we believe the followingaccounting policies to be critical to the judgments and estimates used in thepreparation of our financial statements.

*In-ProcessResearch and Development*

Werecognize in-process research and development in accordance with FASBInterpretation No. 4, *Applicabilityof FASB Statement No. 2 to Business Combinations Accounted for by the PurchaseMethod*and the AICPATechnical Practice Aid, *Assets Acquired in aBusiness Combination to be used in Research and Development Activities:  A Focus on Software, Electronic Devices, andPharmaceutical  Industries. *Assets to be used in research and development activities, specifically,compounds that have yet to receive new drug approval from the FDA and wouldhave no alternative use should approval not be given, are immediately chargedto income when acquired.

InDecember 2004, we incurred $24.5 million of in-process research and developmentexpense as a result of entering into our exclusive license with AbbottLaboratories for cethromycin.  Wedetermined to immediately expense the purchased in-process research anddevelopment costs because the ultimate outcome of clinical trials forcethromycin is unknown and, therefore, FDA approval is uncertain.  As part of the consideration for thecethromycin license, we issued to Abbott shares of our common stock. In orderto determine the value of the common stock issued to Abbott, we relied on thearms-length nature of the transaction, precedent market data and severalinternal valuation models and studies. An independent appraisal was also obtained to provide additional supportfor the valuation methodologies utilized. By their nature, valuations involve judgments of management that

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rely on estimates regarding thetiming and amount of cash flows and discount rates that, if changed, couldsignificantly affect the conclusions as to value.

*Research and Development*

Research and developmentexpenses consist of internal research costs and fees paid for contract researchin conjunction with the research anddevelopment of our proprietary product portfolio.  All such costs are expensed as incurred.  Clinical trial costs incurred by thirdparties are expensed as the contracted work is performed.  We estimate both the total cost and timeperiod of the trials and the percent completed as of that accounting date.  We believe that the estimates made as of June30, 2007 are reflective of the actual expenses incurred as of that date.

*Stock-basedCompensation*

Weaccount for stock-based awards to employees and non-employees using theaccounting provisions of Statement of Financial Accounting Standards No. 123(R)*Share-based Payments*whichprovides for the use of the fair value basedmethod to determine compensation for all arrangements where shares of stock orequity instruments are issued for compensation. We use the Black-Scholes options-pricing model to determine the fairvalue of each option grant as of the date of grant for expense incurred.  The Black-Scholes model requires inputs forrisk-free interest rate, dividend yield, volatility and expected lives of theoptions.  Since the Company has a limitedhistory of stock activity, expected volatility is based on historical data fromseveral peer public companies with similar product portfolios to us.  The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curvein effect at the time of the grant.  Theexpected lives for options granted represents the period of time that optionsgranted are expected to be outstanding and is derived from the contractualterms of the options granted.

**Forward-LookingStatements and Risk Factors**

This Quarterly Report onForm 10-Q, including Management’s Discussion and Analysis of FinancialCondition and Results of Operations, contains forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995.   Forward-looking statements often areproceeded by words such as “believes,” “expects,” “may,” “anticipates,” “plans,”“intends,” “assumes,” “will” or similar expressions.  Forward-lookingstatements reflect management’s current expectations, as of the date of thisreport, and involve certain risks and uncertainties.   Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result ofvarious factors.   Some of thefactors that could cause future results to materially differ from the recentresults or those projected in forward-looking statements include the “RiskFactors” described in our Annual Report on Form 10-K.

**Item 3.*Quantitative and Qualitative Disclosures AboutMarket Risk***

Ourexposure to market risk is currently confined to our cash and cashequivalents.  We currently do not hedgeinterest rate exposure. We have not used derivative financial instruments forspeculation or trading purposes.  Becauseof the short-term maturities of our cash and cash equivalents, we do notbelieve that an increase in market rates would have a significant impact ontheir realized value.

Our most liquid assetsare cash and cash equivalents.  Becauseof their liquidity, these assets are not directly affected by inflation.  We also believe that we have intangibleassets in the value of our intellectual property.  In accordance with generally accepted accounting principles, we have not capitalizedthe value of this intellectual property on our balance sheet.  Due to thenature of this intellectual property, we believe that these intangible assetsare not affected by inflation.  Becausewe intend to retain and continue to use our equipment, furniture and fixturesand leasehold improvements, we believe that the incremental inflation relatedto replacement costs of such items will not materially affect ouroperations.  However, the rate ofinflation affects our expenses, such as those for employee compensation andcontract services, which could increase our level of expenses and the rate atwhich we use our resources.

**Item 4.*Controls and Procedures***

Our management, under thesupervision and with the participation of our Chief Executive Officer (“CEO”)and Chief Financial Officer (“CFO”), has evaluated the effectiveness of ourdisclosure controls and procedures as defined in SEC Rules 13a-15(e) and15d-15(e) as of the end of the period covered by this report.  Based upon that evaluation, management hasconcluded that our disclosure controls and procedures are effectively designedto ensure that information

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we are required to disclose in reports that we file orsubmit under the Securities Exchange Act of 1934 is accumulated andcommunicated to management, including the CEO and CFO, as appropriate to allowtimely decisions regarding required disclosure and is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.

**Changes in Internal Control**

During the period coveredby this report, there have been no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II —OTHER INFORMATION**

**Item 4. *Submission of Matters to aVote of Security Holders***

The following matterswere submitted to a vote of security holders at the Company’s annual meetingheld on May 4, 2007:

**Proposal1: Election of Directors**
| ** **       | **Name** | ** ** | ** ** | ** ** | **For** | ** ** | ** ** | ** ** | **Withheld** | ** ** |
|------------------|----------|------------|------------|------------|---------|------------|------------|------------|--------------|------------|
| John L. Flavin   |     | 22,036,037 |       | 104,491    |
| Richard A. Reck  |     | 21,957,105 |       | 183,423    |
| Rosalie Sagraves |     | 21,950,605 |       | 189,923    |

 

**Proposal2: Ratification of Deloitte & Touche LLP as the Company’s independentregistered public accounting firm for the fiscal year ended December 31, 2007**

|            | **For** | ** ** | ** ** | ** ** | **Against** | ** ** | ** ** | ** ** | **Abstain** | ** ** |
|------------|---------|------------|------------|------------|-------------|------------|------------|------------|-------------|------------|
| 22,038,063 |    | 96,708     |       | 5,757      |

 

**Item 6.*Exhibits***

The following is alist of exhibits filed as part of this Form 10-Q:
| Number | ** ** | **Description**                                                                                                                                      |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                 |
| 31.1   |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |
|   |       |                                                                                                                                                 |
| 31.2   |       | Certification of Chief Financial Officer 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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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, The Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|        |     |                                  |
|--------|----------|---------------------------------------|
|   |     | Advanced Life Sciences Holdings, Inc. |
|   |     |                                  |   |   |
|   |     | By:                                   |   | /s/ Michael T.  Flavin, Ph.D. |
|   |     |                                  |   | Michael T. Flavin, Ph.D. |
|   |     |                                  |   | *Chairman  of the Board, President* |
|   | * * | * *                              | * * | *and  Chief Executive Officer* |
|   | * * | * *                              | * * | * * |
|   |     |                                  |   |   |
|   |     | By:                                   |   | /s/ R. Richard  Wieland II |
|   |     |                                  |   | R. Richard  Wieland II |
|   | * * | * *                              | * * | *Executive  Vice President and* |
|   | * * | * *                              | * * | *Chief  Financial Officer* |

 

 Dated: August 9, 2007

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**EXHIBITINDEX**
| Number | ** ** | **Description**                                                                                                                                      |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                 |
| 31.1   |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                 |
|   |       |                                                                                                                                                 |
| 31.2   |       | Certification of Chief Financial Officer 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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