**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

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**FORM10-Q**

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| **x**                                              | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
|----------------------------------------------------|--------------------------------------------------------------------------------------------------|
| ** **                                         | ** **                                                                                       |
| **For the  Quarterly Period Ended: June 30, 2006** |
| ** **                                         |
| **o**                                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |

 

**Commission File No: 000-51436**

**ADVANCEDLIFE SCIENCES HOLDINGS, INC.****(Exactname of registrant as 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.) |
|                             |   | ** **           |

 

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

**Registrant’s telephone 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 an accelerated filer (as defined in Rule 12b-2 of theExchange Act).    Yes o     No 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 14, 2006, the registrant had 28,258,899 shares of commonstock, $0.01 par value per share, outstanding.

 

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**ADVANCED LIFESCIENCES HOLDINGS, INC(A DEVELOPMENT STAGE ENTITY)INDEXForm 10—Q**

 
|                    |       |                                                                                                                                                                                       |       |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|               |       |                                                                                                                                                                                       |       |
| ** **         | ** ** | **PART I —  FINANCIAL INFORMATION (UNAUDITED)**                                                                                                                             | ** ** |
| Item 1.       |       | Financial Statements:                                                                                                                                                                      |       |
|               |       | Condensed Consolidated Balance Sheets as of June 30,  2006 and December 31, 2005                                                                                                      |       |
|               |       | Condensed Consolidated Statements of Operations for  the three and six months ended June 30, 2006 and 2005 and for the period  from inception (January 1, 1999) through June 30, 2006 |       |
|               |       | Condensed Consolidated Statements of Stockholders’  Equity for period from inception (January 1, 1999) through June 30, 2006                                                          |       |
|               |       | Condensed Consolidated Statements of Cash Flows for  the three and six months ended June 30, 2006 and 2005 and for the period from  inception (January 1, 1999) through June 30, 2006      |       |
|               |       | 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  1A.          | ** ** | Risk Factors                                                                                                                                                                               | ** ** |
| Item 6.       |       | Exhibits                                                                                                                                                                                   |       |
| Signatures         |       |
| Exhibit Index |       |
|               |       |                                                                                                                                                                                       |       |
|               |       |                                                                                                                                                                                       |       |
|               |       |                                                                                                                                                                                       |       |
|               |       |                                                                                                                                                                                       |       |
|               |       |                                                                                                                                                                                       |       |

 

1

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**PART I — FINANCIALINFORMATION**

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

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS (Unaudited)**

 
| ** **                                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                   |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                         |       | $                 | 39,167,501 |                  | $          | 4,749,932 |   |
| Investments — available for sale                                                                                                                                             |       | —            |       | 10,475,000            |       |
| Accounts receivable — related party                                                                                                                                          |       | —            |       | 6,160                 |       |
| Prepaid insurance                                                                                                                                                                 |       | 104,895           |       | 362,241               |       |
| Prepaid expenses and other                                                                                                                                                        |       | 2,721,772         |       | 118,263               |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| Total current assets                                                                                                                                                              |       | 41,994,168        |       | 15,711,596            |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                           |       |              |       |                  |       |
| Furniture and fixtures                                                                                                                                                            |       | 174,598           |       | 147,275               |       |
| Laboratory equipment                                                                                                                                                              |       | 142,928           |       | 142,928               |       |
| Computer software and equipment                                                                                                                                                   |       | 211,984           |       | 187,771               |       |
| Leasehold improvements                                                                                                                                                            |       | 40,646            |       | 40,646                |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| Total property and equipment—at cost                                                                                                                                         |       | 570,156           |       | 518,620               |       |
| Less accumulated depreciation                                                                                                                                                     |       | (315,101          | )          | (267,372              | )          |
|                                                                                                                                                                              |       |              |       |                  |       |
| Property and equipment—net                                                                                                                                                   |       | 255,055           |       | 251,248               |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| OTHER LONG—TERM ASSETS:                                                                                                                                                      |       |              |       |                  |       |
| Deferred financing costs                                                                                                                                                          |       | 39,753            |       | 53,004                |       |
| Other assets                                                                                                                                                                      |       | 3,654             |       | 6,062                 |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| Total other long-term assets                                                                                                                                                      |       | 43,407            |       | 59,066                |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                      |       | $                 | 42,292,630 |                  | $          | 16,021,910 |   |
|                                                                                                                                                                              |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                     | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                              |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                  |       | $                 | 148,528    |                  | $          | 294,816 |   |
| Accrued expenses                                                                                                                                                                  |       | 1,668,986         |       | 240,761               |       |
| Accrued interest payable                                                                                                                                                          |       | 12,917            |       | 5,334                 |       |
| Short-term lease payable                                                                                                                                                          |       | 19,798            |       | 14,114                |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| Total current liabilities                                                                                                                                                         |       | 1,850,229         |       | 555,025               |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| Long-term lease payable                                                                                                                                                           |       | 20,678            |       | 13,166                |       |
| Accrued interest payable - related party                                                                                                                                          |       | —            |       | 765,514               |       |
| Grant payable                                                                                                                                                                     |       | 500,000           |       | 500,000               |       |
| Notes payable - net of $16,899 debt discount June  30, 2006 & $22,532 December 31, 2005                                                                                       |       | 3,898,101         |       | 3,892,468             |       |
| Notes payable - related party                                                                                                                                                     |       | 2,000,000         |       | 2,000,000             |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| Total liabilities                                                                                                                                                                 |       | 8,269,008         |       | 7,726,173             |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                        |       |              |       |                  |       |
| Common stock, $0.01 par value—June 30, 2006:  60,000,000 shares authorized; 28,258,899 issued and outstanding; December 31,  2005: 17,990,322 shares issued and outstanding; |       | 282,589           |       | 179,903               |       |
| Series A preferred stock of Advanced Life Sciences  Inc., no par value—250,000 shares authorized, issued and outstanding                                                     |       | —            |       | —                |       |
| Additional paid-in capital                                                                                                                                                        |       | 88,223,792        |       | 54,834,373            |       |
| Deficit accumulated during the development stage                                                                                                                                  |       | (54,482,759       | )          | (46,718,539           | )          |
|                                                                                                                                                                              |       |              |       |                  |       |
| Total stockholders’ equity (deficit)                                                                                                                                         |       | 34,023,622        |       | 8,295,737             |       |
|                                                                                                                                                                              |       |              |       |                  |       |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                  |       | $                 | 42,292,630 |                  | $          | 16,021,910 |   |

 

See notes to condensedconsolidated 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** | ** ** |
| ** **                                                             | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006**    | ** ** | **2005**   | ** ** | **June 30, 2006**     | ** ** |
| Revenue and income:                                                    |       |                                                |       |                                              |       |        |       |       |       |                            |       |
|  Management fees                                                  |       | $                                                   | —     |                                              | $          | 11,860      |       | $          | —     |                            | $          | 44,379 |   | $ | 1,161,180 |   |
|  Grant                                                            |       | —                                              |       | —                                            |       | 35,127      |       | —     |       | 1,030,910                       |       |
|  Royalty—related party                                       |       | —                                              |       | —                                            |       | —      |       | —     |       | 45,238                          |       |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Total revenue  and income                                              |       | —                                              |       | 11,860                                            |       | 35,127      |       | 44,379     |       | 2,237,328                       |       |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Expenses:                                                              |       |                                                |       |                                              |       |        |       |       |       |                            |       |
|  Research and development                                         |       | 3,579,038                                           |       | 348,146                                           |       | 5,839,416   |       | 665,936    |       | 37,772,652                      |       |
|  Contracted research and development—                        |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| related party                                                          |       | —                                              |       | —                                            |       | —      |       | —     |       | 7,980,299                       |       |
|  Selling, general and administrative                              |       | 1,338,842                                           |       | 470,828                                           |       | 2,488,012   |       | 838,572    |       | 10,123,130                      |       |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Total expenses                                                         |       | 4,917,880                                           |       | 818,974                                           |       | 8,327,428   |       | 1,504,508  |       | 55,876,081                      |       |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Loss from operations                                                   |       | (4,917,880                                          | )          | (807,114                                          | )          | (8,292,301  | )          | (1,460,129 | )          | (53,638,753                     | )          |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Other (income) expense:                                                |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Interest Income                                                        |       | (520,100                                            | )          | —                                            |       | (800,958    | )          | —     |       | (1,073,174                      | )          |
| Interest expense                                                       |       | 128,007                                             |       | 108,938                                           |       | 272,877     |       | 204,249    |       | 1,917,180                       |       |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Net other (income)  expense                                            |       | (392,093                                            | )          | 108,938                                           |       | (528,081    | )          | 204,249    |       | 844,006                         |       |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Net loss                                                               |       | (4,525,787                                          | )          | (916,052                                          | )          | (7,764,220  | )          | (1,664,378 | )          | (54,482,759                     | )          |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Less accumulated  preferred dividends for the period                   |       | 43,750                                              |       | 43,750                                            |       | 87,500      |       | 87,500     |       | 1,232,292                       |       |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Net loss available to  common shareholders                             |       | $                                                   | (4,569,537 | )                                                 | $          | (959,802    | )          | $          | (7,851,720 | )                               | $          | (1,751,878 | ) | $ | (55,715,051 | ) |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Basic and diluted net  loss per share available to common shareholders |       | $                                                   | (0.16      | )                                                 | $          | (0.09       | )          | $          | (0.32      | )                               | $          | (0.16 | ) |   |   |
|                                                                   |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| Weighted average number  common shares                                 |       |                                                |       |                                              |       |        |       |       |       |                            |       |
| outstanding— basic and diluted                                    |       | 28,252,354                                          |       | 10,826,795                                        |       | 24,790,486  |       | 10,780,148 |       |                            |       |

 

See notes tocondensed consolidated financial statements.

3

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**ADVANCED LIFESCIENCES HOLDINGS, INC. AND SUBSIDIARY(A Development Stage Company)CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**FOR THE PERIOD FROMINCEPTION (JANUARY 1, 1999) THROUGH June 30, 2006(Unaudited)

 
| ** **                                                                                                                  | ** ** | ** **            | ** ** | ** **               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | **Deficit**         | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|-------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------|------------|
| ** **                                                                                                                  | ** ** | ** **            | ** ** | ** **               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | **Accumulated**     | ** ** | ** **  | ** ** |
| ** **                                                                                                                  | ** ** | ** **            | ** ** | ** **               | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional** | ** ** | **During the** | ** ** | ** **  | ** ** |
| ** **                                                                                                                  | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | ** **     | ** ** |
| ** **                                                                                                                  | ** ** | **Shares**            | ** ** | **Amount**               | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Stage**           | ** ** | **Total**   | ** ** |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—January 1, 1999  (inception)                                                                                   |       | —                |       | $                        | —     |        | —     |            | $          | —         |       | $                   | —     |        | $          | — |   | $ | — |   |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| Issuance  of common stock in exchange for contributed intellectual property in January  1999                                |       | 1,588,000             |       | —                   |       | —      |       | —          |       | —         |       | —              |       | —      |       |
| Exchange  of shares under recapitalization and spin-off from MediChem Life Sciences,  Inc. in June 1999, at historical cost |       | (1,588,000            | )          | —                   |       | 250,000     |       | —          |       | —         |       | —              |       | —      |       |
| Issuance  of common stock in June 1999, at $0.157 per share                                                                 |       | 1,588,000             |       | 250,000                  |       | —      |       | —          |       | —         |       | —              |       | 250,000     |       |
|  Compensation expense related to stock  options since inception                                                        |       | —                |       | —                   |       | —      |       | —          |       | 15,097         |       | —              |       | 15,097      |       |
|  Conversion of loans to stockholder into  equity, August 2001                                                          |       | —                |       | —                   |       | —      |       | —          |       | 5,751,753      |       | —              |       | 5,751,753   |       |
|  Capital contributions                                                                                                 |       | —                |       | —                   |       | —      |       | —          |       | 1,165,118      |       | —              |       | 1,165,118   |       |
|  Net loss since inception                                                                                              |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (9,274,336          | )          | (9,274,336  | )          |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—December 31,  2001                                                                                             |       | 1,588,000             |       | 250,000                  |       | 250,000     |       | —          |       | 6,931,968      |       | (9,274,336          | )          | (2,092,368  | )          |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
|  Capital contributions                                                                                                 |       | —                |       | —                   |       | —      |       |            |       | 1,161,000      |       | —              |       | 1,161,000   |       |
|  Net loss                                                                                                              |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (1,261,551          | )          | (1,261,551  | )          |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—December 31,  2002                                                                                             |       | 1,588,000             |       | 250,000                  |       | 250,000     |       | —          |       | 8,092,968      |       | (10,535,887         | )          | (2,192,919  | )          |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
|  Capital contributions                                                                                                 |       | —                |       | —                   |       | —      |       | —          |       | 2,337,728      |       | —              |       | 2,337,728   |       |
|  Net loss                                                                                                              |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (2,551,488          | )          | (2,551,488  | )          |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—December 31,  2003                                                                                             |       | 1,588,000             |       | 250,000                  |       | 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                  |       | 250,000     |       | —          |       | 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                  |       | 250,000     |       | —          |       | 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                                                                        |       | 35,113                |       | 351                      |       | —      |       | —          |       | 5,161          |       | —              |       | 5,512       |       |
|  Compensation expense related to stock  options                                                                        |       | —                |       | —                   |       | —      |       | —          |       | 117,605        |       | —              |       | 117,605     |       |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
|  Net loss                                                                                                              |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (7,764,220          | )          | (7,764,220  | )          |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—June 30, 2006                                                                                                  |       | 28,258,899            |       | $                        | 282,589    |        | 250,000    |            | $          | —         |       | $                   | 88,223,792 |        | $          | (54,482,759 | ) | $ | 34,023,622 |   |

 

See notes tocondensed consolidated financial statements.

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY**(A Development Stage Company)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)
| ** **                                                                         | ** ** | ** **                     | ** ** | ** **                      | ** ** | **Period From**        | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | ** **                     | ** ** | ** **                      | ** ** | **Inception**               | ** ** |
| ** **                                                                         | ** ** | **Six months ended** | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **June 30,**              | ** ** | **Through**                     | ** ** |
| ** **                                                                         | ** ** | **2006**                       | ** ** | **2005**                        | ** ** | **June 30, 2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                           |       |                            |       |                        |       |
| Net loss                                                                           |       | $                              | (7,764,220 | )                               | $          | (1,664,378                  | )          | $ | (54,482,759 | ) |
| Adjustments to  reconcile net loss to net cash flows used in operating activities: |       |                           |       |                            |       |                        |       |
| Depreciation and  amortization                                                     |       | 47,729                         |       | 36,377                          |       | 332,634                     |       |
| Non-cash  interest expense                                                         |       | 18,884                         |       | 7,509                           |       | 44,171                      |       |
| Stock  compensation expense                                                        |       | 117,605                        |       | 42,310                          |       | 834,510                     |       |
| Non-cash  research and development                                                 |       | —                         |       | —                          |       | 24,466,667                  |       |
| Settlement of  milestone payment                                                   |       | —                         |       | —                          |       | 6,000                       |       |
| Loss on disposal                                                                   |       | —                         |       | —                          |       | 11,533                      |       |
| Changes in  operating assets and liabilities:                                      |       |                           |       |                            |       |                        |       |
| Clinical  supplies                                                                 |       | —                         |       | —                          |       | 533,333                     |       |
| Accounts  receivable, related party                                                |       | 6,160                          |       | 13,772                          |       | —                      |       |
| Prepaid expenses                                                                   |       | (2,346,163                     | )          | 8,061                           |       | (2,826,667                  | )          |
| Other assets                                                                       |       | 2,408                          |       | (3,330                          | )          | (3,654                      | )          |
| Accounts payable                                                                   |       | (218,869                       | )          | 127,980                         |       | 46,704                      |       |
| Accrued expenses                                                                   |       | 1,428,225                      |       | (142,526                        | )          | 1,668,986                   |       |
| Licenses payable                                                                   |       | —                         |       | (1,000,000                      | )          | (11,000,000                 | )          |
| Accrued interest  on debt                                                          |       | (757,931                       | )          | 98,861                          |       | 590,980                     |       |
|                                                                               |       |                           |       |                            |       |                        |       |
| Net cash flows  used in operating activities                                       |       | (9,466,172                     | )          | (2,475,364                      | )          | (39,777,562                 | )          |
|                                                                               |       |                           |       |                            |       |                        |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                           |       |                            |       |                        |       |
| Purchase of  property and equipment                                                |       | (45,075                        | )          | (4,164                          | )          | (428,960                    | )          |
| Proceeds from  the sales of investments                                            |       | 14,807,158                     |       | —                          |       | 31,557,158                  |       |
| Purchase of  investments                                                           |       | (4,332,158                     | )          | —                          |       | (31,557,158                 | )          |
|                                                                               |       |                           |       |                            |       |                        |       |
| Net cash flows  (used in) provided by investing activities                         |       | 10,429,925                     |       | (4,164                          | )          | (428,960                    | )          |
|                                                                               |       |                           |       |                            |       |                        |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                           |       |                            |       |                        |       |
| Proceeds from  issuance of common stock and capital contributions                  |       | 33,455,801                     |       | 563,660                         |       | 69,943,152                  |       |
| Proceeds from  issuance of notes payable                                           |       | 3,915,000                      |       | 1,267,000                       |       | 12,933,691                  |       |
| Payments on  notes payable                                                         |       | (3,915,000                     | )          | —                          |       | (3,915,000                  | )          |
| Proceeds from  grants                                                              |       | —                         |       | 500,000                         |       | 500,000                     |       |
| Proceeds from  stock options exercised                                             |       | 5,512                          |       | 63                              |       | 26,954                      |       |
| Payments on  capital leases                                                        |       | (7,497                         | )          | (5,799                          | )          | (114,774                    | )          |
|                                                                               |       |                           |       |                            |       |                        |       |
| Net cash flows  provided by financing activities                                   |       | 33,453,816                     |       | 2,324,924                       |       | 79,374,023                  |       |
|                                                                               |       |                           |       |                            |       |                        |       |
| NET INCREASE IN CASH                                                               |       | 34,417,569                     |       | (154,604                        | )          | 39,167,501                  |       |
|                                                                               |       |                           |       |                            |       |                        |       |
| CASH—Beginning of  period                                                     |       | 4,749,932                      |       | 194,555                         |       | —                      |       |
|                                                                               |       |                           |       |                            |       |                        |       |
| CASH—End of period                                                            |       | $                              | 39,167,501 |                            | $          | 39,951                      |       | $ | 39,167,501 |   |
|                                                                               |       |                           |       |                            |       |                        |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                                 |       |                           |       |                            |       |                        |       |
| Cash paid during  the period for interest                                          |       | $                              | 1,025,188  |                            | $          | 97,645                      |       | $ | 1,288,760 |   |
|                                                                               |       |                           |       |                            |       |                        |       |
| SUPPLEMENTAL DISCLOSURE  OF NONCASH TRANSACTIONS                                   |       |                           |       |                            |       |                        |       |
| Noncash  investment activity:                                                      |       |                           |       |                            |       |                        |       |
| Purchase of  property and equipment under capital leases                           |       | $                              | 20,693     |                            | $          | 41,438                      |       | $ | 155,249 |   |
| Capital expenses  included in accounts payable                                     |       | 14,232                         |       | —                          |       | 14,232                      |       |
| Noncash  financing activity:                                                       |       |                           |       |                            |       |                        |       |
| Issuance of  common shares for licenses                                            |       | —                         |       | —                          |       | 9,000,000                   |       |
| Issuance of  common shares for reduction of milestone payment                      |       | —                         |       | —                          |       | 3,000,000                   |       |
| Offering costs                                                                     |       | 86,813                         |       | 948,785                         |       | 86,813                      |       |
| Debt discount                                                                      |       | —                         |       | —                          |       | 30,823                      |       |
| Deferred financing  costs                                                          |       | $                              | —     |                            | $          | 15,000                      |       | $ | 30,000 |   |

 

See notes tocondensed consolidated financial statements.

 

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**ADVANCED LIFE SCIENCES HOLDINGS, INC(A DEVELOPMENT STAGE COMPANY)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2006**

**1.   Summaryof Significant Accounting Policies**

***Nature of Business***—AdvancedLife Sciences Holdings, Inc. (the “Company”) conducts new drug research anddevelopment in the fields of infectious disease, oncology andinflammation.  Since inception, theCompany has devoted substantially all of its efforts to activities such asfinancial planning, capital raising and product development, and has notderived significant revenues from its primary business activity.  Accordingly, the Company is in thedevelopment stage, as defined by Statement of Financial Accounting Standards (“SFAS”)No. 7, *Accounting and Reporting by Development StageEnterprises*.

***Basis ofPresentation***— The accompanying unaudited condensedconsolidated financial statements of the Company and subsidiary have beenprepared in accordance with accounting principles generally accepted in theUnited States of America and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements.   However, in the opinion of management, alladjustments, consisting only of normal recurring adjustments, unless otherwisenoted herein, necessary to present fairly the results of operations, financialposition and cash flows have been made. Therefore, these condensed consolidated financial statements should beread in conjunction with the Company’s most recent audited financial statementsfor the year ended December 31, 2005 and notes thereto. The condensedconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiary Advanced Life Sciences, Inc. (“ALS Inc.”)  All significant intercompany balances andtransactions have been eliminated.  Theresults of operations for any interim period are not necessarily indicative ofthe results of operations expected for the full year.

***Cash and CashEquivalents***—The Company considers all highly liquidinvestments with original maturities of three months or less when purchased tobe cash equivalents.

***Investments***—The Company holds marketable debt securities that are classified asavailable-for-sale, the fair value of which is determined using currentlyavailable market prices.  The Companyreviews the carrying value of investments each quarter to determine whether another than temporary decline in market value exists.  If such a decline is deemed to have occurred,the investment is written-down with a charge to other (income) expense,net.   Available-for-sale securities arecarried at fair value, with the unrealized gains and losses, net of tax,reported as a component of stockholders’ equity in accumulated othercomprehensive loss.   Marketablesecurities available for current operations are classified in the balance sheetas current assets; marketable securities held for long-term purposes areclassified as noncurrent assets. Interest income and realized gains and losseson securities are included in “Interest income” in the statements ofoperations.   As of June 30, 2006, theCompany had no marketable securities and therefore no unrealized holding gainsor losses were recognized in the statements of operations and stockholdersequity.

***Revenue and IncomeRecognition***— Small Business Innovation Research grantrevenue is recorded as expenses are incurred and services performed in accordancewith the terms of the grant agreements. Royalty revenue is earned from a license of the Company’s chemicalprocess technology.  Under the license,revenue is earned based upon a percentage of reported net sales from asubsidiary of deCODE Genetics, Inc. (“deCODE”), for services that incorporatethe licensed technology (see Note 4). Revenue earned through our managementagreement with Flavin Ventures is recorded as expenses are incurred andservices performed.  Management fees,which are generated from a shared services agreement with Sarawak MediChemPharmaceuticals, Inc. (“SMP”), are recognized on the cash basis as thecollectibility of such fees is not reasonably assured.

***Research andDevelopment Expenses***— Research and development expensesconsist of internal research costs and fees paid for contract research inconjunction with the research and development of the Company’s proprietaryproduct portfolio.  All such costs areexpensed.  Clinical trial costs incurredby third parties are expensed as the contracted work is performed.  The Company estimates both the total cost andtime period of the trials and the percent completed as of a particularaccounting date.  Research anddevelopment expenses resulting from contracts that require payments based uponthe progress towards completion of certain milestones are estimated based uponthe percentage of completion method. The Company believes that the estimatesmade as of June 30, 2006 are reflective of the actual expenses incurred as ofthat date.

The company recognizes in-process research anddevelopment in accordance with FASB Interpretation No. 4, *Applicabilityof FASB Statement No. 2 to Business Combinations Accounted for by the PurchaseMethod***and the AICPA TechnicalPractice Aid***, Assets Acquired in a BusinessCombination to be used in Research and Development Activities:  A Focus on Software,*

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*Electronic Devices, andPharmaceutical  Industries.*Assetsto be used in research and development activities, specifically, compounds thathave yet to receive new drug approval from the FDA and would have noalternative use should approval not be given, are immediately charged toexpense when acquired.

***Stock-Based Compensation***—Compensation cost related to share-based payments is measured based on thegrant-date fair value of the equity or liability instruments issued.  Compensation expense will be recognized overthe period that an employee provides service in exchange for the award.

Effective December 2004, the Company adopted Statementof Financial Accounting Standards No. 123(R) *Share-BasedPayment*.* *As prescribed in SFAS No. 123(R) the Company elected to use the ‘‘prospectivemethod’’, which requires expense to be recognized for all awardsgranted, modified or settled in the year of adoption.  In accordance with accounting standards thein effect, no compensation cost had been recognized for stock options issued toemployees prior to 2004.  All stockawards will be expensed over their vesting period. The Company utilized theBlack-Scholes option pricing model to estimate the fair value of options.

***Variable Interest Entities*—**The Company determines consolidation ofvariable interest entities in accordance with FASB Interpretation 46(R),Consolidation of Variable InterestEntities. Our 50/50 joint venture, Sarawak MediChem Pharmaceuticals,has not been included in our consolidatedfinancial statements because the majority of its financial support in the form of contributed capital and debt hasbeen funded by our joint venture partner.

***Use of Estimates***—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements. Estimates also affect the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

**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 $36.1 million. Inaddition to the shares sold, the Company issued warrants to purchase 5,116,732shares of its common stock at a price of $3.81 per share.  The warrants became exercisable upon issuanceand will expire five years from the date of grant.  The warrants contain the right, at thediscretion 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 $2.5 million in underwriting discounts and incurred other offering expensesof $226,000, of which $140,000 was paid through June 30, 2006. The net cashproceeds from the offering were $33.4 million as of June 30, 2006.

**3.   Joint Venture**

Sarawak MediChem Pharmaceuticals (“SMP”) is a jointventure between the State Government of Sarawak, Malaysia (“Sarawak Government”)and the Company. The Sarawak Government, through Craun Research Sdn Bhd, andALS Inc. each maintain a 50% equity interest in SMP.

Under the joint venture agreement (the “Agreement”), theSarawak Government has contributed $9.0 million to SMP through stocksubscription payments based on the attainment of certain milestone achievementsoutlined in the Agreement.  The Companyhas contributed certain intellectual property and has committed to makescientists available to undertake the research and clinical trials, to trainscientists nominated by the Sarawak Government and to permit such scientists toparticipate in the clinical trials, manufacture, marketing and distribution ofany commercial product resulting from the research and development effort.  Additionally, the Sarawak Government hasprovided long-term loans to SMP of $12.0 million through June 30,2006.  The Sarawak Government alsoprovided $22,000 in short-term loans during 2005 that was used for patentprotection and clinical trial insurance expenses. Accrued interest on all suchloans was $6.7 million and $5.3 million as of June 30, 2006 and 2005, respectively.

The Company accounts for its investment in SMP underthe modified equity method of accounting, which provides that the Companyrecord its proportional share of earnings once the accumulated deficit incurredby SMP has been recovered.  Accordingly,as of June 30, 2006 and 2005, the Company’s investment in SMP had a carryingvalue of zero.

7

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According to the terms of the loan agreement with theSarawak Government, $12.0 million of SMP’s debt is past due. As a result ofthis default in payment by the joint venture, the Sarawak Government has theoption under the loan agreement to take over the control and management of theCalanolide A project or the affairs of the joint venture until such time as theloan is repaid in full. In July 2005, the Sarawak Government asserted itsrights to assume control of the management of the joint venture. In December2005, the Sarawak Government nominated and the Board of Directors of SMPapproved the appointment of Mr. Jumastapha bin Lamat as the controlling officerof SMP. Since that time the Company has been transitioning access to the jointventure’s accounting, financial and corporate records to representatives of Mr.Lamat. The Sarawak Government also expressly reserved all contractual and legalremedies available in light of the default and indicated its intent to fullyexercise its rights as a creditor of the joint venture. Ultimately, the Companybelieves that in order for the joint venture to continue, the terms of the debtmust be amended to extend its maturity to a date after commercialization ofCalanolide A.  Additionally, furtherdevelopment of Calanolide A will require the Company to reach a satisfactoryagreement with the Sarawak Government to amend its joint venture relationshipand establish the parties’ respective obligations regarding the future fundingof the project. 

The Company’s joint venture agreement with the SarawakGovernment provides that, upon voluntary termination of the joint venture, anyliabilities of the joint venture will be settled by the parties equally and allpatents or licenses of the joint venture shall be reassigned back to theCompany, including rights to clinical trials. In the event of an involuntarytermination of the joint venture, the assets of SMP would be liquidated for thebenefit of its creditors.  If the jointventure’s assets are insufficient to settle its liabilities, the Company doesnot believe that the equal settlement of liabilities provision obligates it tocontribute funds to the joint venture.

Over the past year, the Company has discussed with theSarawak Government financial restructuring alternatives for SMP, but has not yetbeen able to reach a mutually satisfactory agreement. 

**4.   Related Party Transactions**

In 2001, the Company initiated a management servicesagreement with SMP whereby the Company provides administrative managementservices to SMP. In return, the Company charges SMP a flat monthly service fee.During 2003, management deemed that the collectibility of the monthlymanagement fee was not reasonably assured. Consequently, management concludedthat fee revenue will be recognized on a cash basis.   There were no management fees recognized asrevenue under this agreement for the six months ended June 30, 2006 and 2005.  On a cumulative basis, billed and unrecognizedfees as of June 30, 2006 and 2005 totaled $615,000 and $582,000, respectively.

The Company’s Chief Executive Officer, Michael T.Flavin, has loaned to the Company $2.0 million (see Note 5).  Interest expense of $97,000 was recorded forthe six months ended June 30, 2006 related to the note.

The Company’s line of credit has been secured by 2.5million shares of the Company’s stock held by Flavin Ventures. (seeNote 5).

The Company leases facilities from the BioStartProperty Group (“BioStart”), a wholly-owned subsidiary of Flavin Ventures.  Lease costs were $132,000 and $119,000 forthe six months ended June 30, 2006 and 2005, respectively.  In April 2006, the Company amended its leaseagreement with BioStart.  Under the termsof the amendment, the Company may reduce its required rental payments toBioStart to offset for any shared expenses between the Company and othertenants in the building.

The Series A preferred stock of the Company’swholly-owned subsidiary, ALS, Inc., is held by deCODE as a result of ALS Inc.’sspin-off from MediChem Life Sciences in January 1999, and MediChem’s subsequentacquisition by deCODE in March 2002. deCODE provides analytical services to the Company on an as neededbasis.  Charges related to analyticalservices provided totaled $1,000 and $5,000 for the six months ended June 30,2006 and 2005, respectively.

**5.   Long Term Obligations**

In September 2001, the Company borrowed $2.0 million fromthe Chief Executive Officer of the Company pursuant to a promissory note thatbears interest at 7.75%.  Accrued butunpaid interest is added to the outstanding principal annually.  Principal plus accrued interest is due in alump sum on December 31, 2007. In May 2006, the Company’s Board of Directorsauthorized the payment of accumulated interest on the loan with the ChiefExecutive Officer, totaling $837,000. The authorization also provides for monthly payments of accumulatedinterest until the loan matures on December 31, 2007. As of June 30, 2006 and2005, the Company had $2.0 million and $2.6 million including accrued interest,respectively, outstanding under the note. 

8

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The Company had a $4.0 million line of credit with afinancial institution.  Interest underthe line is payable monthly, and matures on December 31, 2007.

In April 2006, the Company restructured its $4.0million line of credit.  The new line ofcredit provides for a fixed interest rate of 6.75% per annum and a maturitydate of January 1, 2008.  The line ofcredit is secured by substantially all of the Company’s assets, except that thecollateral specifically excludes any rights that the Company may have a resultof its license agreement with Abbott Laboratories for cethromycin. The line ofcredit is also secured by 2.5 million shares of the Company’s common stock heldby ALS Ventures, LLC.  The line of creditalso provides for, among other things, the release of guarantees by FlavinVentures, LLC, Dr. Michael Flavin and his wife, and John L. Flavin.

In connection with the line of credit, the financialinstitution received a warrant entitling it to purchase 14,887 shares of theCompany’s common stock at an exercise price of $8.02 per share, which wassubsequently adjusted to $5.00 per share as a result of the Company’s initialpublic offering.   The warrant isimmediately exercisable and will terminate, if not exercised, onDecember 21, 2009. At the time of issue the warrant was valued, using theBlack-Scholes option pricing model, at $11,900. The amount was recorded as adiscount to the related debt and is being amortized to interest expense overthe term of the debt.  As a result of adecrease in exercise price under the terms of the warrant in connection withthe Company’s initial public offering, the warrant was revalued at$27,000.  The difference between thecarrying value and fair value was recorded as a discount to long-termobligations and is being amortized to interest expense over the remaining termof the line of credit.

**6.**   StockOption Grants

In March 2006, the Company granted stock options topurchase up to 233,500 shares of common stock to certain employees andscientific advisory board members. The exercise price of the options is thefair market price of the Company’s stock on the date of grant.  The Company recognized compensation expensetotaling $118,000 and $42,000 for the six months ended June 30, 2006 and 2005,respectively.

**7.**   EarningsPer Share

Basic earnings per share are computed by dividing netincome by the number of weighted average common shares outstanding during thereporting period.  Diluted earnings pershare are calculated to give effect to all potentially dilutive common sharesthat were outstanding during the reporting period.  The computation of weighted average commonshares outstanding for the six months ended June 30, 2005 gives effect to a3.97-for-one stock split authorized by the Board in June 2005.  The computation of diluted shares outstandingfor the periods ended June 30, 2006 and 2005 excludes incremental shares of6,265,536 and 701,724, 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, 2006 and 2005.

**8.**   SubsequentEvents

On July 12, 2006, the Sarawak Government, the largestcreditor and 50% partner of the Company’s joint venture SMP filed aninvoluntary petition under Chapter 7 of the United States Bankruptcy Code forthe purpose of liquidating SMP’s assets for the benefit of its creditors.  In connection with this petition, the SarawakGovernment initiated settlement discussions with the Company to resolve thematter outside of bankruptcy.  On July31, 2006, the Sarawak Government filed an extension of the deadline to answerthe involuntary petition to allow the parties to the joint venture agreementfurther time to reach a settlement. Settlement discussions are currentlyongoing. The Company is presently unable to determine the ultimate outcome ofits SMP joint venture.  However, it islikely that the Company will no longer maintain its equity position in SMP orcontinue to manage or control the development of Calanolide A or the otherintellectual property in its product portfolio.

According to the terms of SMP’s license agreement withthe NIH, SMP is required to notify the NIH in the event of that a bankruptcypetition has been filed against SMP to allow the NIH consideration of itsrights to terminate the license of Calanolide A at the NIH’s discretion.  As the Company does not manage the SMP jointventure at this point, the Company can only be aware of events to which it isinformed and is not aware that the NIH has or intends to terminate the license.

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**Item 2.   *Management’s Discussion and Analysis of FinancialCondition and Results of 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 a biopharmaceutical company focused on thediscovery, development and commercialization of novel drugs in the areas ofinfectious disease, oncology and inflammation. Using our internal discoverycapabilities and our network of pharmaceutical and academic partners, we haveassembled a promising pipeline of clinical and preclinical product candidates.Our most advanced product candidate, cethromycin, is a novel ketolideantibiotic in Phase III clinical development for the treatment of respiratory tractinfections. We also have product candidates in earlier stages of developmentfor the treatment of indications including inflammation-related tissue damageand malignant melanoma.

None of our product candidates have been approved bythe FDA or any comparable foreign agencies, and we have not generated anysignificant revenues to date. Our ability to generate revenues in the futurewill depend on our ability to meet development or regulatory milestones underany license agreements that trigger payments to us, to enter into new licenseagreements for other products or territories and to receive regulatoryapprovals for, and successfully commercialize, our product candidates eitherdirectly or through commercial partners.

Since our inception we have incurred net losses eachyear. Our net losses for the six months ended June 30, 2006 and 2005 were  $7.8 million and $1.7 million,respectively.  As of June 30, 2006,we had an accumulated deficit of $54.5 million. Our operations to datehave been funded principally through proceeds from our initial public offeringin August 2005 (“the IPO”), our private placement in March 2006 (“privateplacement”), debt and capital contributions made by our Chief Executive Officerand borrowings under our bank line of credit.

We expect to significantly increase the rate of ourresearch and development expenditures as we accelerate our development ofcethromycin. Accordingly, our total expenses and net losses will similarlyincrease. If the clinical testing for our product candidates is delayed, wecould incur increased development costs and a delay in our ability to generaterevenues. Such delay, depending on its duration, may also require the Companyto raise additional capital to fund the completion of clinical trials and otheroperating activities.

In December 2005, we initiated Phase III clinicaltrials for cethromycin.  Our Phase IIItrials compare cethromycin with standard of care therapies for communityacquired pneumonia in the United States, Canada, Europe, Central and SouthAmerica and South Africa.  The objectiveis to establish statistical non-inferiority against comparators.   The trials are designed to demonstrate aclinical cure rate non-inferiority endpoint using a 95% confidence interval. Weanticipate having certain preliminary data from these trials by the end of2006.

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.

**Results of Operations**

*Threemonths ended June 30, 2006 compared to three months ended June 30, 2005*

*Revenueand income. *TheCompany had no revenue for the three months ended June 30, 2006 compared to$12,000 for the three months ended June 30, 2005.  Revenue derived from our management agreementwith Flavin Ventures wherein we provided management and administrative servicesto a series of companies jointly owned by Flavin Ventures ended after we werenotified in December 2005 that the management services would no longer beneeded.

*Researchand development expense.* Total research and developmentexpense increased $3.2 million to $3.6 million for the three months ended June30, 2006 compared to $348,000 for the three months ended June 30, 2005. Theincrease is attributable to our cethromycin development program.  Our development strategy to date has beenfocused on ensuring the availability of clinical supplies of cethromycin andits comparator as well as the initiation of the clinical sites.  The sites initiated to date are in the UnitedStates and Canada.  In the second quarterof 2006 we worked to initiate clinical sites in South Africa and South America,coinciding with the beginning of the community acquired pneumonia season inboth locations.  Throughout 2006, as ourclinical trials progress, we expect research and development expenditures toincrease substantially.  The largestcomponent of our development expense is the 

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cost to conduct our clinical trials.  Since our clinical trial contracts arelargely milestone based, dependent on clinical site initiation and patientenrollment, research and development expense will vary based upon the progressof the trials.

*Generaland administrative expense.* General and administrative expense increased$868,000 to $1.3 million for the three months ended June 30, 2006 compared to$471,000 for the three months ended June 30, 2005.  Approximately $341,000 of this increase wasattributable to expenses incurred operating as a public company such asdirector and officer insurance, SEC compliance related expenses and listingfees.  Compensation and related expensesaccounted for an incremental expense of $337,000 for the three months endedJune 30, 2006.  The remaining increase of$190,000 resulted from marketing research expenditures related to thecommercialization of cethromycin as well as increased travel related to ourclinical trials and investor relations programs.

* Interestincome. *Interestincome was $520,000 for the three months ended June 30, 2006.  The Company had no interest income in theprior year period.  Interest income isderived through the investment of funds received from our initial publicoffering and private placement proceeds in marketable debt securities and moneymarket funds.

*Interest expense.* Interestexpense increased $19,000 to $128,000 for the three months ended June 30, 2006from $109,000 for the three months ended June 30, 2005.  Interest expense increased due to a 2.0%increase in the prime rate between June 30, 2005 and 2006 as well asincremental borrowings of $915,000 on our line of credit.

**       ***Six monthsended June 30, 2006 compared to six months ended June 30, 2005*

        *Revenue and income. *Total revenue and income decreasedby $9,000 to $35,000 for the six months ended June 30, 2006 compared to $44,000for the six months ended June 30, 2005. Revenue in 2006 was derived from Small Business Innovative Research  (“SBIR”) grants in the amount of $35,000 forthe six months ended June 30, 2006, resulting from the completion of a phase Igrant awarded during the third quarter of 2005. Although we regularly submit grants to the National Institutes for Health,no additional awards have been made to date and we do not expect to recognizeadditional revenue for the remainder of 2006.

Revenuein 2005 was derived from our management agreement with Flavin Ventures whereinwe provided management and administrative services to a series of companiesjointly owned by Flavin Ventures. Revenue related to the management agreement decreased to $0 for the sixmonths ended June 30, 2006 compared to $44,000 for the six months ended June30, 2005.  We were notified by FlavinVentures in December of 2005 that the management services would no longer beneeded.

*        Research and development expense.*Researchand development expense increased $5.1 million to $5.8 million for the sixmonths ended June 30, 2006 compared to $666,000 for the six months ended June30, 2005 and is attributable to our cethromycin development program.

*       General and administrative expense.*General and administrative expense increased $1.7 million to $2.5 million forthe six months ended June 30, 2006 compared to $839,000 for the six monthsended June 30, 2005.  Approximately$720,000 of this increase was attributable to expenses incurred operating aspublic company during 2006.  Compensationand related expenses accounted for an incremental expense of $635,000 for thesix months ended June 30, 2006, the majority of which relates to theimplementation of our senior management compensation program that was initiatedby our board during the first quarter of 2006 to adjust compensation to currentmarket levels and provide incentives for key personnel to achieve cethromycindevelopment goals.  The remainingincrease of $345,000 represents additional expenditures to support our ongoingcommercialization efforts for cethromycin, expanded patent protection costs forour proprietary portfolio of compounds, as well as increased travel related toour clinical trials and investor relations programs.

*         Interest income. *Interest income increased$801,000 for the six months ended June 30, 2006 from $0 for the six monthsended June 30, 2005.  Interest income isderived through the investment of our IPO and private placement proceeds inmarketable debt securities and money market funds.

*         Interest expense.*  Interest expense increased $69,000 to $273,000for the six months ended June 30, 2006 from $204,000 for the six months endedJune 30, 2005.  Interest expenseincreased due to a 2.0% increase in the prime rate between June 30, 2005 and2006 as well as incremental borrowings of $915,000 on our line of credit forthe same period.

**Liquidity and Capital Resources**

We have devoted substantially all of our cashresources to research and development and general and administrative expenses.To date, we have not generated any revenues from the sale of products, and wedo not expect to generate any such revenues for a number of years, if at all.As a result, we have incurred an accumulated deficit of $54.5 million and$46.7 million as of June 30, 2006 and December 31, 2005,respectively, and we expect to incur significant and increasing operatinglosses for the foreseeable future. Our working capital as of June 30, 2006amounted to $40.1 million. Cash and cash equivalents was $39.2 million asof June 30, 2006. Since our inception in 1999 to August 2005, we financedour operations primarily through debt and capital contributions from our 

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founder and controlling stockholder and borrowingsunder our bank line of credit.  In August2005 we completed our initial public offering in which we raised $28.7 million,net of underwriters discount and offering costs.  In March 2006 we completed a privateplacement in which we raised $33.4 million, net of underwriters discount andoffering costs.

In September 2001, our Chief Executive Officer made a$2.0 million loan to us. The loan accrues interest at the rate of 7.75%,compounded annually, and is due and payable on December 31, 2007.   The balance of the loan and accrued interestwas $2.0 million as of June 30, 2006.

We have a $4.0 million line of credit with a localfinancial institution.  As of June 30,2006, the line of credit had an outstanding balance of $3.9 million bearinginterest of 6.75% per annum.  Interest ispayable monthly, and matures on December 31, 2007.  The line of credit is secured by the assetsof the Company, excluding any rights that we may have as result of our licenseagreement with Abbott Laboratories for cethromycin, as well as approximately2.5 million shares of our common stock held by Flavin Ventures. (see Note 5 tothe condensed consolidated financial statements).

During the six months ended June 30, 2006, cashused in operating activities totaled $9.5 million.  Approximately $7.2 million was used for thedevelopment of cethromycin, $137,000 for research activities related to ourproprietary portfolio of compounds, net of $35,000 received from SBIR grantfunding, and $2.9 million for general operations which was offset by $729,000of net interest income. Cash provided by investing activities totaled $10.4million during the six months ended June 30, 2006 and related to investmentssold that had reached maturity and subsequently were reinvested in cashequivalents.  Cash provided fromfinancing activities totaled $33.5 million during the six months ended June 30,2006 due to the sale of our common stock through the completion of our privateplacement.

*Contractual Obligations*

As of  June 30,2006, 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,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt                 |       | $                                                    | —     |   | $ | 2,000,000 |   | $ | 3,915,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | 5,915,000 |   |
| Interest                       |       | 209,631                                              |       | 419,263 |   | — |   | — |   | — |   | — |   | 628,894 |   |
| Abbott license  payments       |       | —                                               |       | 10,000,000 |   | 30,000,000 |   | — |   | — |   | — |   | 40,000,000 |   |
| Cethromycin  development costs |       | 17,700,000                                           |       | 3,900,000 |   | 8,000 |   | — |   | — |   | — |   | 21,608,000 |   |
| Operating leases               |       | 114,365                                              |       | 234,789 |   | 160,645 |   | — |   | — |   | — |   | 509,799 |   |
| Capital leases                 |       | 11,830                                               |       | 20,348 |   | 6,238 |   | 6,238 |   | 2,079 |   | — |   | 46,733 |   |
| Total                          |       | $                                                    | 18,035,826 |   | $ | 16,574,400 |   | $ | 34,089,883 |   | $ | 6,238 |   | $ | 2,079 |   | $ | — |   | $ | 68,708,426 |   |

 

In the first half of 2006 we executed contractstotaling $26.6 million related to our clinical development of cethromycin.  Of this amount, $19.5 million represents thecosts we will incur to complete the Phase III pivotal clinical trials, $2.3million relates to cardiac safety studies, clinical laboratory support for thetrials, and the manufacture and analysis of clinical supplies for the trialsand $4.8 million relates to the manufacture of test batches of cethromycinrequired for the new drug application to the FDA.  Payments due under these contracts occur primarilyover the next twelve months.  Themajority of these payments are milestone-based and the periods in whichmilestone obligations become payable are only estimates due to uncertainties inpatient enrollment.

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 2007 and 2008, respectively.  Thereafter, we would owe Abbott an additional$2.5 million upon reaching $200 million in aggregate net sales of cethromycinand $5.0 million upon reaching $400 million in aggregate net sales.  The periods in which milestone obligationsbecome payable are only estimates due to uncertainties in the regulatoryapproval process.

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 July 2006, we executed a contract totaling $1.7million to measure the efficacy of cethromycin against inhalation anthrax innon-human primates.  We expect to expend$785,000 during the remainder of this year and $915,000 in 2007 under the termsof this contract.

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**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. The preparation of these financial statementsrequires us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities and expenses andrelated disclosure of contingent assets and liabilities. We review ourestimates on an ongoing basis. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significantaccounting policies are described in more detail in the notes to ourfinancial statements included in this quarterly report, we believe thefollowing accounting policies to be critical to the judgments and estimatesused in the preparation of our financial statements.

*In-ProcessResearch and Development*

We recognize in-process research and development inaccordance with FASB Interpretation No. 4, *Applicability of FASBStatement No. 2 to Business Combinations Accounted for by the Purchase Method***and the  AICPA Technical PracticeAid***, Assets Acquired in a Business Combinationto 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.**

In December 2004, we incurred $24.5 million ofin-process research and development expense as a result of entering into ourexclusive license with Abbott Laboratories for cethromycin. We determined toimmediately expense the purchased in-process research and development costsbecause the ultimate outcome of clinical trials for cethromycin 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 alsoobtained to provide additional support for the valuation methodologiesutilized. By their nature, valuations involve judgments of management that relyon estimates regarding the timing and amount of cash flows and discount ratesthat, if changed, could significantly affect the conclusions as to value.

*Research andDevelopment*

Research and development expenses consist of internalresearch costs and fees paid for contract research in conjunction with theresearch and development of the Company’s proprietary product portfolio.  All such costs are expensed as incurred.  Clinical trial costs incurred by thirdparties are expensed as the contracted work is performed.  The Company estimates both the total cost andtime period of the trials and the percent completed as of that accountingdate.  Research and development expensesresulting from contracts that require payments based upon the achievement ofcertain milestones are estimated based upon progress towards completion.   The Company believes that the estimates madeas of June 30, 2006 are reflective of the actual expenses incurred as of thatdate.

*Variable InterestEntities*

We determine consolidation of variable interestentities in accordance with FASB Interpretation 46(R),*Consolidation of Variable Interest Entities*.Our 50/50 joint venture, Sarawak MediChem Pharmaceuticals,has not been included in our consolidatedfinancial statements because the majority of its financial support in the form of contributed capital and debt hasbeen funded by our joint venture partner.

*Stock-basedCompensation*

Effective December 2004, we adopted Statement ofFinancial Accounting Standards SFAS No. 123(R) *Share-BasedPayment. *As prescribed in SFAS No. 123(R) we elected to use the ‘‘prospectivemethod’’, which requires expense to be recognized for all awardsgranted, modified or settled in the year of adoption. In accordance withaccounting standards then in effect, no compensation cost had been recognizedfor stock options issued to employees prior to 2004.  All stock awards will be expensed over theirvesting period. We used the Black-Scholes option pricing model to estimate thefair value of options granted.

**Forward-LookingStatements and Risk Factors**

This Quarterly Report on Form 10-Q, includingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995.  Forward-lookingstatements often are proceeded by words such as “believes,” “expects,” “may,” “anticipates,”“plans,” “intends,” “assumes,” “will” or similar expressions. Forward-looking statements reflect management’s current expectations, as of thedate of this report, and involve certain risks and uncertainties.  Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of various 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 Registration Statement on Form S-1 (Reg. No333-132900).

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

Our exposure to market risk is currently confined toour cash and cash equivalents that have maturities of less than one year. Wecurrently do not hedge interest rate exposure. We have not used derivativefinancial instruments for speculation or trading purposes.  Our most liquid assets are cash and cashequivalents. Because of their liquidity, these assets are not directly affectedby inflation. We also believe that we have intangible assets in the value ofour intellectual property. In accordance with generally accepted accountingprinciples, we have not capitalized the value of this intellectual property onour balance sheet. Due to the nature of this intellectual property, we believethat these intangible assets are not affected by inflation. Because we intendto retain and continue to use our equipment, furniture and fixtures andleasehold improvements, we believe that the incremental inflation related toreplacement costs of such items will not materially affect our operations.However, the rate of inflation affects our expenses, such as those for employeecompensation and contract services, which could increase our level of expensesand the rate at which we use our resources.

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

Our management, under the supervision and with theparticipation of our Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”), has evaluated the effectiveness of our disclosure controls andprocedures as defined in SEC Rules 13a-15(e) and 15d-15(e) as of the end of theperiod covered by this report. Based upon that evaluation, management hasconcluded that our disclosure controls and procedures are effectively designedto ensure that information we are required to disclose in reports that we fileor submit under the Securities Exchange Act of 1934 is communicated tomanagement, including the CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure and is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.

**Changes inInternal Control**

During the period covered by this report, there havebeen no significant changes in our internal control over financial reportingthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

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**PART II — OTHER INFORMATION**

**Item IA.**   ***Risk Factors***

** **

The reader should carefully consider, in connectionwith the other information in this report, the factors discussed in Part I,“Item IA. Risk Factors” on pages 17 through 30 of our 2005 Annual Report onForm 10-K. These factors could cause our actual results to differ materiallyfrom those stated in forward-looking statements contained in this report andelsewhere.  In addition to the factorsincluded in the Form 10-K, the reader should also consider the following risksfactors with material changes from risk factors previously disclosed:

***The future clinical testing ofour product candidates could be delayed, resulting in increased costs to us anda delay in our ability to generate revenues.***

Our product candidates will require preclinical testingand extensive clinical trials prior to submitting a regulatory application forcommercial sales. We do not know whether planned clinical trials will begin ontime, if at all. Delays in the commencement of clinical testing couldsignificantly increase our product development costs and delay productcommercialization. In addition, many of the factors that may cause, or lead to,a delay in the commencement of clinical trials may also ultimately lead todenial of regulatory approval of a product candidate. Each of these resultswould adversely affect our ability to generate revenues.

The commencement of clinical trials can be delayed fora variety of reasons, including delays in:

·          demonstrating sufficient safety toobtain regulatory approval to commence a clinical trial;

·          reaching agreement on acceptable termswith prospective contract research organizations and trial sites;

·          manufacturing sufficient quantities ofa product candidate; and

·          obtaining institutional review boardapprovals to conduct clinical trials at prospective sites.

 

In addition, the commencement of clinical trials maybe delayed due to insufficient patient enrollment, which is a function of manyfactors, including the size of the patient population, the nature of theprotocol, the proximity of patients to clinical sites, the availability ofeffective treatments for the relevant disease, and the eligibility criteria forthe clinical trial. Because community acquired pneumonia is generally seasonalin nature, achieving sufficient patient enrollment for our pivotal Phase IIIclinical trials of cethromycin may be particularly difficult.

The FDA required one of our competitors, AventisPharmaceuticals, to undertake a 24,000 patient safety study prior to approvingKetek® for commercialization. Since Ketek’s introduction in the United States, the FDA has received reports of acuteliver failure, including four deaths, among people treated with Ketek**. **InJune of 2006, Aventis agreed to revise the label for Ketek.  The revised label contains a bolded warningand additional information relating to the nature and characterization ofhepatic events, as well as revised recommendations for the use of Ketek inpatients with myasthenia gravis. Abbott’s studies to date and our ongoing clinical program will includemonitoring of cardiac and hepatic safety. We do not expect the FDA to require a similarly sized trial forcethromycin because Ketek was the first ketolide introduced and no previoussafety testing had been conducted for this class of antibiotics. However, ifthe FDA does require a larger than anticipated safety trial for cethromycin, itwould significantly increase our costs and extend the time required to receiveregulatory approval. 

***If we are unable to restructurethe debt and joint venture relationship with the State Government of Sarawak,Malaysia, then our development program for Calanolide A may be delayed orabandoned.***

The intellectual property for Calanolide A is held bySarawak MediChem Pharmaceuticals, Inc., our 50/50 joint venture with the StateGovernment of Sarawak, Malaysia. The original intent of our businessrelationship was that we would contribute intellectual property and managementto the joint venture and our partner would provide funding. To advanceCalanolide A, the Sarawak Government funded $9.0 million by purchasing its 50%equity position and loaned an additional $12.0 million to the joint venture.According to the terms of the loan agreement with the Sarawak Government, $12.0million of this debt is past due. As a result of this default in payment by thejoint venture, the Sarawak Government has the option under the loan agreementto take over the control and management of the Calanolide A project or theaffairs of the joint venture until such time as the loan is repaid in full. InJuly 2005, the Sarawak Government asserted its rights to assume control of themanagement of the joint venture. In December 2005, the Sarawak Governmentnominated and the Board of Directors of SMP approved the appointment of Mr.Jumastapha bin Lamat as the controlling officer of SMP. Since that time we havebeen transitioning access to the joint venture’s accounting, financial andcorporate records to representatives of Mr. Lamat. The Sarawak Government alsoexpressly reserved all contractual and legal remedies available in light of thedefault and indicated its intent to fully exercise its rights as a creditor ofthe joint venture. Ultimately, we believe that in order for the joint ventureto continue, the terms of the debt must be amended to extend its maturity to adate after commercialization of Calanolide A. Additionally, further development of Calanolide A will require us toreach a satisfactory agreement with the Sarawak Government to amend our jointventure relationship and establish our respective obligations regarding thefuture funding of the project. 

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Our joint venture agreement with the SarawakGovernment provides that, upon voluntary termination of the joint venture, anyliabilities of the joint venture will be settled by the parties equally and allpatents or licenses of the joint venture shall be reassigned back to us,including rights to clinical trials. In the event of an involuntary terminationof the joint venture, the assets of SMP would be liquidated for the benefit of itscreditors.  If the joint venture’s assetsare insufficient to settle its liabilities, we do not believe that the equalsettlement of liabilities provision obligates us to contribute funds to thejoint venture.

Over the past year, we have discussed with the SarawakGovernment financial restructuring alternatives for SMP, but have not been ableto reach a mutually satisfactory agreement. On July 12, 2006, the SarawakGovernment, the largest creditor and 50% partner of our joint venture SMP filedan involuntary petition under Chapter 7 of the United States Bankruptcy Codefor the purpose of liquidating SMP’s assets for the benefit of itscreditors.  In connection with thispetition, the Sarawak Government initiated settlement discussions with theCompany to resolve the matter outside of bankruptcy.  On July 31, 2006, the Sarawak Governmentfiled an extension of the deadline to answer the involuntary petition to allowthe parties to the joint venture agreement further time to reach asettlement.  We are presently unable todetermine the ultimate outcome of our SMP joint venture.  However, it is likely that we will no longermaintain our equity position in SMP or continue to manage or control thedevelopment of Calanolide A or the other intellectual property in its productportfolio.  

**Item 6.**   *Exhibits*

The following is a listof 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 14, 2006

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**EXHIBIT INDEX**

** **
| **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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