**UNITEDSTATESSECURITIES AND 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: September 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.**(Exact name 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 November 6, 2006,the registrant had 28,279,649 shares of common stock, $0.01 par value pershare, outstanding.

 

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.(A DEVELOPMENT STAGE ENTITY)INDEXForm 10-Q**
| **PART I — FINANCIAL INFORMATION (UNAUDITED)** | ** ** | ** **                                                                                                                                                                                             |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                                  |       | Condensed Consolidated Financial Statements:                                                                                                                                                           |   |   |
|                                                          |       | Condensed  Consolidated Balance Sheets as of September 30, 2006 and December 31,  2005                                                                                                            |   |   |
|                                                          |       | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2006 and 2005 and for the period from inception (January  1, 1999) through September 30, 2006 |   |   |
|                                                          |       | Condensed  Consolidated Statements of Stockholders’ Equity for period from inception  (January 1, 1999) through September 30, 2006                                                                |   |   |
|                                                          |       | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2006 and 2005 and for the period from inception (January 1, 1999) through  September 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                                                                                                                                                                               |   |   |
| Item 5.                                                  |       | Other                                                                                                                                                                                                  |   |   |
| ** **                                                    | ** ** | ** **                                                                                                                                                                                             |
| **PART II — OTHER  INFORMATION**               | ** ** | ** **                                                                                                                                                                                             |
| Item 6.                                                  |       | Exhibits                                                                                                                                                                                               |   |   |
| Signatures                                                    |       |                                                                                                                                                                                                   |
| Exhibit Index                                            |       |                                                                                                                                                                                                   |

 

1

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**PART I —FINANCIAL INFORMATION**

**Item 1.    *FinancialStatements (Unaudited)***

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

**CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)**
| ** **                                                                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                        |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                              |       | $                      | 32,042,342 |                  | $          | 4,749,932 |   |
| Investments - available for sale                                                                                                                                                       |       | —                 |       | 10,475,000            |       |
| Accounts receivable - related party                                                                                                                                                    |       | —                 |       | 6,160                 |       |
| Prepaid insurance                                                                                                                                                                      |       | 559,318                |       | 362,241               |       |
| Prepaid clinical trials                                                                                                                                                                |       | 2,551,799              |       | 4,500                 |       |
| Other prepaid expenses and deposits                                                                                                                                                    |       | 451,296                |       | 113,763               |       |
| Total current assets                                                                                                                                                                   |       | 35,604,755             |       | 15,711,596            |       |
|                                                                                                                                                                                   |       |                   |       |                  |       |
| PROPERTY AND  EQUIPMENT:                                                                                                                                                               |       |                   |       |                  |       |
| Furniture and fixtures                                                                                                                                                                 |       | 250,307                |       | 147,275               |       |
| Laboratory equipment                                                                                                                                                                   |       | 142,928                |       | 142,928               |       |
| Computer software and equipment                                                                                                                                                        |       | 216,480                |       | 187,771               |       |
| Leasehold improvements                                                                                                                                                                 |       | 182,839                |       | 40,646                |       |
| Total property and equipment—at cost                                                                                                                                              |       | 792,554                |       | 518,620               |       |
| Less accumulated depreciation                                                                                                                                                          |       | (348,331               | )          | (267,372              | )          |
| Property and equipment—net                                                                                                                                                        |       | 444,223                |       | 251,248               |       |
|                                                                                                                                                                                   |       |                   |       |                  |       |
| OTHER LONG-TERM  ASSETS:                                                                                                                                                               |       |                   |       |                  |       |
| Deferred financing costs                                                                                                                                                               |       | 33,127                 |       | 53,004                |       |
| Other assets                                                                                                                                                                           |       | 1,452                  |       | 6,062                 |       |
| Total other long-term assets                                                                                                                                                           |       | 34,579                 |       | 59,066                |       |
|                                                                                                                                                                                   |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                           |       | $                      | 36,083,557 |                  | $          | 16,021,910 |   |
|                                                                                                                                                                                   |       |                   |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT  LIABILITIES:                                                                                                                                                                  |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                       |       | $                      | 557,522    |                  | $          | 294,816 |   |
| Accrued clinical trial expenses                                                                                                                                                        |       | 1,205,058              |       | 83,186                |       |
| Other accrued expenses                                                                                                                                                                 |       | 652,343                |       | 157,575               |       |
| Accrued interest payable                                                                                                                                                               |       | —                 |       | 5,334                 |       |
| Short-term lease payable                                                                                                                                                               |       | 21,926                 |       | 14,114                |       |
| Total current liabilities                                                                                                                                                              |       | 2,436,849              |       | 555,025               |       |
|                                                                                                                                                                                   |       |                   |       |                  |       |
| Long-term lease  payable                                                                                                                                                               |       | 22,761                 |       | 13,166                |       |
| Accrued interest  payable - related party                                                                                                                                              |       | —                 |       | 765,514               |       |
| Grant payable                                                                                                                                                                          |       | 500,000                |       | 500,000               |       |
| Notes payable -  net of $14,083 debt discount September 30, 2006 & $22,532 December 31,  2005                                                                                      |       | 3,900,917              |       | 3,892,468             |       |
| Notes payable -  related party                                                                                                                                                         |       | 2,000,000              |       | 2,000,000             |       |
| Total liabilities                                                                                                                                                                      |       | 8,860,527              |       | 7,726,173             |       |
|                                                                                                                                                                                   |       |                   |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                            |       |                   |       |                  |       |
| Common stock, $0.01 par value—September 30, 2006:  60,000,000 shares authorized; 28,268,899 issued and outstanding; December 31,  2005: 17,990,322 shares issued and outstanding; |       | 282,689                |       | 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                                                                                                                                                             |       | 88,297,045             |       | 54,834,373            |       |
| Deficit accumulated during the development stage                                                                                                                                       |       | (61,356,704            | )          | (46,718,539           | )          |
| Total stockholders’ equity                                                                                                                                                        |       | 27,223,030             |       | 8,295,737             |       |
|                                                                                                                                                                                   |       |                   |       |                  |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                       |       | $                      | 36,083,557 |                  | $          | 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)** | ** ** |
| ** **                                                             | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **             | ** ** | ** ** | ** **  | **Through**                     | ** ** |
| ** **                                                             | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                             | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006**               | ** ** | **2005**   | ** **  | **2006**                        | ** ** |
| Revenue and  income:                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Management fees                                                        |       | $                                                        | —     |                                                    | $          | 8,502                  |       | $          | —      |                            | $          | 52,881 |   | $ | 1,161,180 |   |
| Grant                                                                  |       | —                                                   |       | —                                                  |       | 35,127                 |       | —     |        | 1,030,910                       |       |
| Royalty—related party                                             |       | —                                                   |       | —                                                  |       | —                 |       | —     |        | 45,238                          |       |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Total revenue and income                                               |       | —                                                   |       | 8,502                                                   |       | 35,127                 |       | 52,881     |        | 2,237,328                       |       |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Expenses:                                                              |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Research and development                                               |       | 5,730,269                                                |       | 938,813                                                 |       | 11,569,685             |       | 1,604,749  |        | 43,502,921                      |       |
| Contracted research and development—related party                 |       | —                                                   |       | —                                                  |       | —                 |       | —     |        | 7,980,299                       |       |
| Selling, general and administrative                                    |       | 1,489,502                                                |       | 1,239,674                                               |       | 3,977,514              |       | 2,078,246  |        | 11,612,632                      |       |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Total expenses                                                         |       | 7,219,771                                                |       | 2,178,487                                               |       | 15,547,199             |       | 3,682,995  |        | 63,095,852                      |       |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Loss from  operations                                                  |       | (7,219,771                                               | )          | (2,169,985                                              | )          | (15,512,072            | )          | (3,630,114 | )           | (60,858,524                     | )          |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Other (income)  expense:                                               |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Interest Income                                                        |       | (466,475                                                 | )          | (97,712                                                 | )          | (1,267,433             | )          | (97,712    | )           | (1,539,649                      | )          |
| Interest expense                                                       |       | 120,649                                                  |       | 135,925                                                 |       | 393,526                |       | 340,174    |        | 2,037,829                       |       |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Net other  (income) expense                                            |       | (345,826                                                 | )          | 38,213                                                  |       | (873,907               | )          | 242,462    |        | 498,180                         |       |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Net loss                                                               |       | (6,873,945                                               | )          | (2,208,198                                              | )          | (14,638,165            | )          | (3,872,576 | )           | (61,356,704                     | )          |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Less accumulated  preferred dividends for the period                   |       | 43,750                                                   |       | 43,750                                                  |       | 131,250                |       | 131,250    |        | 1,276,042                       |       |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Net loss  available to common shareholders                             |       | $                                                        | (6,917,695 | )                                                       | $          | (2,251,948             | )          | $          | (14,769,415 | )                               | $          | (4,003,826 | ) | $ | (62,632,746 | ) |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Basic and  diluted net loss per share available to common shareholders |       | $                                                        | (0.24      | )                                                       | $          | (0.15                  | )          | $          | (0.57       | )                               | $          | (0.33 | ) |   |   |
|                                                                   |       |                                                     |       |                                                    |       |                   |       |       |        |                            |       |
| Weighted average number  common shares outstanding- basic and diluted  |       | 28,268,247                                               |       | 14,819,191                                              |       | 25,962,479             |       | 12,134,776 |        |                            |       |

 

See notes to condensedconsolidated financial statements.

3

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

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY****FORTHE PERIOD FROM INCEPTION (JANUARY 1, 1999) THROUGH September 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                                                                              |       | 45,113                |       | 451                      |       | —      |       | —          |       | 6,631          |       | —              |       | 7,082       |       |
| Compensation  expense related to stock options                                                                              |       | —                |       | —                   |       | —      |       | —          |       | 189,388        |       | —              |       | 189,388     |       |
| Net  loss                                                                                                                   |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (14,638,165         | )          | (14,638,165 | )          |
|                                                                                                                        |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—September 30, 2006                                                                                             |       | 28,268,899            |       | $                        | 282,689    |        | 250,000    |            | $          | —         |       | $                   | 88,297,045 |        | $          | (61,356,704 | ) | $ | 27,223,030 |   |

 

See notes to condensedconsolidated financial statements.

4

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

** **

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **                      | ** **  | ** **                      | ** ** | **Period From**             | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | ** **                      | ** **  | ** **                      | ** ** | **Inception**                    | ** ** |
| ** **                                                                         | ** ** | **Nine months ended** | ** **  | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **September 30,**          | ** **  | **Through**                     | ** ** |
| ** **                                                                         | ** ** | **2006**                        | ** **  | **2005**                        | ** ** | **September 30, 2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                            |        |                            |       |                             |       |
| Net loss                                                                           |       | $                               | (14,638,165 | )                               | $          | (3,872,576                       | )          | $ | (61,356,704 | ) |
| Adjustments to  reconcile net loss to net cash flows used in operating activities: |       |                            |        |                            |       |                             |       |
| Depreciation and  amortization                                                     |       | 80,959                          |        | 54,837                          |       | 365,864                          |       |
| Non-cash  interest expense                                                         |       | 28,326                          |        | 15,713                          |       | 53,613                           |       |
| Stock  compensation expense                                                        |       | 189,388                         |        | 434,888                         |       | 906,293                          |       |
| Non-cash  research and development                                                 |       | —                          |        | —                          |       | 24,466,667                       |       |
| Settlement of  milestone payment                                                   |       | —                          |        | 6,000                           |       | 6,000                            |       |
| Loss on disposal                                                                   |       | —                          |        | —                          |       | 11,533                           |       |
| Changes in  operating assets and liabilities:                                      |       |                            |        |                            |       |                             |       |
| Clinical  supplies                                                                 |       | —                          |        | —                          |       | 533,333                          |       |
| Accounts  receivable, related party                                                |       | 6,160                           |        | 21,204                          |       | —                           |       |
| Other prepaid  expenses                                                            |       | (3,081,909                      | )           | (492,867                        | )          | (3,562,413                       | )          |
| Other assets                                                                       |       | 4,610                           |        | (3,330                          | )          | (1,452                           | )          |
| Accounts payable                                                                   |       | 277,110                         |        | (73,467                         | )          | 542,683                          |       |
| Accrued expenses                                                                   |       | 1,616,640                       |        | 65,796                          |       | 1,857,401                        |       |
| Licenses payable                                                                   |       | —                          |        | (9,000,000                      | )          | (11,000,000                      | )          |
| Accrued interest  on debt                                                          |       | (770,848                        | )           | 148,811                         |       | 578,063                          |       |
| Net cash flows  used in operating activities                                       |       | (16,287,729                     | )           | (12,694,991                     | )          | (46,599,119                      | )          |
|                                                                               |       |                            |        |                            |       |                             |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                            |        |                            |       |                             |       |
| Purchase of  property and equipment                                                |       | (258,645                        | )           | (27,419                         | )          | (642,530                         | )          |
| Proceeds from  the sales of investments                                            |       | 14,807,158                      |        | 1,000,000                       |       | 31,557,158                       |       |
| Purchase of  investments                                                           |       | (4,332,158                      | )           | (10,375,000                     | )          | (31,557,158                      | )          |
| Net cash flows  (used in) provided by investing activities                         |       | 10,216,355                      |        | (9,402,419                      | )          | (642,530                         | )          |
|                                                                               |       |                            |        |                            |       |                             |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                            |        |                            |       |                             |       |
| Proceeds from  issuance of common stock and capital contributions                  |       | 33,368,988                      |        | 29,273,676                      |       | 69,856,339                       |       |
| Proceeds from  issuance of notes payable                                           |       | 3,915,000                       |        | 1,610,000                       |       | 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                                             |       | 7,082                           |        | 9,879                           |       | 28,524                           |       |
| Payments on  capital leases                                                        |       | (12,286                         | )           | (8,873                          | )          | (119,563                         | )          |
| Net cash flows  provided by financing activities                                   |       | 33,363,784                      |        | 31,384,682                      |       | 79,283,991                       |       |
|                                                                               |       |                            |        |                            |       |                             |       |
| NET INCREASE IN CASH                                                               |       | 27,292,410                      |        | 9,287,272                       |       | 32,042,342                       |       |
|                                                                               |       |                            |        |                            |       |                             |       |
| CASH—Beginning of  period                                                     |       | 4,749,932                       |        | 194,555                         |       | —                           |       |
|                                                                               |       |                            |        |                            |       |                             |       |
| CASH—End of period                                                            |       | $                               | 32,042,342  |                            | $          | 9,481,827                        |       | $ | 32,042,342 |   |
|                                                                               |       |                            |        |                            |       |                             |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                                 |       |                            |        |                            |       |                             |       |
| Cash paid during  the period for interest                                          |       | $                               | 1,147,031   |                            | $          | 169,416                          |       | $ | 1,410,603 |   |
|                                                                               |       |                            |        |                            |       |                             |       |
| SUPPLEMENTAL DISCLOSURE  OF NONCASH TRANSACTIONS                                   |       |                            |        |                            |       |                             |       |
| Noncash  investment activity:                                                      |       |                            |        |                            |       |                             |       |
| Purchase of  property and equipment under capital leases                           |       | $                               | 29,693      |                            | $          | —                           |       | $ | 164,249 |   |
| Capital expenses  included in accounts payable                                     |       | 14,404                          |        | —                          |       | 14,404                           |       |
| Noncash  financing activity:                                                       |       |                            |        |                            |       |                             |       |
| Issuance of  common shares for licenses                                            |       | —                          |        | —                          |       | 9,000,000                        |       |
| Issuance of  common shares for reduction of milestone payment                      |       | —                          |        | 3,000,000                       |       | 3,000,000                        |       |
| Debt discount                                                                      |       | —                          |        | 18,925                          |       | 30,823                           |       |
| Deferred  financing costs                                                          |       | $                               | —      |                            | $          | 15,000                           |       | $ | 30,000 |   |

 

See notes to condensed consolidated financial statements.

5

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC( A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2006**

**1. Summary ofSignificant Accounting Policies**

***Nature ofBusiness—******Advanced***LifeSciences 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***Companyconsiders all highly liquid investments with original maturities of threemonths or less when purchased to be cash equivalents.

***Investments—***TheCompany has, at times, invested in marketable debt securities which wereclassified as available-for-sale, the fair value of which was determined usingcurrently available market prices.  TheCompany reviews the carrying value of investments each quarter to determinewhether an other 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 are carried atfair value, with the unrealized gains and losses, net of tax, reported as acomponent of stockholders’ equity in accumulated other comprehensive loss.   Marketable securities available for currentoperations are classified in the balance sheet as current assets; marketable securitiesheld for long-term purposes are classified as noncurrent assets. Interestincome and realized gains and losses on securities are included in “Interestincome” in the statements of operations.  As of September 30, 2006, the Company had no marketable securities andtherefore no unrealized holding gains or losses were recognized in thestatements of operations and stockholders equity.

***Revenue and IncomeRecognition—***Small Business Innovation Researchgrant revenue is recorded as expenses are incurred and services performed inaccordance with the terms of the grant agreements.  Royalty revenue is earned from a license ofthe Company’s chemical process technology. Under the license, revenue is earned based upon a percentage of reportednet sales from a subsidiary of deCODE Genetics, Inc. (“deCODE”), for servicesthat incorporate the licensed technology (see Note 4). Revenue earned throughour management agreement with Flavin Ventures, LLC. is recorded as expenses areincurred and services performed.  Managementfees, which are generated from a shared services agreement with SarawakMediChem Pharmaceuticals, Inc. (“SMP”), are recognized on the cash basis as thecollectibility of such fees is not reasonably assured (see Note 3 for recentdevelopments concerning SMP).

***Research andDevelopment Expenses—***Research and developmentexpenses consist of internal research costs and fees paid for contract researchin conjunction 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 that accountingdate.  Research and development expensesresulting from contracts that require payments based upon the progress towardscompletion of certain milestones are estimated based upon the percentage ofcompletion method. The Company believes that the estimates made as of September30, 2006 are reflective of the actual expenses incurred as of that date.

The company recognizes in-process research anddevelopment in accordance with FASB Interpretation No. 4, *Applicability of FASBStatement No. 2 to Business Combinations Accounted for by the Purchase Method*and the**AICPATechnical Practice Aid, 

6

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Assets Acquired in a Business Combination to be usedin Research and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical  Industries. Assets to be used in research anddevelopment activities, specifically, compounds that have yet to receive newdrug approval from the FDA and would have no alternative use should approvalnot be given, are immediately charged to expense when acquired.

***Stock-BasedCompensation—***Compensation cost related toshare-based payments is measured based on the grant-date fair value of theequity or liability instruments issued. Compensation expense will be recognized over the period that an employeeprovides service in exchange for the award.

Effective December 2004, the Company adopted Statementof Financial Accounting Standards No. 123(R)*Share-Based Payment*. As prescribed in SFAS No. 123(R) the Company elected to use the ‘‘prospectivemethod’’, which requires expense to be recognized for all awards granted,modified or settled in the year of adoption. In accordance with accounting standards the in effect, no compensationcost had been recognized for stock options issued to employees prior to 2004.  All stock awards will be expensed over theirvesting period. The Company utilized the Black-Scholes option pricing model toestimate the fair value of options.

***Variable Interest Entities***—**The Company determines consolidation ofvariable interest entities in accordance with FASB Interpretation 46(R),*Consolidationof ***Variable*** Interest Entities*. Our 50/50 joint venture, Sarawak MediChemPharmaceuticals, has not been included in our consolidated financial statementsbecause the majority of its financial support in the form of contributedcapital and debt has been funded by our joint venture partner (see Note 3 for recent developmentsconcerning SMP).

***Use of Estimates—******The***preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements. Estimates also affect the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

**2. PrivatePlacement**

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 offeringexpenses of $226,000. The net cash proceeds from the offering were $33.4million as of September 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 (“CRAUN”), and ALS Inc. each maintain a 50% equityinterest in SMP.

Under the joint venture agreement (the “JV Agreement”),Sarawak Government contributed $9.0 million to SMP through stock subscriptionpayments based on the attainment of certain milestone achievements outlined inthe Agreement.  The Company contributedcertain intellectual property and committed to make scientists available toundertake the research and clinical trials, to train scientists nominated bythe Sarawak Government and to permit such scientists to participate in theclinical trials, manufacture, marketing and distribution of any commercialproduct resulting from the research and development effort.  Additionally, the Sarawak Government providedlong-term loans to SMP of $12.0 million through September 30, 2006.  The Sarawak Government also provided $22,000in short-term loans during 2005 that were used for patent protection andclinical trial insurance expenses. Accrued interest on all such loans was $7.0million and $5.7 million as of September 30, 2006 and 2005, respectively.

According to the terms of the loan agreement with theSarawak Government, $12.0 million of SMP’s debt is past due. In Decemberof 2005, as a result of this default in payment by SMP, the Sarawak Governmentappointed its representative as an officer of SMP for purposes of assumingcontrol of the affairs and management of SMP. The Sarawak Government 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.

7

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On July 12, 2006, the Sarawak Government filed aninvoluntary chapter 7 petition against SMP for the purpose of liquidating SMP’sassets for the benefit of its creditors. The Sarawak Government filed an extension of the deadline to answer theinvoluntary petition until October 31, 2006, to allow the parties to the JVagreement further time to reach a settlement agreement.

On October 27, 2006, the Company and ALS Inc. enteredinto a Stock Purchase Agreement with the Sarawak Government, pursuant to whichthe Sarawak Government, through CRAUN agreed to purchase ALS Inc.’s 50% equityinterest in SMP.  Under the terms of theStock Purchase Agreement, the Sarawak Government will own 100% of SMP and itsHIV-therapeutic candidate, Calanolide A, in exchange for a $1 million cashpayment to ALS Inc.  The parties madecertain representations and warranties in the Stock Purchase Agreement andmutually agreed to waive any future legal claims otherwise arising out of theSMP joint venture.  In connection withthis transaction, ALS Inc. and the Sarawak Government have agreed to terminatethe JV Agreement, which would release the Company and ALS Inc. from any futureobligations to SMP.  On October 30, 2006,in light of the Stock Purchase Agreement, the United States Bankruptcy Courtfor the Northern District of Illinois, Eastern Division, granted the jointmotion of the Sarawak Government and SMP to dismiss the petition for chapter 7involuntary bankruptcy that the Sarawak Government filed against SMP on July12, 2006.  The closing of the Stock Purchase Agreement is dependant upon,among other things, the order dismissing the bankruptcy case becoming a final,non-appealable order.  Currently, this transaction is scheduled to closeno later than December 21, 2006.

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 September 30, 2006 and 2005, the Company’s investment in SMP had acarrying value of zero.  The Company’ssale of the 50% interest in SMP is expected to result in a $1.0 million gain,less direct expenses incurred from the sale, which will be recorded in fourthquarter of 2006.

**4. Related PartyTransactions**

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 nine months ended September 30, 2006 and2005.  On a cumulative basis, billed andunrecognized fees as of September 30, 2006 and 2005 totaled $615,000.  As part of our agreement to sell our 50% interestin SMP (see Note 3), we agreed that the $615,000 will not be paid to theCompany; however, as the Company had not recognized these fees as income therewill be no effect on our financial statements.

The Company’s Chief Executive Officer, Michael T. Flavin,has loaned to the Company $2.0 million (see Note 5).  Interest expense of $136,000 and $149,000 wasrecorded for the nine months ended September 30, 2006 and 2005, respectively,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, LLC. (“BioStart”), a wholly-owned subsidiary of FlavinVentures.  Lease costs were $187,000 and$168,000 for the nine months ended September 30, 2006 and 2005,respectively.  In April 2006, the Companyamended its lease agreement with BioStart. Under the terms of the amendment, the Company may reduce its requiredrental payments to BioStart to offset for any shared expenses between theCompany and other tenants 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 $3,650 and $9,000 for the nine months ended September30, 2006 and 2005, respectively.

**5. Long TermObligations**

In September 2001, the Company entered into a $2.0million promissory note with the Chief Executive Officer of the Company whichbears 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.   As ofSeptember 30, 2006 and December 31, 2005, the Company had $2.0 million and $2.8million including accrued interest, respectively, outstanding under the note.  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.

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 connection with the line of credit, thefinancial institution received a warrant entitling it to purchase 14,887 sharesof the Company’s common stock at an exercise price of $5.00 per share, subjectto certain adjustments.   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.

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 maturity dateof January 1, 2008.  The line of creditis 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 and 2.5million shares of the Company’s common stock held by ALS Ventures, LLC.  The new line of credit also provides for,among other things, the release of guarantees by Flavin Ventures, LLC, Dr.Michael Flavin and his wife, and John L. Flavin.

**6. Earnings PerShare**

Basic loss per share are computed by dividing net lossby 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 nine months ended September 30, 2005 gives effect toa 3.97-for-one stock split authorized by the Board in June 2005.  The computation of diluted shares outstandingfor the periods ended September 30, 2006 and 2005 excludes incremental sharesof 6,254,965 and 681,921, 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 endedSeptember 30, 2006 and 2005.

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

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

**Overview**

We are 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 respiratorytract infections. We also have product candidates in earlier stages ofdevelopment for the treatment of indications including inflammation-relatedtissue damage and malignant melanoma.

None of our product candidates have been approved bythe Food and Drug Administration (“FDA”) or any comparable foreign agencies,and we have not generated any significant revenues to date. Our ability togenerate revenues in the future will depend on our ability to meet developmentor regulatory milestones under any license agreements that trigger payments tous, to enter into new license agreements for other products or territories andto receive regulatory approvals for, and successfully commercialize, ourproduct candidates either directly or through commercial partners.

Since our inception we have incurred net losses eachyear. Our net losses for the nine months ended September 30, 2006 and 2005 were$14.8 million and $4.0 million, respectively. As of September 30, 2006, we had an accumulated deficit of$61.4 million. Our operations to date have been funded principally throughproceeds from our initial public offering in August 2005 (“the IPO”), ourprivate placement in March 2006 (“private placement”), debt and capitalcontributions made by our Chief Executive Officer and borrowings under our bankline 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 itsduration, may also require the Company to raise additional capital to fund thecompletion of clinical trials and other operating activities.

In December 2005, we initiated Phase III clinicaltrials for cethromycin.  Our Phase IIItrials compare cethromycin with standard of care therapies for communityacquired pneumonia (CAP) in the United States, Canada, Europe, South Americaand South Africa.  The objective is toestablish statistical non-inferiority against comparators.   Each trial will seek to demonstratestatistical non-inferiority to a comparator agent using a 95% confidenceinterval.  Clinical cure rate will serve as the primary endpoint in eachtrial with bacteriological eradication serving as a secondary endpoint.

As of the beginning of the fourth quarter of 2006 wehave initiated clinical trial sites in the United States, Canada, Europe, SouthAmerica and South Africa.  This approachhas positioned us to recruit patients for our CAP studies in both hemispheresduring each respective peak CAP season. We anticipate having certain preliminary data available by the end of2006.  We expect to have morecomprehensive data available by the end of the first quarter of 2007.  This timeline depends on the severity of theCAP season and the successful treatment of patients in the clinical trialssites we have established.  We willcontinue to enroll in all geographies until we have enrolled the requisitenumber of patients to complete our studies.

Even if our pivotal Phase III clinical trials ofcethromycin are successfully completed, we do not expect to receive FDAapproval for commercialization until 2008 at the earliest.  As of September 30, 2006, we estimate thatour cethromycin development program  will require an additional $69 million in research and developmentexpenses which includes $40 million in additional milestones to Abbott, $20million to complete the cethromycin clinical trials and $9 million for thepreparation of the cethromycin NDA and other commercialization-related costs.  The Abbott milestones are triggered uponsubmitting an NDA and receiving FDA approval, respectively.  Development timelines and related costs aredifficult to estimate and may vary significantly from our current estimates.

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

10

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**Results ofOperations**

*Three months endedSeptember 30, 2006 compared to three months ended September 30, 2005*

*Revenueand income.**  *TheCompany had no revenue for the three months ended September 30, 2006 comparedto $8,500 for the three months ended September 30, 2005.

*Researchand development expense.*   Total research anddevelopment expense increased $4.8 million to $5.7 million for the three monthsended September 30, 2006 compared to $939,000 for the three months endedSeptember 30, 2005. Excluding non-recurring bonuses and stock optioncompensation expense of $578,000 recognized as a result of our IPO in the thirdquarter of 2005, research and development expenses increased $5.4 million inthe third quarter of 2006.  Cethromycinclinical trial costs accounted for $3.4 million of the quarter-over-quarterincrease.  During the third quarter wesubmitted our regulatory filings in Europe and began enrolling patients in thatgeography.  With clinical supplies ofcethromycin and its comparator in place around the world and in anticipation ofthe approaching CAP season in the Northern Hemisphere (US, Canada and Europe)we believe patient enrollment may accelerate during the fourth quarter.  As a result, we expect that research anddevelopment expense may increase substantially since our clinical trialcontracts are dependant on site initiation and patient enrollment.

Manufacturing costs associated with the production ofcommercial grade cethromycin related to our anticipated 2007 cethromycin NDAfiling totaled $1.7 million for the three months ended September 30, 2006,representing 35% of the increase in research and development for the thirdquarter.

In addition to the Phase III clinical trials forcethromycin, we also initiated additional trials to evaluate cethromycin’sefficacy in a non-human primate model against inhalation anthrax.  Expenditures related to this trial totaled$206,000 during the quarter and are expected to cost an additional $1.7 millionto complete this study.  Compensation andrelated expenses increased $100,000 resulting from additions to our clinicalmanagement team as well as our senior management compensation program that wasinitiated by our board during the first quarter of 2006 to adjust compensationto current market levels and provide incentives for key personnel to achievecethromycin development goals.

*Generaland administrative expense.**  *Generaland administrative expense increased $250,000 to $1.5 million for the threemonths ended September 30, 2006 compared to $1.2 million for the three monthsended September 30, 2005.  Excludingnon-recurring bonuses and stock option compensation expense of $578,000recognized as result of our IPO in the third quarter of 2005, general andadministrative expenses increased $828,000 in the third quarter of 2006.Compensation and related expenses increased $316,000 resulting from additionalstaff hired into business development, investor relations and accountingpositions as well as the implementation of our senior management compensationprogram that was initiated by our board during the first quarter of 2006 toadjust compensation to current market levels and provide incentives for keypersonnel to achieve cethromycin development goals.  Incremental costs incurred to operate as apublic company totaled $289,000 and included expenses such as director andofficer insurance, SEC compliance related expenses and listing fees.  Approximately $182,000 was expended inmarketing at various industry specific conferences during the quarter.  The remaining increase of $41,000 resultedfrom increased operating costs of our corporate headquarters as a result ofadditional personnel.

*Interestincome.*   Interest income was $466,000 and $98,000for the three months ended September 30, 2006 and 2005, respectively.  Interest income is derived through theinvestment of funds received from our initial public offering and private placementproceeds in marketable debt securities and money market funds.

*Interestexpense.*   Interest expense decreased $15,000 to$121,000 for the three months ended September 30, 2006 from $136,000 for thethree months ended September 30, 2005. In the second quarter of 2006, we restructured of our line of credit toa lower, fixed rate of interest and paid approximately $837,000 of accumulatedinterest due under the note with our CEO.

*Ninemonths ended September 30, 2006 compared to nine months ended September 30,2005*

*Revenueand income.**  *Totalrevenue and income decreased to $35,000 for the nine months ended September 30,2006 from $53,000 for the nine months ended September 30, 2005.  Revenue in 2006 was derived from Small Business Innovative Research  (“SBIR”) grants and totaled $35,000 for thenine months ended September 30, 2006, resulting from the completion of a phaseI grant awarded during the third quarter of 2005.

Revenue in 2005 was derived from our managementagreement with Flavin Ventures wherein we provided management and administrativeservices to a series of companies jointly owned by Flavin Ventures.  Revenue related to the management agreementdecreased to $0 for the nine months ended September 30, 2006 compared to$53,000 for the nine months ended September 30, 2005.

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*Researchand development expense.*   Research anddevelopment expense increased $10.0 million to $11.6 million for the ninemonths ended September 30, 2006 compared to $1.6 million for the nine monthsended September 30, 2005 and is attributable to our cethromycin developmentprogram.  Excluding non-recurring bonusesand stock option compensation expense of $578,000 recognized as a result of ourIPO in the third quarter of 2005, research and development expenses increased $10.5million for the nine months ended September 30, 2006. Of the total increase,$7.8 million related to costs incurred to conduct our clinical trials, $2.4million was expended in the production of commercial grade cethromycin and$205,000 to conduct our Anthrax trials. Compensation and related expenses increased $100,000 resulting fromadditions to our clinical management team as well as our senior managementcompensation program that was initiated by our board during the first quarterof 2006 to adjust compensation to current market levels and provide incentivesfor key personnel to achieve cethromycin development goals.

*Generaland administrative expense.*   General andadministrative expense increased $1.9 million to $4.0 million for the ninemonths ended September 30, 2006 compared to $2.1 million for the nine monthsended September 30, 2005.  Excludingnon-recurring bonuses and stock option compensation expense of $578,000recognized as result of our IPO in the third quarter of 2005, general andadministrative expenses increased $2.5 million for the nine months endedSeptember 30, 2006.  Compensation andrelated expenses increased $1.0 million resulting from additional staff hiredinto business development, investor relations and accounting positions as wellas the implementation of our senior management compensation program that wasinitiated by our board during the first quarter of 2006 to adjust compensationto current market levels and provide incentives for key personnel to achievecethromycin development goals. Incremental costs incurred to operate as a public company totaled $1.0million and included expenses such as director and officer insurance, SECcompliance related expenses and listing fees. Marketing and travel expenses increased $323,000 over the prior periodthe result of a greater presence at industry conferences held during the year.  The remaining increase of $177,000 resultedfrom increased operating costs of our corporate headquarters as a result ofadditional personnel.

*Interestincome.*   Interest income increased $1.2 millionto $1.3 million for the nine months ended September 30, 2006 from $98,000 forthe nine months ended September 30, 2005. Interest income is derived through the investment of our IPO and privateplacement proceeds in marketable debt securities and money market funds, whichwere received in August 2005 and April 2006, respectively.

*Interestexpense.*   Interest expense increased $53,000 to$394,000 for the nine months ended September 30, 2006 from $340,000 for thenine months ended June 30, 2005. Interest expense increased due to a 2.0% increase in the prime ratebetween June 30, 2005 and April 2006 as well as incremental borrowings of$915,000 on our line of credit for the same period.  In April 2006 we restructured our line ofcredit which decreased the rate on outstanding borrowings approximately 1.8%.  In May 2006 we paid all outstandingaccumulated and capitalized interest to our CEO in connection with his $2.0million note, reducing the balance upon which interest is calculated by$837,000.

**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 until our NDA for cethromycin isapproved by the FDA.  As a result, wehave incurred an accumulated deficit of $61.4 million and $46.7 million asof September 30, 2006 and December 31, 2005, respectively, and we expectto incur significant and increasing operating losses for the foreseeablefuture. Our working capital as of September 30, 2006 amounted to$33.2 million. Cash and cash equivalents was $32.0 million as ofSeptember 30, 2006. Since our inception in 1999 to August 2005, wefinanced our operations primarily through debt and capital contributions fromour founder and controlling stockholder and borrowings under our bank line ofcredit.  In August 2005 we completed ourinitial public offering in which we raised $28.7 million, net of underwritersdiscount and offering costs.  In March2006 we completed a private placement in which we raised $33.4 million, net ofunderwriters discount and offering 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 September 30, 2006.

We have a $4.0 million line of credit with a localfinancial institution.  As of September30, 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 and approximately 2.5million shares of our common stock held by Flavin Ventures. (see Note 5 to thecondensed consolidated financial statements).

During the nine months ended September 30, 2006,cash used in operating activities totaled $16.3 million.  Approximately $12.2 million was used for thedevelopment of cethromycin, $259,000 for research activities related to ourproprietary portfolio of compounds, net of $35,000 received from SBIR grantfunding, and $4.9 million for general operations while net interest income of$1.0 million offset the cash expenditures. Cash provided by investingactivities totaled $10.2 million during the nine months ended September 30,2006 and related to investments sold that had reached maturity and subsequentlywere reinvested in cash equivalents. Cash provided from financing activities totaled $33.4 millionduring the nine months ended September 30, 2006 due to the sale of ourcommon stock through the completion of our private placement.

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*ContractualObligations*

As of  September30, 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                       |       | 106,284                                              |       | 419,263 |   | — |   | — |   | — |   | — |   | 525,547 |   |
| Abbott license  payments       |       | —                                               |       | 10,000,000 |   | 30,000,000 |   | — |   | — |   | — |   | 40,000,000 |   |
| Cethromycin  development costs |       | 6,000,000                                            |       | 14,365,000 |   | 8,000 |   | — |   | — |   | — |   | 20,373,000 |   |
| ALS-357 clinical  supplies     |       | 267,000                                              |       | 94,000 |   | 12,000 |   | — |   | — |   | — |   | 373,000 |   |
| Operating leases               |       | 55,697                                               |       | 225,878 |   | 154,708 |   | — |   | — |   | — |   | 436,283 |   |
| Capital leases                 |       | 6,880                                                |       | 24,211 |   | 10,101 |   | 10,101 |   | 4,655 |   | — |   | 55,948 |   |
| Total                          |       | $                                                    | 6,435,861  |   | $ | 27,128,352 |   | $ | 34,099,809 |   | $ | 10,101 |   | $ | 4,655 |   | $ | — |   | $ | 67,678,778 |   |

 

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

In the first nine months of 2006 we executed contractstotaling $30.1 million related to our clinical development of cethromycin.  Of this amount, $20.0 million represents thecosts we will incur to complete the Phase III pivotal clinical trials, $3.2million relates to cardiac safety studies, clinical laboratory support for thetrials, and the manufacture and analysis of clinical supplies for the trials,$4.8 million relates to the manufacture of test batches of cethromycin requiredfor the new drug application to the FDA, $2.1 million relates to measuring theefficacy of cethromycin against inhalation anthrax in non-human primates andrelated expenses.  Payments due underthese contracts occur primarily over the next twelve months.  The majority of these payments are milestonebased and the periods in which milestone obligations become payable are onlyestimates due to uncertainties in patient enrollment.

In October 2006, we executed additional contractstotaling $333,000 to measure the efficacy of cethromycin against inhalationanthrax in non-human primates and $46,000 in the manufacture of clinicalsupplies for the trials.  We expect toexpend these amounts primarily over the next twelve months.  Additionally, we executed contracts totaling$393,000 to manufacture clinical supplies related to our ALS-357 compound whichhas shown evidence of anti-tumor activity against malignant melanoma inpreclinical studies.

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.

We believe thatour cash on hand at September 30, 2006 is sufficient to fund our cashrequirements through the completion of our Phase III clinical trials ofcethromycin under the current protocols. We anticipate raising additional capital in 2007 through eitheradditional offerings or a commercial partnership to fund our post-NDA filingcash requirements.  Our future capitaluses and requirements depend on numerous forward-looking factors. These factorsinclude, but are not limited to, the following:

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

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

·                                          ourability to establish and maintain additional collaborative arrangements;

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

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

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

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

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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 judgments that affect the reported amounts ofassets, liabilities and expenses and related disclosure of contingent assetsand liabilities. We review our estimates on an ongoing basis. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions. While oursignificant accounting policies are described in more detail in the notes toour financial 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 FASB Statement No. 2 to BusinessCombinations Accounted for by the Purchase*Method and the  AICPA Technical Practice Aid, *AssetsAcquired in a Business Combination to be used in Research and DevelopmentActivities:  A Focus on Software,Electronic Devices, and Pharmaceutical Industries.*Assets to be used in research and developmentactivities, specifically, compounds that have yet to receive new drug approvalfrom the FDA and would have no alternative use should approval not be given,are immediately charged to 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 methodologies utilized.By their nature, valuations involve judgments of management that rely onestimates regarding the timing and amount of cash flows and discount ratesthat, if changed, could significantly affect the conclusions as to value.

*Research and Development*

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 accounting date.  Research and development expenses resultingfrom contracts that require payments based upon the achievement of certainmilestones are estimated based upon progress towards completion.   The Company believes that the estimates madeas of September 30, 2006 are reflective of the actual expenses incurred as ofthat date.

*VariableInterest Entities*

We determine consolidation of variable interestentities in accordance with FASB Interpretation 46(R), Consolidation ofVariable Interest Entities. Our 50/50 joint venture, Sarawak MediChemPharmaceuticals, has not been included in our consolidated financial statementsbecause the majority of its financial support in the form of contributedcapital and debt has been funded by our joint venture partner.

*Stock-basedCompensation*

Effective December 2004, we adopted Statement ofFinancial Accounting Standards SFAS No. 123(R) Share-Based Payment.  As prescribed in SFAS No. 123(R) we electedto use the ‘‘prospective method’’, which requires expense to be recognized forall awards granted, modified or settled in the year of adoption. In accordancewith accounting standards then in effect, no compensation cost had beenrecognized for 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,” 

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“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).

**Item 3. *Quantitative and Qualitative Disclosures About Market 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 accumulated andcommunicated to management, including the CEO and CFO, as appropriate to allowtimely decisions regarding required disclosure and is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.

**Changes in Internal Control**

During the period 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.

**Item 5. *Other***

On August 24, 2006 the board of directors approved amodification to the employment agreements of our CEO Michael Flavin, ourPresident John Flavin, our Chief Financial Officer Richard Wieland, our ChiefLegal Counsel Patrick Flavin and our Vice Presidents David Eiznhamer, SuseelanPookote and Ze-Qi Xu (“Senior Management”) to include a provision that providesfor immediate vesting of all remaining outstanding unvested stock options upona change in control.  As a result, theSenior Management employment agreements were amended and restated on November7, 2006 and are attached as exhibits hereto.

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**PART II —OTHER INFORMATION**

**Item 6. *Exhibits***

The following is alist of exhibits filed as part of this Form 10-Q:
| Number | ** ** | **Description**                                                                                                                                                                                                                                              |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                         |
| 10.1   |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and Michael T. Flavin,  Ph.D.                                                                                                                         |
|   |       |                                                                                                                                                                                                                                                         |
| 10.2   |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and John L. Flavin.                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                         |
| 10.3   |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and R. Richard Wieland,  II.                                                                                                                          |
|   |       |                                                                                                                                                                                                                                                         |
| 10.4   |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and Suseelan Pookote,  Ph.D.                                                                                                                          |
|   |       |                                                                                                                                                                                                                                                         |
| 10.5   |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and Ze-Qi Xu, Ph.D.                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                         |
| 10.6   |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and Patrick W. Flavin.                                                                                                                                |
| 10.7   |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and David Eiznhamer,  Ph.D.                                                                                                                           |
|   |       |                                                                                                                                                                                                                                                         |
| 10.8   |       | Stock purchase agreement dated October 27, 2006  between CRAUN Research Sdn. Bhd. and Advanced Life Sciences Holdings, Inc. and  its subsidiary Advance Life Sciences, Inc., as filed on our Current Report on  Form 8K as Exhibit 10.1 on November 2, 2006. |
|   |       |                                                                                                                                                                                                                                                         |
| 10.9   |       | Agreement dated  October 27, 2006 between CRAUN Research Sdn. Bhd. and Advanced Life Sciences  Holdings, Inc. and its subsidiary Advance Life Sciences, Inc., as filed on  our Current Report on Form 8K as Exhibit 10.2 on November 2, 2006.                |
|   |       |                                                                                                                                                                                                                                                         |
| 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: November 8, 2006

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**EXHIBIT INDEX**
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                               |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                          |
| 10.1       |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and Michael T. Flavin,  Ph.D.                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                          |
| 10.2       |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and John L. Flavin.                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                          |
| 10.3       |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and R. Richard Wieland,  II.                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                          |
| 10.4       |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and Suseelan Pookote,  Ph.D.                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                          |
| 10.5       |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and Ze-Qi Xu, Ph.D.                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                          |
| 10.6       |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and Patrick W. Flavin.                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                          |
| 10.7       |       | Amended and Restated Employment Agreement dated  November 7, 2006 between Advanced Life Sciences, Inc. and David Eiznhamer,  Ph.D.                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                          |
| 10.8       |       | Stock purchase  agreement dated October 27, 2006 between CRAUN Research Sdn. Bhd. and  Advanced Life Sciences Holdings, Inc. and its subsidiary Advance Life  Sciences, Inc., as filed on our Current Report on Form 8K as Exhibit 10.1 on  November 2, 2006. |
|       |       |                                                                                                                                                                                                                                                          |
| 10.9       |       | Agreement dated  October 27, 2006 between CRAUN Research Sdn. Bhd. and Advanced Life Sciences  Holdings, Inc. and its subsidiary Advance Life Sciences, Inc., as filed on  our Current Report on Form 8K as Exhibit 10.2 on November 2, 2006.                 |
|       |       |                                                                                                                                                                                                                                                          |
| 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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